What is a Property Protective Trust?
A Property Protective Trust, which is sometimes known as a Property Trust, is an Interest in Possession Trust ('IIPT') that is used to protect the first to die's share of a property and intended beneficiaries from a range of potential threats, such as care home fees or remarriage of the survivor.
Why are Property Protective Trusts usually set up?
To protect each Testator's (a testator is a person who makes a Will) share of the property for their chosen beneficiaries and
To give a life interest to the survivor, so that they are able to continue to live in the family home. The Trust also gives the survivor flexibility to downsize or move property, should they wish to do so.
The main aims of setting up a Property Protective Trust
- To ensure that the survivor in a relationship is able to continue living in the house after first death.
- Protecting the children and other beneficiaries of the first to die from a reduced inheritance due to care home fees of the survivor and other potential threats.
- To protect children (or other chosen beneficiaries) of the first of a couple to die should the survivor remarry, find a new partner or have a dispute with the first to die's chosen beneficiaries after the first to die's death.
When should a Property Protective Trust be set up?
Property Trusts are particularly recommended for couples who have children from previous relationships. After the first death there is always a risk that the survivor may cut these stepchildren out of their own Wills or accidentally disinheriting them by marrying another person, and voiding the existing Will.
Property Trusts are also used in cases where one partner/spouse owns the house in their own name and would like to give the survivor the right to live in the property, whilst still retaining the whole property within their own Estate for their chosen beneficiaries which is usually the children.
Even in the case of a straightforward marriage with no children from previous relationships, a Property Trust can still be very valuable and will still protect the children from future sideways disinheritance due to remarriage, or loss of the estate through care home fees.
Severance
Most couples will own their properties as joint tenants, which means that on first death the property will pass to the survivor regardless of the Will.
In order to set up the Property Trust, the type of ownership to needs to changed to Tenants in Common, which is land registry work and is known as severance.
Goodwills can arrange the relevant paperwork and liaise with the Land Registry in order to ensure this is carried out properly for the clients. This is included in the price of the Trust.
Declarations of Trust and Transfers of Equity
In some cases, clients wish to formalise their respective share within a property before setting up the Trust, especially if the share is not 50/50 (or even in cases where no Trust is desired). This can be arranged through a Declaration of Trust, which we are able to set up for the clients.
Where only one partner/spouse owns the Property, we are able to add the other to the Title Deeds (thus both becoming legal owners) – this is called a Transfer of Equity.
What are alternative ways to protect against Care Home Fees?
Property Protective Trusts are low risk and have a very high chance of succeeding in their objectives.They do, however, only protect half of the property. If you are mortgage free and looking to protect your hold property, then take a look at our Home Protection Trust Page.
If you would like to put a Protective Property Trust in your Will, or would like further information please do not hesitate to contact us.
Why you should consider an Asset Preservation Trust (APT)
The main purpose of an Asset Preservation Trust is to protect final beneficiaries such as children or grandchildren, or even great great great grandchildren from disinheritance caused by many reasons whilst allowing a surviving spouse to have a life interest in any assets placed into the Trust.
How are thousands of families disinherited every year?
The main reasons are the remarriage of the surviving spouse or their long term care fees, divorce, bankruptcy, long term care fees and inheritance tax liabilities for beneficiaries.
Remarriage – The Problem
Mr and Mrs Smith have assets worth £500,000; their main asset is their home which is worth £300,000 and they also have £200,000 in various investments. They have made typical Joint Wills that leave everything to each other and then their estate is to pass to their two children.
Mr Smith dies and Mrs Smith remarries; her Will is thereby revoked and should she die before her new husband, much of her estate will pass to him and not to her children.
When her husband dies, the assets will pass to his own family and not to Mr and Mrs Smith's children. Clearly, this is not fair and certainly not what Mr and Mrs Smith would have wanted.
Even if Mrs Smith makes a new Will after her remarriage she may leave a considerable element of the estate to her new Husband, she may also subsequently divorce, which could put half of the property at risk of being lost in the divorce proceedings. This loss of (part of) the house in the divorce of course means that the property will never pass to the children.
Divorce - The Problem
We all hope that our children (and grandchildren) will make good marriages but, with around 40% of marriages ending in divorce, it is important to at least consider the possibility of divorce. When your children inherit your estate, a future divorce settlement would take that settlement into account and your hard-earned assets could become the property of an ex-spouse.
Bankruptcy of beneficiaries - The Problem
If your any of your children or grandchildren should be made bankrupt, their inheritance could be considered by the court as an asset to be included in a settlement with their creditors effectively stopping your legacy passing through to future generations.
Long Term Care Fees - The Problem
Since the introduction of the Community Care Act 1990, thousands of estates have been wrecked by the imposition of paying for Long Term Care fees. Around 480,000 people are resident in nursing and residential care homes; less than 20% of these are cared for by the Local Authorities, families are paying the cost either directly or through the loss of their inheritance. It is currently estimated that around 70,000 homes are sold each year to fund Long Term Care fees which could be as high as £2,000 per week (with £1,000 per week now being the nationwide average). If you live in England, your beneficiaries may see their inheritance disappearing week by week and they may inherit as little as £13,000.
How an Asset Preservation Trust (APT) can help
Goodwills can draft an Asset Preservation Trust in your Will and when the first dies, their assets are held in a Protective Trust. The Trustees may be the surviving spouse and adult children or a trusted family member; this means that you and your family remain in control. The Trust gives the surviving spouse an absolute right to live in the home and a life interest in all the other assets; this means that they have an indefeasible right to the income produced and if they do require capital, the Trustees can simply make cash advancements.
If the surviving spouse remarries, the assets held in Trust are not part of their estate and remain in the Trust to pass to the children when the survivor dies.
Upon the second death, all of the family's assets pass to a 'discretionary Trust' with the children as the discretionary beneficiaries. This means that if they should divorce, the inheritance is protected from the ex-spouse. Similarly, in the event of bankruptcy, the inheritance is protected from creditors.
In the event that one of the beneficiaries is considered as a 'vulnerable person', the Trustees shall hold 'their share' in Trust to ensure that their inheritance is not squandered or cause them harm.
If the surviving spouse goes into Long Term Care, the local authority cannot take into account any assets there are held in Trust; they can only take into account income and assets outside of the Trust. The local authority is likely to disregard the value of the property altogether but you can be certain that at least half of your estate is protected for your children to inherit. The surviving spouse may sell the house and move to another property; in effect nothing changes.
Inheritance Tax Planning (IHT Planning)
Although lifetime gifts are tax efficient, it is difficult to know how much to gift to your children whilst you are both living. After the first death, the survivor may decide that the income they are receiving is in excess of what they need; they may surrender their life interest in any part of the Trust assets (Potentially Exempt Transfers) and this will be free from Inheritance Tax as long as the surviving spouse lives for 7 years: on average, widows live for 9 years. Even if the surviving spouse dies before 7 years has elapsed, Inheritance Tax is saved on a pro rata basis, so that if they survived for 6 years, 80% of the tax liability would still be saved.
IYour childrens'' estates may have a liability to Inheritance Tax when assets pass to their children. Your children are not compelled to take the full inheritance into their own estates but only what they need, or more likely, borrow what they need from the Trust and create a 'friendly debt' on their estate which will be paid back to the Trust upon their death thereby avoiding any liability to Inheritance Tax. The Asset Preservation Trust may run for up to 125 years after the first death. There may be a Periodic Charge every 10 years on assets in excess of the Nil Rate Band.
How Goodwills Set Up The Asset Preservation Trust
The effectiveness of the Asset Preservation Trust relies on you owning your joint assets as 'tenants in common; if your home is owned jointly, (as more are), we will register a 'severance of tenancy' with the Land Registry so that each of you owns half of the property. If you own capital assets jointly, we will draft an agreement stating that your assets are owned as 'tenants in common'; none of this actually affects you.
Only when the first dies is the Trust actually set up (which is known as being 'settled'). Upon the second death, the Trustees may end the Trust and settle the assets upon the beneficiaries (your children) or they may continue the Trust for up to 125 years, this will ensure the protection of the assets from divorce, bankruptcy and vulnerable beneficiaries and mitigate future Inheritance Tax Liabilities.
Summary of the main benefits of the Asset Preservation Trust
- Assets are protected from Remarriage
- Assets are protected from Divorce of a beneficiary
- Assets are protected from creditors
- Assets are protected from vulnerable beneficiaries
- Assets are protected from long term care fees
- Assets are protected for future generations
- Enables Inheritance Tax (IHT) planning for future generations through 'friendly debts'
- The surviving spouse can be given cash advancements or loans (to assist with IHT planning)
- The surviving spouse can make Potentially Exempt Transfer to avoid IHT
Goodwills Asset Preservation Trust is a vital element of Estate Planning for couples who own their home or have significant assets.
The Asset Preservation Trust must be put into the Will prior to the first death.
Goodwills can draft the Asset Preservation Trust into your Wills and ensure that your wealth and property will cascade down the generations of your family.
This information is based upon our understanding of revenue practice at the time of writing (25/06/2022).
What is a Childrens' Protective Trust (CPT)
Also known as a Bereaved Minor Trust
Those with young children often realise the value of planning to provide those children with the financial support they would need in the event of the unlikely or untimely death of a single parent or both parents. We all know such tragedies do happen. We all think that it won’t happen to us, but at the same time graveyards are full of those who never saw their demise coming, with many not thinking about how to best provide for their children in their absence.
The core purpose of the Goodwills Childrens' Protective Trust (also known as 'Bereaved Minor Trust') is to enable minor beneficiaries to be benefit with safeguards.
A Trust will normally hold an entire estate after the demise of the single parent or both parents (for the record, this can include a step-parent), overseen by Trustees whose responsibility it is to utilise capital or revenue on behalf of a child or children until they achieve maturity. This is often taken to be when the youngest is 25 (at which point they’d normally have earned a university degree or finished an apprenticeship). But it can, instead, be at 18 or 21 at the parents bequest. If there is no Will, then the child would usually inherit at age 18, where they might not be mature or responsible enough to use the money wisely.
How to influence the upbringing of your children should you die whilst they are young
A Goodwills Childrens' Protective Trust works in a discretionary way, that is to say that it should protect children from wasting funds or doing anything harmful (an example might be to refuse to pay for a 'walk-with-lions' experience). So the Trustees can say 'no' in the same way that parents could, would or might do. And the funds will be ring-fenced.
Yet parents should not worry that, having passed on, they will have no lasting influence. The Trustees are obliged to be guided in their decisions by 'letters of wishes'. These often accompany Wills; they are usually informal narratives from the parent or parents, outlining how they would like to the Trustees to act in their absence.
How Does Inheritance Tax impact on a A Childrens'' Protective Trust in regards to 10 year charges and exist charges?
There is no inheritance tax to pay if the assets are only intended for a bereaved minor and that minor becomes fully entitled to the assets by the time they're 18. The child has to get the assets by the time they are 25 in any event. And for any beneficiaries aged between 18 and 25 inheritance tax exit charges can apply though 10-yearly charges will not.
This is all rather complex. Obviously! Yet a capable person (like somebody at Goodwills) will be able to explain how it all works and advise you accordingly.
Teaching Kids to Be Responsible (in Your Absence)
The Trustees act as guardians of your children' assets and will disburse funds to cover the costs of living, education and/or training, holidays, treats and more depending on your wishes. Their approach has to be conservative in every sense, conserving what they can of the estate (since the balance is handed over when the offspring are deemed to have achieved adulthood) and conserving the child's (or childrens') life, health, liberty, morals and more. So the Trustees are, in a very real sense, in loco parentis – standing in for parents.
What Happens When Children Reach the Age of Majority (or Adulthood)?
The age of majority in most countries around the World is 18 years. Childrens' Protective Trusts might deem that to be the age at which the Trust is effectively wound up, but arrangements may be guided by a number of considerations including how many offspring there are and not only their ages but the difference in their ages. Yet on a predetermined date each Trust is inevitably wound up as the assets are handed to the hopefully-mature beneficiary or beneficiaries.
Saving the children from themselves
Of course not having parents can create enduring emotional, psychological, social, behavioural and even physical problems for children. Orphans are disadvantaged, no matter how much their parents loved them and provided for them. And part of the responsibility that Trustees assume is to do their best as overseeing adults to keep their charges on straight and level courses.
With that in mind, if bereaved children encounter difficulties such as indulging in deviant or criminal behaviour, if they have marital difficulties or problems with drink, drugs or gambling, the Trustees can temporarily – or even permanently – tighten the purse-strings to protect assets.
This protection means that, deprived of income, the children may be entitled to state or charitable assistance. And that would protect their inheritance.
Disabled or Vulnerable People can Benefit from having their inheritance put into a Trust
There are tax-breaks for disabled – i.e. 'vulnerable' – people. And good lawyers know how to overcome the technical complexities which are involved in order to help clients take advantage of those tax-breaks. This won’t compensate for the disability but it can make life a little more tolerable.
So What is the Relevant Definition of 'Disabled'?
We should be clear on who the HMRC considers to be a disabled – or vulnerable – person. And they’re this:
- Somebody who, due to a mental disorder recognised by the Mental Health Act 1983 (this includes Alzheimer’s and other forms of dementia, bipolar disorder, schizophrenia, depression or other mental illness, autism aka ‘pervasive developmental disorder’, or a learning disability g. Down’s syndrome), can’t administer their property or manage their affairs, or
- Somebody receiving attendance allowance, disability living allowance (high / middle care or high mobility), personal independence payments, an increased disablement pension (under s104 SSCBA 1992 or s104 SSCBS[NI]A 1992), constant attendance allowance or an armed forces independence payment.
That’s from the HMRC handbook. See www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem3421. Yet actually it’s more complex than this (one good reason to use a competent solicitor like somebody at Goodwills). Because it also includes:
- Somebody who is entitled to, but is not actually receiving, attendance allowance, disability living allowance (high / middle care or high mobility), personal independence payments, an increased disablement pension (under s104 SSCBA 1992 or s104 SSCBS(NI)A 1992), constant attendance allowance or an armed forces independence payment.
You can find this at www.gov.uk/trusts-taxes/trusts-for-vulnerable-people. And here you will also find that there is always going to be a lot of discussion whether a brain injury or disabilities such as Parkinson’s disease might class as, or have repercussions that result in, mental illness. But the definition of ‘vulnerable people’ anyway goes well beyond those with disabilities. Vulnerable people, for example, would also include orphaned minors.
There are other anomalies. And these actually enable the disabled to qualify even if they are not resident or present in the UK, have kidney failure and are in hospital with it, or they’re in a care-home paid for from the public purse.
So, self-evidently, it’s easy for the regulations to be misinterpreted. This sort of complexity explains why it’s worth going to a solicitor e.g. somebody at Goodwills. They are expected to know – or ascertain – the minutiae of entitlements.
Are All Disabled People Treated Equally?
No. Because, if the truth be told, administrative burdens would overwhelm some disabled people just as they overwhelm their able-bodied counterparts.
Disabled persons’ Trusts can often be run by the beneficiaries themselves if the disability or disabilities are purely physical. Yet if the disability is mental then usually the Trust will be operated instead by reliable friends and relatives.
What is the Process Involved in Claiming Special Tax Treatment Because of a Disability?
The appointed Trustees need to complete and sign what is called a ‘vulnerable person election’ form if they want to claim special treatment on behalf of a disabled beneficiary who must sign it too.
Yes you could do this online yourself. But HMRC doesn't make it easy. For example you cannot save a half-completed form. So you might well run up against questions for which you don’t know the answers. And then you stand to lose everything you’ve already entered into the system.
Any special treatment might come in the shape of capital gains tax, income tax or inheritance tax. We cannot explain here precisely how that might pa
Assuming the special treatment is sanctioned then the entitlement would be a rolling one but, should the beneficiary die or overcome their disability in some way, the Trustees have a legal responsibility to promptly inform HMRC.
Why is HMRC being so Generous to Disabled People?
In all fairness, the tax-breaks which HMRC gives are intended to assist the Trust to hold on to all the cash that it has. But that has the end-result of avoiding the disabled person being a liability to, and a burden on, the state. So there is a certain amount of self-interest involved.
Where Can You Find Out More about Disabled Persons' Trusts?
You can find out more on disabled persons’ Trusts at Goodwills though the HMRC website will tell you a lot at www.gov.uk/hmrc-internal-manuals/Trusts-settlements-and-estates-manual/tsem3421. Self-evidently this really is technically complex so, whilst disabled persons’ Trusts are a great idea, anyone who is even thinking of setting one up should avail themselves of the expert help that’s available and which should be considered to be indispensable.
