Property protection trust

Property protection trust

This page was last updated on 1 November 2020

Property protection trust

This article explains all you need to know about property protection trusts.

What is a property protection trust?

This is a trust you put in your will so that the surviving spouse can continue living in your property, but the deceased’s share of the property is kept separate.

Therefore others, most commonly children and loved ones, can inherit after the surviving spouse’s death. This is called a ‘life interest trust,’ but ‘protection property trust’ is a marketing term.

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What is a trust?

A trust is a legal tool you can use so that the property owner is different from the person who gets the benefit of the trust property.

A ‘trustee’ is someone who has the legal ownership of the property and controls it. A ‘beneficiary’ is someone who gets the benefit of the asset.

A trust is where a trustee or trustees holds the assets for the beneficiary or beneficiaries.

Who can benefit from a protective property trust?

Couples, especially where one of them may need long term care in the future.

This is especially true where one partner has children from a past marriage and wants both the children to benefit and to make sure that their spouse can keen on living in the family home.

The surviving partner who gets to keep living in the property is called the ‘life tenant.’

It is important to remember that your motive for setting up a property protection trust cannot just be to avoid having to pay for care, as this is illegal.

Here is a short video that explains how a protective property trust works.

Why would I consider getting a property protection trust?

The benefit of a life interest trust is that the survivor can continue to live in the house until they die, but at least half the value of the estate is preserved for the children to inherit.

This is useful in case circumstances arise after one partner’s death, where their partner remarries, goes bankrupt, or there is a possibility of them incurring care costs.

Example of how the trust works

Mr and Mrs. A set up a trust over their property, which is held in joint names.

If Mrs. A dies before her husband, her share of the property goes into the protection trust. Her husband gets the rest of the estate.

Mr. A has the right to live in the property, and if he needs long term care, then Mrs. A’s share of the property is already in the property protection trust.

Therefore it cannot be assessed as capital to pay Mr. A’s care fees because it doesn’t belong to him.

After Mr. A’s death, the trust ends, and Mrs. A’s share of the estate passes to the beneficiaries, without them having to pay capital gains tax.

How do I go about putting property in trust and into my will?

When you make a will as a couple, you can have a protective private property trust set up.  This is a good way to consider putting property in trust.

Trust wills can be made online or through using a solicitor or specialist financial advisor.

Do I need legal advice to set up a trust?

Individuals should seek legal advice to set up a trust. Setting up a trust is a complex process, therefore using a will and probate specialist will avoid stress.

In addition, using a specialist will give you peace of mind that your wealth is protected legally and effectively.

How much does a property protection trust cost?

Trust wills are complicated legal tools so you will need a solicitor or wills and probate service to set the details of your trust.

Solicitors will generally charge a client a fixed fee for their services, though the fee structure will depend on the firm you instruct.

This service will probably cost you somewhere between £300 and £1,000 plus VAT, depending on the complexity of the life interest trust.

This cost is for advice on your personal situation and making the terms of the lifetime property trust suit your needs. It will generally cost more to set up trust wills as a couple than as individuals.

Do property protection trusts work?

Yes. Property protection trusts mean that half of the value of the property is held separately, so it does not come within the life tenant’s estate.

"The benefit of a life interest trust is that the survivor can continue to live in the house until they die, but at least half the value of the estate is preserved for the children to inherit."

How does a property protection trust operate?

You and your partner have to both leave your property to the property protection trust listed in your will. The surviving spouse will benefit from the share of the house on trust and can keep living in the home. 

Then, once they die, the trust money passes on to others, most often the couple’s children.

What does the trust mean for the surviving spouse?

The life tenant can continue to live in the property for the rest of their lifetime until their death. The trustees of the property have no right to evict them.

The life tenant can still sell the house if they want, but any money made on downsizing will be shared between them and the beneficiaries. The surviving partner is usually one of the trustees, alongside another person, who is likely to be a family member.

Therefore the surviving spouse will get control over what happens to the trust.

protective property trust

Can I put my property in a trust to avoid care costs?

While lifetime trusts will mean that the share in the trust is not assessed for care costs, this cannot be the sole reason for setting up the trust.

If this is found to be the reason for the trust, this is called ‘deprivation of assets.’  if the local authority thinks there has been a deprivation of assets, they will assess the assets in the trust anyway.

You also cannot create trusts to prevent having to pay your own care costs.  Protection trusts are testamentary, meaning that they come from wills.

When you have to pay your own care costs, you will still be alive so your will is not in force.

What are the property protection trust advantages?

There are numerous advantages to this type of trust:

  • You get to implement your wishes over what happens to your wealth and savings
  • You can ensure your children get a share of the property even if after the remarriage of your spouse
  • The life tenant can continue living in the home.
  • It protects a share of the property against being lost if the life tenant needs long term care, becomes bankrupt, or gets remarried.
  • The trust only is established after death. This means the person can do what they want with their asset while they are alive.

 

What are the property protection trust disadvantages?

While these trusts are largely a helpful tool, there are some disadvantages to consider:

  • They are more difficult to set up, and the wills and trust have to be carefully drafted to reflect the couples’ intentions.
  • The cost of setting up the trust, including hiring a legal service company
  • Unlike a lifetime trust, you do not get an income from the trust.
  • Possible tax consequences. As long as no income passes to the life tenant, tax returns should not be necessary. However the capital value can come within the surviving spouse’s estate, so more inheritance tax may be due if the estate is worth over a set sum. Where the couple was not married, the money may also be due.

How do I get rid of a property protection trust?

The trust is not established until one of the partners dies. Therefore, if you change your mind, you can just change your Will document.

property trust Will

Do the title deeds need to change to set up a property protection trust?

The family home needs to be in both you and your partner’s names as tenants in common. This means that when one partner dies, the title will become joint between the trustees and the surviving spouse.

Who are the trustees?

Trustees are the people who control the trust and determine what happens to it. For a protection trust, the trustees will normally be the survivor and then at least one more person. It is important that the survivor’s right to occupy the property is protected in the trust.

Can the trustees evict the survivor from the home?

No. When you set up a trust, you will make sure the terms of the will ensure that the surviving spouse has a right of occupation. The right of occupation exists because the surviving spouse owns a half share of the property.

Why would I not just give half my property to my children when I die?

This is another option. However, there are risks to leaving your property to your family members.

If any of your children go bankrupt, get a divorce or pass away while you are still alive, the property may have to be sold to pay your child’s creditors, the court, or their executors.

Also, you rely on maintaining a good relationship with your children, because if you fall out, they may ask that the property is sold so they get their share.

Also, if the children own half of the property when the surviving spouse passes away, and the property is sold, the children may have to pay capital gains tax if they don’t live in the property and its value has increased since they gift was made to them.

What happens to the trust if the surviving spouse wants to move house?

The family home can be sold, and another house can be bought. If the new home is cheaper than the family home, the profit made from the sale will have to be distributed between the surviving spouse and the trustees.

What happens if the survivor has to move into residential care?

If the surviving spouse moves into full-time care, then the local authority will not look at any asset that comes within the trust.

They will only consider the half share belonging to the surviving spouse when assessing the person’s finances and how much of their own care costs they will have to cover.

How does the local authority calculate care costs?

The local authority will determine care fees based on the person’s assets and savings. The cost of your care will depend on the home you choose, how much care you need, and where the care home is.

Anyone with assets of more than £23,250 may not be able to get state help with care fees, which covers most people who own their own homes.

What happens with inheritance tax?

A property protection trust will not have any impact on inheritance tax payments where the value of the family home is below the nil rate band for IHT, which is currently £325,000 in the UK. If the estate is worth more than this, you should seek a solicitors guidance.

What happens with Capital Gains Tax?

Effectively,  capital gains tax should not be payable in the UK. Principal private residence relief is available when the family home goes into the trust.

Will the life tenant have to pay income tax?

When the life tenant is living in the property, the trust doesn’t give them an income, so income tax charges are not payable.

Tax may be an issue if the property is rented out, the life tenant lives somewhere else, or there is equity release from the sale of the property. If the life tenant gets an income, they will have to declare this on their tax return.

Are protective property trusts legal?

They are legal however it is important to remember that a protective property trust may not always work how you thought it would.

Local Authorities are more likely than ever before to examine the life tenant’s assets to see if there has been  ‘deprivation of assets’ for someone who needs care.

If it is obvious from the circumstances that the trust was made to avoid paying care fees and when the trust was made it was likely that the life interest beneficiary would need care, then the local authority can consider the assets when they do means-testing calculations anyway.

Does setting up a protective property trust will not count as deprivation of assets?

The government and the local authority want to ensure they get the right amount of tax and care home fees from everyone.

In cases where the Local Authority think you deliberately moved the interest in the assets to escape care home fees, they may apply to the court to transfer the property ownership to the spouse.

Whether this application is successful depends on when the transfer was made, especially if the trust was made when the health of the partner meant needing care was likely. 

The court will use its discretion to consider all the circumstances of the case. If you find yourself in this position, you should seek assistance from solicitors.

What are the alternatives to a property protection trust?

While there aren’t any other types of arrangements that do exactly the same things, there may be other options that work better for your situation.

If you have the opportunity, it may be worth consulting with solicitors or another financial service before making any decisions. Options include:

  • Flexible life interest wills are useful for couples who have a significant amount of investments or assets.
  • Discretionary trust in a will can protect property assets and investments in cases where the person is vulnerable or has mental capacities.
  • Lifetime trusts are where a beneficiary can receive proceeds from the trust or use the asset. 
  • Asset protection trusts are a broader form of lifetime trust, so cover your property and all your assets.

Would you like some help setting up a Trust or to have a free consultation on which Trust option is likely to be best for your circumstances?

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Article author

Katy Davies

I am a keen reader and writer and have been helping to write and produce the legal content for the site since the launch.   I studied for a law degree at Manchester University and I use that theoretical experience, as well as my practical experience as a solicitor, to help produce legal content which I hope you find helpful.

Outside of work, I love the snow and am a keen snowboarder.  Most winters you will see me trying to get away for long weekends to the slopes in Switzerland or France.

Email – katy@helpandadvice.co.uk

LinkedIn – Connect with me

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