Inheritance tax, probate delays, and more. Is there a better way to leave your home to the next generation?
What are property trusts?
A property trust is a legal arrangement that operates like most trusts, in that you are taking assets out of your estate and giving control of those assets over to the trustees, who will look after it and distribute those assets according to your wishes after your death (or other specified life event). The key difference is that this type of trust only covers properties, and usually stipulates that you may keep living there until you die or choose to move out even though you no longer own the property.
Types of property trusts
There are different types of property trust which determine the level of control (if any) you have on your property once it’s in trust, and how that property is distributed.
The most common types of property trust are as follows:
Bare Trust
Also called an Absolute Trust, this is the most straightforward arrangement and allows for no flexibility. The settlor (the person who owned the home and sets up the trust) decides on the beneficiaries, who will then be given ownership of the house.
Discretionary Trust
The key here is in the name; your trustees (the people you nominate to take charge of the trust) will have complete discretion to manage the property on behalf of the beneficiaries.
For example, this could look like your children (the trustees) handling the management of the property until your grandchildren (the beneficiaries) are old enough to move out or – if selling the property – are considered to be responsible enough to receive such a large amount of money.
Life Interest Trust
Also called an Interest in Possession Trust, this is useful for couples who want to leave their share of the property to their partner first, then to someone else (such as their children) on their death. This allows for you and your partner to keep living in and owning your home as long as you need it, without having to set up multiple arrangements.
Protective Property Trust
This is usually intended as a feature to a will, and is designed to protect what you want to leave to certain beneficiaries by ringfencing them within a trust upon your death. In simple terms, if you own 50% of your property, you can arrange a Protective Property Trust on your share which will prevent your spouse from inheriting it. This means that if they remarry, they can’t leave your share of the property to their new family.
What are the pros of getting a property trust?
Trusts are a very effective estate planning solution when used properly. Here are some of the main benefits to putting your property into trust:
Inheritance Tax Planning
By removing your property from your estate, it will no longer be part of your taxable estate when you die and therefore not subject to IHT (provided certain conditions are met).
Immediate Inheritance
It can take six months to a year to receive someone’s inheritance after death, as you have to wait for a Grant of Probate to be issued before you can take ownership of any assets. However, by putting the property into trust, it is no longer subject to probate rules and can be transferred immediately.
Tailor-Made to You
Trusts can be set up to suit your specific needs and, often, to make sure that your wishes are carried out after your death. By deciding what type of trust you want, you can decide how much authority to give your trustees, or how strict you want the trust conditions to be.
Long-Term Plans
If you want to leave your house to your children or grandchildren, but believe that they’re too young to receive such a substantial inheritance at this time, you can arrange for the trust to grant them access at a certain age, or after certain conditions have been met.
Indisputable
In England and Wales, wills are not legally binding and relatives are able to challenge a will in court if they believe they’ve been unfairly treated, but the conditions of a trust cannot be changed once it’s set up. Whilst it’s unlikely that a strong will would be successfully challenged in court, trusts provide an extra layer of protection and security for when you’re gone.
What are the cons of getting a property trust?
Trusts are a formal legal arrangement and should not be entered into lightly. Here are some potential downsides to be aware of:
Unless you are one of the trustees, you will no longer have any control over what happens to your property. Even if you are a trustee, your role now is to administrate the trust, and you will no longer own your own home – though you may still live there.
Disputes with Trustees
If there is more than one trustee, all trustees must agree on any decisions regarding the discretionary trust. Without a consensus, no actions can be taken. Additionally, if one of the trustees loses mental capacity for whatever reason (such as an accident or stroke), the other trustees will have to apply to the Courts to have them removed before any further actions can be taken.
Deprivation of Assets
One of the benefits of putting your property into a trust is that it cannot be used to pay towards your own care home fees. However, if the local authority determines that you deliberately put your property into a trust to avoid paying care home fees, and for no other legitimate reason, they may still force you to pay for your own care home fees, whether you can afford it or not!
How do you set up a property trust?
Step 1. Book in a consultation call
Step 2. Discuss your wishes for your property and receive professional advice on the best option for you
Step 3. Choose your trustees
Step 4. Submit your application
Making the right decision for yourself
Trusts can be an effective addition to your estate planning, as they are tax-efficient, not subject to will disputes, and can be tailored to your needs. The main downside to a trust is that they are inflexible once established, so you should always seek the professional advice of an estate planner or solicitor before arranging one, to ensure that your trust meets your specific needs.
If you are considering putting your property into a trust, please get in touch; we are here to help you make estate planning as pain free as possible.
