What is a ‘right to reside’?

There’s a growing trend of couples who are concerned about preserving wealth for their children and grandchildren when they die. The cost of later life care can strip away the savings that you’ve worked so hard to build.

Estate planning can help protect your wealth for the next generation. Trusts are not only for the super-wealthy.

Standard mirror Wills do not include asset protection trusts. If safeguarding your wealth is important to you, read on, and we’ll explain how a simple Will trust can benefit your family.

What is a property protection trust?

The simplest way to explain the difference between a standard mirror Will and a Will containing a property protection trust is with an example:

Chris and Davina - a case study

Chris and Davina are 70 years old, married, and have an adult son, Martin. They own a house worth around £200,000 and have ISA and premium bond savings of £80,000. When they wrote their Wills in 2001, they wanted to keep things straightforward.

When Chris dies, everything he owns passes to Davina, and she leaves everything to him. Both Wills say that when the survivor dies, everything passes to their son Martin. This is a typical arrangement for married couples with children.

Now, fast-forward five years. Chris dies, and his property and money pass to Davina; she now owns assets worth £280,000.

Fast forward another 2 years. Davina has a bad fall and needs to move into residential care.

The local authority assesses Davina’s needs and finances. Since she has more than the Upper Capital Limit (UCL) of £23,250, she has to pay the full care home fees from her savings.

The care home costs £45,000 a year. Davina stays in the care home for another 5 years until she dies, so the total cost amounts to £225,000. Davina’s savings have reduced from £280,000 to £55,000 - so son Martin inherits £55,000.

IMPORTANT: In our blog examples, if both Chris and Davina needed later life care for more than 4 years, Martin would only inherit £28,500.

Like those Chris and Davina made in 2001, Mirror Wills are only suitable for people who feel obliged or duty-bound to fund their later life care.

However, if you have worked hard all your life and paid your taxes, you might reasonably expect the state to support you in your later life. Most people want to leave as much of their wealth as possible for their family. If you agree, you need to consider a protective trust in your Will.

Protective Property Trust Wills

Will trusts don’t exploit a legal loophole - they’re a legitimate and sensible estate planning tool.

There is a legal way to protect your half-share of the family home for your children. Will trusts are not only for the super-wealthy. Anyone can use a Will trust to direct their assets to the people they choose.

A property trust in your Will passes your (half) share of your home into a trust when you die. Unmarried couples can use property trusts too, but there may be tax implications to consider*. A property trust allows the surviving spouse or civil partner to continue living in the family home for the rest of their life. This is called a ‘right to reside’.

The Trust protects the value of your share. It doesn’t belong to the surviving spouse or civil partner, so it is ‘ring-fenced’ by the trust for the final beneficiaries. Under the current rules, it is not taken into account if the surviving spouse is means-tested for residential care home fees. Importantly, the children do not own the half share, so they have no capital gains tax implications of second home ownership. When both parents have passed away, the two half-shares are passed to the children.

What are the benefits of a property trust in my Will?

Let’s go back to Chris and Davina. They are still worth £280,000, but this time, when they put their Wills in place, they include a Protective Property Trust.

Fast-forward 5 years. Chris dies, and his half-share of the family home is now transferred (the legal term is assented) into a Property Trust created by his Will. The rest of his estate passes to his wife, Davina. She has the right to live in the property for as long as she wishes.

Davina continues to live in the family home and has all the money Barry left her. In practical terms, everything remains the same for Davina as in our first example.

Fast-forward two more years. Davina needs more support, so she moves into a care home. The local Authority assesses her financial situation.

What does Davina own?

The house is still worth £200,000, and Davina owns half of it. The other half is held in trust. The people Chris chose as trustees are responsible for this share. Now that Davina has stopped living in the family home, it can be sold or rented. Davina’s cash and investments are still valued at £80,000, so her personal assets are valued at £180,000.

Davina remains in the care home for 5 years. In under 4 years, the value of her savings drops below £23,250, at which point the Local Authority offers financial support. When her assets drop below £14,250, she receives the maximum financial support from the Local Authority.

Image courtesy of Unsplash

When Davina dies, her estate is only worth £14,250, but the trustees have invested Chis’s share of the property trust. It is untouched by the care home cost. The trust fund may have increased in value if interest has been added.

In our first example, Martin inherits £55,000.

In our second example, Martin inherits £114,250. Using a Property Trust Will, Chris and Davina’s son receives an additional inheritance of £59,250. A simple estate planning tool has protected Martin’s inheritance.

IMPORTANT: A Will trust only comes into effect when you die.

Being a tenant in common and including a property trust in your Will has no benefit to you in your lifetime. You may have other financial planning options to safeguard your savings. We’d be happy to refer you to a trusted financial planner who can explain your options.

Are there any other benefits?

Protective Property Trust Wills have other potential benefits. If Davina remarried after being widowed, her new husband would inherit everything because marriage cancels all previous Wills. If Davina died before her new husband (and failed to make a new Will), Martin would receive no inheritance from his parents. With a property trust in your Will, this situation can be avoided.

There are other forms of Will trust. Some forms of trust can be created in your lifetime rather than by your Will. Each type of trust has different benefits. Your Carisma Wills consultant will help you understand the costs and benefits of any form of trust before drafting your Will.

The property trust is a life interest trust. In the case study above, Chris and Davina chose to include their property but pass any other cash assets to their partner. They could have decided to put all their property into a life interest Will trust, so the cash and savings would have the same protection.

You’ll find answers to the most commonly asked questions about Life Interest trusts below:

Life Interest Trusts FAQs

What is a Life Interest Trust in a Will?

A Life Interest Trust in your Will is designed to protect your share of the family home (plus any other cash, savings and investments) against re-marriage or the long-term effects of care fees. Life Interest Trusts help where a property is jointly owned and are particularly useful where there are children from previous relationships.

How does a Life Interest Trust work?

The Life Interest Trust protects your share of the family home and other assets for your chosen beneficiaries (i.e. your children) whilst allowing your surviving partner to remain living in the family home for the rest of their life or for as long as they wish to. If the survivor doesn’t want to stay in the family home, then it can be sold, and the money will be invested with the income being paid to them. Alternatively, they might decide to rent the property, and they will be entitled to the rental income. The capital from your share of the family home will still be protected for your chosen beneficiaries.

Most couples who own a family home jointly will own it as joint tenants. This means that when one co-owner dies, the property will pass automatically to the surviving co-owner, regardless of what the Will says.

Is there a potential problem if we own our property as joint tenants?

If your co-owning partner dies, you will own everything that you inherit from them. As the surviving co-owner:

• you can sell the home and spend the money

  • your partner’s beneficiaries could be disinherited

• any means testing assessment for state benefits or care will include the full value of the house

  • you’ll pay for your care until your savings reach £23,250

• you could change your Will and leave the house to someone else

  • your partner’s beneficiaries could be disinherited

• if you meet and marry a new partner, they will inherit the house unless you update your Will

  • your partner’s beneficiaries could be disinherited

To protect your share of the family home, you will need to own it as tenants in common and include a Life Interest Trust in your Will. Holding the family home as tenants in common means that you and your partner own distinct shares of the family home, which pass under the terms of your respective Wills.

What happens when I die?

When you make your Will, you will name people you trust to be your Trustees. Trustees are people who look after your assets for the benefit of others.

When you die, your Trustees will be responsible for managing your share of the family home, and they will need to allow your surviving partner to remain in the family home undisturbed and in compliance with the terms of the trust.

Can I sell the family home if I’ve made a Life Interest Trust Will?

This is fine. If you sell your current home and buy a new family home (owned as tenants in common), then the terms of the Life Interest can apply to this new home.

Obviously, if you sell the home and then don’t buy a new one, then the Life Interest Trust will not apply.

Can the survivor sell the family home if I die first?

Yes, the Life Interest Trust can be drafted in such a way as to enable the survivor to sell the family home and buy a new property, which will be held on the same terms.

If the property is cheaper, then any surplus cash will be invested to provide an income for the survivor whilst the capital is still protected for your chosen beneficiaries.

Who will pay the bills and sort out any repairs?

Whilst the survivor is living in the family home, they will be responsible for the bills and for any repairs as they have the enjoyment and benefit of the property.

Can I give my house to my children now instead of using my Will?

This is not advisable for several reasons. You create potential Inheritance Tax consequences for you and issues with deliberate deprivation. The Deprivation of Capital Rules deal with giving away assets that ought to be used to pay for your care will ‘undo’ the gift. You’ll still have to pay for your care.

Perhaps the biggest disadvantage is if you put the family home in your children’s names and they then divorce, die, or become bankrupt, the family home will be at risk, as the house would be one of their assets.

What are the disadvantages of a Life Interest Trust?

A Grant of Probate will need to be obtained on your death to deal with the property, but we can talk your Executors and Trustees through this process and assist them if they wish.

HMRC require Life Interest Trusts to be registered on their Trust Registration Service, and again, this is something that we can help your Executors and Trustees arrange.

If the survivor wishes to move house, the sale will be subject to Stamp Duty Land Tax at the second home rate.

The disadvantages of a life interest trust should be weighed against the benefits of protecting assets. If the trust is drafted flexibly, and your executors and trustees take sound legal advice at the point of need, your estate will be protected and any additional expenses kept to a minimum.

What do I do next?

Please get in touch if you would like advice about updating your Will or making a new Will.

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Please note that information provided on the Carisma Wills website:

• Does not provide a complete or authoritative statement of the law;

• Does not constitute legal advice by Carisma Wills;

• Does not form part of any other advice, whether paid or free.