PROPERTY PROTECTION TRUST
PROPERTY PROTECTION TRUST (Life Interest Trust)
Creating a Property Protection Trust (Life Interest Trust) through your Will allows someone to benefit from your estate after you have died as if he or she owned the assets, without actually inheriting it.
A life interest trust is typically used to allow someone to benefit from assets, without owning them. For example, if you have a disabled child who doesn’t have the mental capacity to manage his financial affairs, you may opt to place your estate in a trust, managed by other family members for your child’s benefit. Your wealth enables your child to be cared for, with the trustees making the decisions about how best your estate should be used to do so.
The same structure is used to ‘protect’ property from means-tested fees. Your husband or wife never inherits the assets, so they never count as part of his or her estate from which fees can be paid, yet he or she can benefit from them as if they were owned. On his or her death, the remaining estate passes to other beneficiaries who do inherit it.
Mike and Emma have been happily married for a few years and have a son Harry. Unfortunately, Mike passes away and the total estate valued at £300,000 (primarily the value of their home) passes to Emma with it written in her Will that when Emma dies their son Harry will inherit the estate.
After a few years of living alone, Emma meets Peter. Emma and Peter then decide to get married.
After a couple of years, Emma dies and Peter then Inherits the estate. This could lead to Mike and Emma’s son Harry being disinherited and not receiving any of his parents’ inheritance and Peter keeping it all.
This is called ‘sideways disinheritance’ and is unfortunately quite common.
If Mike & Emma had set up a Property Protection Trust in their Will whereby Harry was to Inherit the £300,000 estate (primarily the value of their home) then Harry would have inherited the £300,000 on Emma’s death.
NB: If you leave the property directly to your partner or spouse, he or she decides what happens to it through his or her will (or possibly through the laws of intestacy if he or she doesn’t make a will).
This can become an issue if you have children from earlier relationships who may not be in the Will of your spouse or partner (particularly if he or she remarries after your death). You are likely to want to support your surviving partner or spouse while they are alive, but you also want to make sure your children inherit.
Mike and Emma have assets worth £300,000 together, primarily in the value of their home. At this level of wealth, their joint estate does not qualify for inheritance tax at any rate.
They wish to leave as much as possible of their estate to their son Harry.
Mike passes away before Emma, leaving her his share in the home and all his other assets.
After 2 years of continuing to live at home, Emma needs care and moves to a nursing home. Fees are the UK average of £35,000 per year (see table below). Her new level of wealth means that she may have to pay such fees for just over 9 years (before the local authority pay for her care home fees).
She lives for 7 more years, and Harry inherits £55,000.
Had Mike placed his share of the property in a Property Protection Trust, Emma would still have been able to live in the family home, but the value of her estate would have been £150,000 just after Mikes death. Care costs for 7 years would have reduced the value of her estate to Zero.
However, Harry would have inherited the £150,000 left by Mike in trust. So, Harry would have inherited £205,000 instead of the £55,000 which is £150,000 more because the Property Protection Trust was set up.
NB: While it is lawful and possible to create an asset protection trust both during your lifetime and through your will, it may not always have the effect you intend. A result of current financial pressure on the UK care system, local authorities are more likely to scrutinise and challenge any scheme or device that leads to a ‘deprivation of assets’ for someone who needs care.
However, if you write a will before care might need to be considered for your husband, wife, or partner, it might be difficult for a local authority to claim that the primary reason for leaving assets in a trust was to avoid care fees. There are after all other legitimate reasons to leave gifts in a trust with a lifetime beneficiary, such as to avoid ‘sideways dis inheritance’ in example 1.
Care home costs
According to Laing & Buisson care for Older People UK Market Report 2020, the average annual UK care home fees in 2019-20 were:
- Residential (Frail older) -£34,686
- Residential (Dementia) – £35,464
- Nursing (Frail older) – £48,048
- Nursing (Dementia) – £49,712
Remember, you might have to pay extra for things like trips out, hairdressing and some therapies – check what’s included in the care home fees. The cost will be affected by the location, quality and service offered, too.
NB: If the capital reaches less than £23,250, the Local Authority may assist with funding. Once their capital reaches below £14,250 they will be totally funded by the Local Authority, though any eligible income will be taken into account.
SETTING UP TRUSTS
We also deal with setting up any trusts outlined in the Will of the deceased – such as
- Life Interest / Flexible Life
- Interest Trust
- Nil Rate Band Discretionary Trust
If you would like to talk to someone about this, just give us a call on :
0203 762 2252
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