Can Will Trusts help to protect your inheritance?
Protecting inheritances for families is high on the agenda for many of us as we approach our older years. One option is to look at Will Trusts. This article explains what they are and how they work.
What is a Will Trust?
There are several types of Will Trusts which can be created within your Will to allow you to protect your assets which you hope to pass on to your family.
Establishing Trust can give you an element of control over assets you would not have if you gave them away outright. There can also be tax advantages, but this should never be the main reason for setting one up. If you do not obtain the correct advice, you could end up paying more tax by putting us into Trust.
Further, your Will should be regularly reviewed to ensure it is the most appropriate Trust as the law does change. The particular Trust discussed in this article is what is called a ‘Life Interest Trust’.
Life Interest Will Trust
This is a Will Trust which is only created when you pass away. You set up the conditions of the Trust in your will, and it activates upon your death.
This Will Trust can be over your whole estate, or mainly people wish for it to be on each person’s individual share of their property.
When the first person passes away, their half share of the house will pass into the Trust. The survivor can continue to live in the house as long as they like, or move to a different house if they wish.
However, the capital is held by the Trust, and it cannot be spent by the survivor, or used for care fees, unless approved by the Trustees, if this provision is included in your Will. This protects the capital so that, when the second person passes away, each respective share will pass to their chosen beneficiaries.
Reasons to include a Life Interest Trust
There are a number of reasons why it would be beneficial to set up a Life Interest Trust.
Care fees
First, the capital assets representing the Trust are not available to the survivor. If the survivor moved into permanent residential care, then they would be obliged to pay for their care fees from their own funds. This would be their half of the property and whatever other assets they hold at that time. The value of the half of the property held in Trust would not be taken into account and would therefore not be utilised to pay for care fees. Assistance from the Local Authority with care fees would therefore be sought at an earlier date.
However, it is possible to include a provision to enable the Trustees to appoint (gift) capital from the Trust to the survivor. This gives the flexibility to decide whether capital should be advanced in order to pay for either care at home, or care fees.
Please note however that this payment of capital would be completely discretionary, and it may be decided that the capital should be protected in the Trust and not appointed out to the survivor.
Beneficiaries
A Life Interest Trust is useful in securing the assets to pass to particular beneficiaries. Once the Trust is set up, upon the first death, it will not be possible to amend the beneficiaries who ultimately benefit upon the second death. This gives peace of mind of knowing that your chosen beneficiaries will inherit at least your half of the property, whatever happens to the survivor during their lifetime.
Once the property is sold for the final time, (as a result of the survivor moving into residential care, for example) the funds belonging to the Trust would then be invested and an income would be produced for the benefit of the survivor.
Disadvantages
There are, of course, disadvantages with such a scheme:
- The survivor will have to effectively gain the permission of the Trustees when they wish to move. This removes some of the freedom that a person has in respect of dealing with what is essentially their own assets. This means that additional steps will need to be fulfilled when the property is sold.
- If one person moves into residential care when both are still alive, then that person’s share of the property may be utilised to pay for that care. The Local Authority is likely to place a charge against the property in order to ensure that it are reimbursed.
- Trustees have a duty to ensure that the paperwork is kept up to date on an on-going basis. It is important for the Trustees to keep a note of all the decisions that they make and that they ensure that they always act in the best interests of the beneficiaries. They must also follow, where possible, any written wishes that come to their attention.
Financial Advice and Tax
Financial advice would need to be sought in respect of the cash being held by the Trust after the sale of the property for the final time takes place. There are some efficient financial advisors, and we can certainly recommend some. However, it will necessarily incur a charge. As soon as income is being produced, it is then necessary to complete an annual Tax Return and pay the relevant tax.
The taxation of Trusts is a complex area, and we will be pleased to provide you with further information should you wish.
It should be noted, however, that as soon as a tax liability arises, it will be necessary for the Trustees to register the Trust online with the HMRC. In addition, tax returns will need to be submitted and of course the relevant tax paid.
Other new regulations also stipulate that Trusts containing certain investments need to obtain a Legal Entity Identifier number. This will also incur a charge that will need to be paid from the assets held within the Trust.
Again, our experts at will be more than happy to assist the Trustees with these issues should they arise.
The Property
In order for the Life Interest Trust to take effect, the property needs to be held as Tenants in Common, not Joint Tenants. ‘Tenants in Common’ means that each person is able to gift by way of Will their share of the property, whereas ‘Joint Tenants’ means that the property will pass automatically to the survivor, regardless of the provisions that you make in your Wills.
It is therefore of vital importance that the property is held as Tenants in Common for the Life Interest Trust to take effect.
In the event that a property is held as Joint Tenants, then the tenancy can be ‘severed; by serving Notice and making the relevant application to HM Land Registry. A Restriction will then appear on the title to the property.
Please be aware that if you move house during your joint lifetimes, you will need to ensure that you hold your new property as Tenants in Common and not as Joint Tenants.
This is an overview of the law as at May 2021 and is, of course, subject to future amendment. You can seek advice from one of the experts at Bennett Griffin LLP, authors of this article, on 01903 229999 or at www.bennettgriffin.co.uk.
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