What is a Protective Property Trust Will?

A Protective Property Trust Will is a will designed to help protect your property from threats to the estate once the first Testator (Person Making a Will) has died. The share of the first to die (capital element) will be protected from any Local Authority care fees assessment for the surviving spouse or partner should they require care. It will also protect the share of the property of the first to die should the surviving spouse or partner enter another relationship.

The half share of the family home belonging to the first person to die passes into the trust. This type of trust is known as a life interest trust in favour of the survivor (life tenant) which means that they can benefit from the share of the house in the trust during their lifetime rent free and on their death the trust fund passes to others (remaindermen), usually the children of the testator.  The survivor is responsible for the insurance, maintenance, and repair of the property and all outgoings related to the property (Utility Bills, Council Tax etc).

Example

Mr and Mrs Jones own their house as Joint Tenants.  Mr & Mrs Jones want to ensure that their respective half shares of the house ultimately pass to their children whilst ensuring the survivor has the  protection of living in the property for the remainder of their lifetime.

If Mr Jones dies first he leaves his half share of the property into a Protective Property Trust, with the remainder of his estate left to his wife.  Mrs Jones has a right to occupy Mr Jones’s half share of the property together with the ability to move house.  Even if Mr and Mrs Jones’s children are made bankrupt, become divorced or predecease Mrs Jones, her occupation is secured. On Mrs Jones’s death, the Protective Property Trust comes to an end and the half share of the house transferred (or the sale proceeds paid) to the children free from any Capital Gains Tax. Mrs Jones’s half of the house passes directly to her beneficiaries.

Who is a Protective Property Trust Will suitable for?

It is a Will for couples who are concerned that after the first has died their share of the property is ring-fenced ultimately to benefit their chosen beneficiaries following second death.

How does a Protective Property Trust Will work?

Both members of the couple make a Will leaving their share of the property into a Protective Property Trust.

What happens to the title deeds?

When you make your Wills you must make sure that the family home is owned in your joint names as Tenants in Common. After death, the legal title should be transferred into the joint names of the surviving spouse and the trustees (these are usually the same persons as your executors) again as Tenants in Common.  A trust deed is then drawn from the Will and Trustee minutes prepared. A suitably qualified person will be required to draw up the trust deed. The surviving spouse / partner can be one of the trustees. If the property is currently held as Joint Tenants it will be changed to Tenants in Common for you.

Who controls the trust?

The trustees control the trust. The trustees will usually be the surviving spouse / partner and at least one other person, although the survivor’s right of occupation is protected.

Could the trustees evict the surviving spouse?

No. The trust gives the surviving spouse / partner a right of occupation. The surviving spouse also has a right of occupation by virtue of the half share of the home that they own.

What are the tax implications?

There are no adverse Inheritance Tax implications and no adverse Capital Gains Tax implications. (If the trust is set up for the immediate post death interest of the surviving spouse the spousal exemption for inheritance tax purposes will apply. When the Life Tenant dies no CGT will be payable on disposal of the trust asset as principal place of residence relief can be claimed by the trustees)

Isn’t it easier if we simply give half of the property to our children when one of us dies?

It might seem more straightforward, however, you are vulnerable should any of your children become bankrupt, get divorced or die during your lifetime. If any of these events occurred, a sale of the property could be forced to make the child’s share of the property available to his/her creditors, the court or his/her executors. Or, you might simply fall out with your children and they could request that the property be sold so that they can receive their share of the cash proceeds of sale.

If a half share of the property is owned outright by the children, when the surviving spouse dies and the property is sold, the children may be exposed to capital gains tax on their share of the property if it has increased in value from the date of the gift if it is not their residence. There will not be any capital gains tax liability on the share of the property held by the Trust since the trustees can claim principal private residence relief as a result of the surviving partner’s right to occupy.

What if the surviving spouse wants to move house?

This is not a problem. The family home can be sold and an alternative property purchased. If the property which is purchased costs less than the original property, any surplus would need to be shared equally between the surviving spouse / partner and the trustees. The surplus cash held in trust is again held for the lifetime benefit of the surviving spouse / partner with any income generated belonging to the surviving spouse / partner. The trustees can agree a loan to the surviving spouse / partner from these funds, which is normally repayable on death. Ownership of the new property is shared between the trustees and the surviving spouse / partner.

What if I change my mind?

Since the trust does not come into existence until the first spouse / partner dies, you can simply change your Will(s) before this time.

It is a trust that is established to provide the beneficiary with (who is known as the ‘life tenant’) the right to receive the income (after expenses) from the trust.  This right is usually given for their lifetime.  On their death the trust fund passes the other named beneficiaries, known as the ‘residuary beneficiaries’ or remaindermen.

The life tenant does not have any right to the capital, unless expressly given in the trust deed.

If there is a property held in the trust the life tenant is entitled to either receive the rental income from it or to live in the property if they wish.

A life interest trust can be established either in your lifetime or by your Will.

Why would this type of trust be used?

Here are a few typical examples:

• Unsure as to what the future may hold?  Concerns that your spouse could remarry after your death and their new family would inherit your assets
• Second marriages and step-children.  This type of trust allows you to provide for your new spouse but ultimately your assets pass to your own children
• Concerns regarding care fees in the future.  This allows you to ring-fence your assets, to ensure that your children will receive some inheritance in due course
• Keeping the family business in the family.  Shares could be held in the trust

What assets could the trust hold?

The trust can hold most assets; typically it is cash, investments or property.

If establishing a trust in your lifetime cash is often transferred in due to tax considerations.

If done by a Will, it is typically your entire estate or your share of the family home.

If a share of the family home is held within the trust, this does not prevent the life tenant moving home with the trustees’ permission.

They would however have to seek the trustees’ permission before the property could be sold and a new one purchased.

Who should be a trustee?

Care should always be given when deciding whom to appoint.  It is often the surviving spouse and the children.  However, if there is any family conflict or potential for conflict, it is our advice to appoint independent trustees, who could be a friend, family member or a professional trustee.

A maximum four trustees are permitted and we would recommend that a minimum of two are appointed.

Tax treatment

The trustees are responsible for declaring and paying income tax and capital gains tax.

The income received belongs to the life tenant and is taxed at their personal income tax rate.

For capital gains tax, the trust is taxed.  The trust will have an annual allowance to offset against the gain.

If the life tenant lives in the trust property as their principal private residence and that property is sold, it is not subject to capital gains tax.

For inheritance tax purposes, the trust will be treated differently depending on whether it was established in your lifetime or by your Will.

If in your lifetime, inheritance tax may be due when:

• On each ten year anniversary of the Trust
• When assets are put into the trust
• When assets are transferred out

If by your Will and it is an immediate post-death trust:

• The spouse exemption is available if the life tenant is the surviving spouse; there is no tax to pay when established.  Otherwise inheritance tax is paid within the estate
• It is treated as part of the life tenant’s estate.  If the combined trust value and the estate value is over the available nil rate band (this is the amount of the estate that is taxed at zero percent) inheritance tax will be paid at that point

A clause for a will, giving a beneficiary the right to occupy real property rent free, which ends in specified circumstances. The beneficiary has an interest in possession limited to the real property itself (not the proceeds of sale).

This will safeguard the property if the person given the right to occupy should experience financial difficulties, go into care or be subject to separation or divorce proceedings. It will also ensure that when the right to occupy terminates the property can then pass to the beneficiaries noted in the Will.

The right to occupy will normally require the occupant to:

Maintain, insure, repair and pay all outgoings related to the property.

To give up the right to occupy if they become physically or mentally unfit to occupy the property.

Cease to use the property as their main residence.

Fail to keep to the terms of the trust after being warned by the trustees that continued failure to adhere to the terms will result in termination of their rights under the trust.

Trusts are commonly used to protect the interests of vulnerable / disabled beneficiaries. Their formation will often arise through the Will of a testator whom wishes to pass assets to a disabled or vulnerable friend or relative.

Discretionary and disabled person’s trusts (DPT) are the most commonly used trusts to protect the interest of vulnerable and disabled beneficiaries.

A DPT is generally a type of discretionary trust (and commonly is set up in such a way). Where the relevant conditions are met, namely, the beneficiary meets the definition of a ‘disabled / vulnerable person’ and the trust is a ‘qualifying trust’, an election can be made so that it receives more favourable tax treatment in respect of income, capital and inheritance tax. In order for the special tax treatment to apply the disabled / vulnerable person must be treated as the principal beneficiary with only very modest amounts of the trust fund benefitting other beneficiaries during the lifetime of the principal beneficiary.

There are many benefits to using the above trusts for a vulnerable / disabled beneficiary. For example:

• They are useful where a beneficiary is unable to, or will have difficulty managing funds and assets themselves;
• The beneficiary has no direct access or power to access the trust fund themselves. As such, a level of protection is provided to a vulnerable or disabled beneficiary whom might be more at risk of financial abuse or misappropriation;
• It provides a means of helping to manage important financial affairs and providing financial support, which is particularly important where one’s mental capacity or ability to manage a large or complex assets is questionable;
• Funds held on discretionary trust should be disregarded by social services funding care or for certain means tested benefits;

• The money held in the trust can be used without impacting on benefits to buy extra things which might not be covered by benefits or social services funding; such as holiday, clothing, gifts, equipment, extra activities and so on;
• Funds can also be used to top up care and support without effecting care funding or benefits. Social services will often only meet a basic level of care and may therefore conclude that a beneficiary needs a much lower level of support in comparison to what they have received from the deceased if they were a close relative;
• A trust can be the legal owner of a property. As such, the trust fund can be used to buy a house or a flat where the beneficiary can reside. As the property is owned by the trust, and not by the beneficiary, again, it should be disregarded for benefit purposes and local authority care funding;
• The trustees will also be responsible for managing and maintaining property it owns which the beneficiary may find difficult to do themselves;

It is a trust established on death under the terms of your Will. Rather than make absolute appointments to the beneficiaries you leave the distribution of trust income and capital to the absolute discretion of your trustees.

It is generally good practice to guide your trustees as to the distribution of trust capital and income by way of an expression of wishes, which is not legally binding upon the trustees.

Such a trust can be useful in terms of generational inheritance tax planning, helping to provide protection from issues such as a child’s divorce or insolvency, providing for a vulnerable child or adult whilst not jeopardising benefits, or for making provision for a bankrupt individual or such other person who you believe should not take direct control of a legacy. It is also useful where you are undecided as to how your intended beneficiaries will be best catered for by your estate after your death as this will be decided by your trustees who will be able to continually monitor the individual requirements of your selected beneficiaries.

Payments from the trust can then be made at the trustees’ discretion in accordance with the circumstances of the beneficiaries at any particular time. These payments can be by direct appointment to the beneficiaries or by way of loan to the beneficiaries.