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Tenants in Common, and Will Trusts

  • You can protect the half of the house of who dies first
  • It works but leaves the survivor’s share exposed if he/she goes into care
  • Providing a life interest can benefit your cohabiting partner, and your kids

Okay so you want to know what you can do about care cost avoidance

“If you transfer your assets away to avoid you paying your own care costs in the future, the local authority will class it as deliberate deprivation and they will have the right to try and recover the care costs from whoever you transferred them to”.

What you are allowed to do is to protect your own assets from being used to pay for someone else’s care costs, like your partner. You are free to do what you wish with your own asset so you could transfer them away into your own Trust for instance.

The first step is to safeguard your home, it is usually your biggest asset,  most married couples will own it as Joint Tenants which means that on first death, the survivor would then automatically own it 100% outright, this is when your home becomes vulnerable to attack from Care costs, if you (as the survivor) then go into care.

Simply changing the way you own your home to Tenants in Common, combined with the appropriate Will trusts will effectively ensure that half of your property is protected on that first death. The deceased’s share is held by the Will Trust.

The survivor can continue to live in the house, owning their own half & having a life interest in the deceased’s half. The house cannot be sold without the survivor’s consent, but if the survivor needs to move house, it is easily possible whether down-sizing or buying another house with a new partner. The will trust’s share in that new house remains protected and will eventually go to the beneficiaries of the deceased’s Will when the survivor either goes into care or dies.

This is an effective piece of planning and works well. Not all Will trust are the same, ours minimises the risks and is best aligned with The Care Act 2014 should a local authority even consider challenging the trust.

Will trust are also extremely useful for couples on second relationships. If you die first, you can give your partner a ‘life interest’ in your estate so they aren’t disadvantaged, when your partner eventually dies, so does the life interest and the assets held in the Will trust go to your children. Your partner cannot change this, so you have the peace of mind knowing you have provided for your partner and your kids get their rightful inheritance.. perfect!

The bottom line with a Will trust is that it can only protect half the value of the property, if one of the couple dies. If no one dies and both go into care together then it will not work for either of them, so there is still a risk to your house. Will trusts work at the date of death, you could set up trusts now whilst you are alive, these are called ‘lifetime trusts’.

Our lifetime trust is called a Family Asset Protection Trust. Protecting both halves right now then is clearly a good idea.

Top 10 Inheritance Tax Tips

  1. The Annual Exemption – you can give away £3,000 each year, so a couple can give away twice this amount. If you don’t use this allowance one year, you can use it in the next year.
  2. Gift Assets to your Children – these are known as ‘potentially exempt transfers’ (PET’s) and provided you survive 7 years then the job is done. Who should make the gift? Will you lose control of the asset that you’ve gifted? Well, you can protect the gift in the hands of the recipient so you don’t need to lose total control of it.
  3. Gift part of your house to your children – after 7 years it is out of your estate for IHT. The trouble is you have to pay full market rent to your children. They in turn have to pay income tax on the rent received. If they sell it they will be liable for Capital Gains Tax (CGT) on the gain on their share, and if you get it slightly wrong the gift will fail entirely. The better solution is for one spouse to sell their half share of the house to the other spouse in exchange for an IOU, which is then gifted to the children as a 7 year PET. After 7 years, half the ‘value of the house’ is out of the estate for IHT, but the married couple still owns the entire house.
  4. IOU Scheme – as tip no. 3 above but it can be done with any asset, e.g. a share portfolio, second property and so on. When set up properly, the value of the asset will be taken out of the estate after 7 years.
  5. Deed of Variation (DoV) – say a relative dies and leaves you an inheritance that creates you an IHT liability. Use the DoV procedure to vary that Will after death and set up a Trust to receive the inheritance for the benefit of you, and your family. There are time limits but this works very well if set up correctly.
  6. Gift out of regular income – if you have an IHT estate and your income is higher than your expenditure, the problem will only get worse as time goes by. Gifting the excess out of regular income to your children is immediately exempt from IHT. The rules can be tricky to implement but this is a very significant exemption if used correctly.
  7. Business Property Relief (BPR) Scheme – if you hold investment assets in a BPR scheme for only 2 years they will be 100% exempt from IHT. You need to retain these assets until you die but you can get an income and, since you have not given these assets away, you can cash them in at any time if you need to.
  8. Settlor Excluded Trust – if you want to gift an asset to your children to avoid your IHT after 7 years, but the asset has gone up in value (like a house) and would trigger a CGT liability if you sell it, you could instead set up a Settlor Excluded Trust and transfer the asset to that trust. As you are the Settlor and a trustee you therefore retain control of the asset, but as you will have no benefit from it, given 7 years it will be out of your estate for IHT and you will get holdover relief for CGT as well.
  9. Discounted Gift Trust – can seem attractive and you can get an immediate IHT exemption for part of your initial investment. The trouble is the portion that is exempt is based on your age and health so it may not be as great as you had wished for.
  10. Family Protection Trusts (FPT’s) – avoid the problem in the first place. If inheriting from your parents is going to give you an IHT problem, get them to set up FPT’s because with their assets ‘in trust’ you will have the option of borrowing your inheritance from the trust in exchange for a valid IOU so that you get the full benefit of the inheritance without incurring an IHT liability.

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