A Property Protection Trust is written into a Will and only becomes effective on the first death.
It is a Will for couples who are worried that one of them may need long term care in the future or that their spouse will remarry after they have died and their share of the property will fall into the hands of someone outside the family as often happens without proper planning.
It’s also designed to help protect half of the value of your property from being included in a financial assessment by the local authority for funding of long term care fees.
What do I need to do?
Your jointly owned property is changed so that the two owners identify their shares, usually on a 50/50 split, and hold the property as tenants in common. This is know as Severing the Joint Tenancy.
The half share of the family home belonging to the first person to die, passes into the trust on death.
This type of trust is also known as a Life Interest Trust which means the survivor can benefit from the share of the house in the trust during their lifetime and on their death, the trust fund passes to others, usually children of the family named in the will.
The same principles apply to prevent your share passing to the new wife or husband if the surviving spouse remarries after you die. Your share is protected in the same way and your beneficiaries are certain to receive your shares after the survivor has died or no longer needs the use or income from your share.
Your half share is transferred into the trustee’s names and they are shown on the title deeds with the surviving spouse.
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). The surviving partner can be one of the trustees.
Who controls the trust?
The trustees control the trust. The trustees will usually be the surviving partner and at least one other person. The other trustees are often one or all of the executors named in the Will - but they can be different people.
Could the trustees evict the surviving spouse?
No. The trust gives the surviving spouse 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 in their own right.
What happens if the surviving spouse needs to move into residential care?
The value of the half share of the property in the trust is a disregarded asset for the purpose of financial assessment by a Local Authority.
Isn't it easier if we simply give half of the property to our children when one of us dies?
That’s may sound like a good idea but it is not without and should be very carefully thought through before you decide to proceed to do this. You will need legal advice from a solicitor but these are the main risks:
Death, Divorce or Bankruptcy and Deprivation of Assets
You are at risk if 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 realise their share of the property to pay their creditors, agree a divorce settlement for their ex-spouse, or to allow their executors to collect in the assets of their estate and distribute to beneficiaries in their will or if they have not made one under the intestacy rules.
Families are complicated and you may fall out with your children or they are pressured by their spouses to sell the property sold so that they can receive their share of the cash. You could end up homeless unless your right to live there is protected.
Local Authority Financial Assessment and Deprivation of Assets
You must be aware that if the Local Authority think you may have transferred or disposed of your interest in the asset in any way to avoid paying care home fees, they can make an application to Court to have the transaction set aside. In other words, the Court makes an order for the property to be given back to the original owner.
It will depend on the surroundings of the transaction, when it was transferred out of their ownership and how close to the transfer when the person is in need a care home.
What are the Tax implications?
The Government likes to make sure they get their fair share of tax and there may be tax implications by doing it this way.
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 subject to Capital Gains Tax on their share of the property if it has increased in value from the date of the transfer/ gift to them if it is not their principal main residence.
With a Property Protection Trust there will be no capital gains tax liability on the share of the property held by the Trust as the trustees can claim principal private residence relief because of the surviving partner’s right to occupy.
What if I want to move to a smaller house ?
They can move house and buy another- maybe closet to the family or a smaller property that is easier to manage. This is not a problem. If the replacement property costs less than the original property, any surplus profit would need to be shared equally between the surviving spouse and the trustees to be held on trust in accordance with the terms of the Will and the trust for the benefit of the residuary beneficiaries.
Can I change my mind?
Yes, you can. Since the trust does not come into existence until the first spouse dies, you can simply change your Wills before this time.
What are the costs?
There will be additional charges for this type of Will but in comparison to what you could be saving the fees are monies well spent. We will give you a fixed fee quotation before we undertake any work.
What are the inheritance Tax implications?
If your joint estates are valued below £650,000, here are no adverse inheritance tax implications.
New Private Residence Nil Rate Band- April 2017
We will explain to you the implication if your joint estate is over £650,000 as the new Private Residence Nil Rate Band allowance introduced in the Summer Finance Bill 2015 will affect your IHT allowance from April 2017.
Who is likely to be affected
Individuals with direct descendants who have an estate (including a main residence) with total assets above the Inheritance Tax (IHT) threshold (or nil-rate band) of £325,000 and personal representatives of deceased persons.
General description of the measure
This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.
This will be:
- £100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.
The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.
There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.
When does this new threshold start?
The measure will take effect for relevant transfers on death on or after 6 April 2017.