What is a property protection trust?
Creating a property protection trust (sometimes called an asset protection trust, a family protection trust or a property preservation trust) through your will allows someone to benefit from your estate after you have died as if he or she owned the assets, without actually inheriting it. The value of his or her estate is therefore kept minimised.
In law, there is no such thing as a property protection trust. The mechanism is a standard trust where a beneficiary has a life interest. The name is used in marketing, presumably because the idea of 'protecting' your assets from the state is appealing enough to want to pay higher fees for the writing of 'special' terms into your will by a professional.
A life interest trust is typically used to allow someone to benefit from assets, without owning them. For example, if you have a disabled child who doesn’t have mental capacity to manage his or her financial affairs, you may opt to place your estate in a trust, managed by other family members for your child’s benefit. Your wealth enables your child to be cared for, with the trustees making the decisions about how best your estate should be used to do so.
The same structure is used to 'protect' property from means tested fees. Your husband or wife never inherits the assets, so they never count as part of his or her estate from which fees can be paid, yet he or she can benefit from them as if they were owned. On his or her death, the remaining estate passes to other beneficiaries who do inherit it.
Why it is used
If you have children and you die without having made a will, then your husband or wife automatically inherits the first £250,000 of value in the estate and half of the remainder. The children receive the other half of the remainder.
Many couples make wills that transfer all of the estate to the other, if the other survives, otherwise all to children.
The intention in both cases is for the survivor to be able to live comfortably for the rest of his or her life, before the joint wealth that both parents have accumulated over their lifetimes is passed on to the next generation.
In these situations, the surviving spouse will find himself or herself much wealthier as an individual as a result of the death of his or her husband or wife.
The issue here is not so much that the surviving spouse is more likely to have assets over the threshold at which he or she must pay for elderly care (because that threshold is relatively low), but rather that he or she has more wealth that can be used to pay such fees before falling back below the threshold.
Many people feel that care fees erode what would otherwise be the children’s inheritance.
Example
Alf and Brenda have assets worth £300,000 together, primarily in the capital value of their home. At this level of wealth, their joint estate does not qualify for inheritance tax at any rate.
They wish to leave as much as possible of their estate to their son Charles.
Alf dies before Brenda, leaving her his share in the home and all his other assets.
After 2 years of continuing to live at home, Brenda needs care and moves to a nursing home. Fees are slightly less than the UK average at £30,000 per year. Her new level of wealth means that she may have to pay such fees for just over 9 years (before her wealth drops below the current threshold for paying fees of £23,250).
She lives for 7 more years, and Charles inherits £90,000.
However, had Alf placed his assets in a property protection trust, Brenda would still have been able to live in the family home, but the value of her estate would have been still £150,000 just after Alf's death. Care costs for 7 years would have reduced the value of her estate to £14,250 (the level at which your local authority pays all care costs).
However, Charles would have inherited that £14,250 plus the £150,000 left by Alf in trust. So Charles would be £74,250 richer.
How much does a Property Protection Trust cost to set up?
Solicitors and will writers often charge from £500 to £4,000 to set up a protective property trust.
The cost tends to be greater if the trust comes into existence during your lifetime. Lifetime trusts require deeds separate to your Will to be drafted and additional documents generate higher costs.
Advice is a large component of the total cost
A great proportion of the cost may be attributed to providing legal advice. Tailored advice is charged on a per hour basis, so a two hour consultation with your solicitor might cost you £400. A further hour of discussion once the wording has been written to make sure that you understand the implications might cost and additional £200.
Ensuring that your share of the property can be placed in trust
If you hold your property as joint tenants, then 'severing' the joint tenancy so that each of you owns your share of the property as tenants in common will also come at a cost. However, it is relatively simple to do using a tenants in common agreement.
Bear in mind that an online search at the Land Registry (to identify how legal title is held and therefore whether the work needs to be done) costs £3 currently and can be done by anyone. Completing Form SEV and sending it to the Registry takes ten minutes.
A solicitor will want to carry out this work (they would be negligent if they failed to do so and later there was a problem). However, it may account for £200 to £400 of the total cost.
However, you can do this work yourself and show your solicitor a copy of the search as evidence that they do not need to do the work.
Value based charging rather than time cost based charging
It is common with the will writing industry to charge for the additional of a trust not based on how much work the solicitor or will writer does, but on perceived value to you the client.
By including a protective property trust in your will that qualifies for the Residence Nil Rate Band (a tax relief), your beneficiaries might save tens of thousands of pounds. In the example above, Charles saves £70,000 on a reasonably modestly valued joint estate of £300,000.
This advantage will be conveyed to you strongly during your consultation meeting because saving tens of thousands of pounds later makes the relative cost of a few thousand pounds for drafting your will worth it.
The right words to create a lifetime trust take very little time for a will writer to find. Using will precedents (template wording), the establishment of a trust through a will (even reasonably complex ones) might take 30 minutes provided that the requirements are understood.
A flexible life interest trust (known as a FLIT) usually is more expensive. This type of trust allows the trustees to convert the trust into a discretionary trust during the lifetime of the life tenant so that the life tenant can spend the capital of the property if required. For example, the beneficiaries might decide to fund long term care fees by using an equity release scheme on the home that also allows the surviving spouse to continue living in the property.
Using a Net Lawman will template and our Lawyer Assist service or our drafting service (see below for the link), you can create a Will with a property protection trust within it for the same price as an hour of solicitor's time. Our charges are based on time, not on the saving your estate might make.
Ethics and legality
Property protection trusts created through wills
The reason to create these types of trusts through your will is to prevent the wealth of the person who dies first from being used to pay for care fees (whether residential care or medical care) for the spouse. Your children inherit a greater value.
Other mechanisms, such as discretionary trusts, have been used widely in the past for similar purposes – to avoid inheritance tax (although that loophole is now closed).
Trusts created during your lifetime
Some solicitors and will writers may encourage you to set up a property trust during your lifetime so that you can also avoid care fees yourself.
Is it ethical and legal?
Whether using these is ethical is very much a personal opinion.
Setting up such trusts is certainly legal.
While it is lawful and possible to create an asset protection trust both during your lifetime and through your will, it may not always have the effect you intend.
The Net Lawman opinion is that as a result of current financial pressure on the UK care system, local authorities are more likely to scrutinise and challenge any scheme or device that leads to a 'deprivation of assets' for someone who needs care.
Deprivation of assets means that you have taken an action to reduce the value of your assets in order to deprive the local authority of fees to which they would otherwise be entitled.
If it is reasonably clear that the motive for creating the trust was to avoid paying care fees then a local authority can look through the trust and take into account the assets in means testing.
Your motive in creating this type of trust can't always be proved in court. However, what will be taken into consideration is:
If the trust is made during your lifetime to protect you from paying for care, then whether it was reasonable to believe that you would need personal care. The argument is likely to be strengthened if you have continued to live in the famly home after the trust is created.
If the trust arises from your will, whether it was reasonable to believe at the time you wrote your will that the life interest beneficiary would need care.
A local authority is more likely to apply for power to look through a trust created during your lifetime because the purpose is more likely to be for deprivation.
However, if you write a will before care might need to be considered for your husband, wife or partner, it might be difficult for a local authority to claim that the primary reason for leaving assets in a trust was to avoid care fees. There are after all other legitimate reasons to leave gifts in a trust with a lifetime beneficiary.
Other considerations
There have been cases in court regarding high pressure selling of such schemes to vulnerable adults.
There have also been cases of mis-selling, where a will writer led a client to believe that the property protection trust would certainly protect his estate, in a situation where clearly it would not.
There have also been situations where solicitors have written wills that nominate themselves as trustees. In that position, they can charge further ongoing fees for their work.
Why would you use a trust with a life interest?
Leaving assets in trust with a lifetime beneficiary may give you more control of them than leaving them directly.
A common use of such trusts is where you live together unmarried with a partner or where you have remarried.
If you leave the property directly to your partner or spouse, he or she decides what happens to it through his or her will (or possibly through the laws of intestacy if he or she doesn't make a will).
This can become an issue if you have children from earlier relationships who may not be in the will of your spouse or partner (particularly if he or she remarries after your death). You are likely to want to support your surviving partner or spouse while they are alive, but you also want to make sure your children inherit.
The solution is a trust with a lifetime beneficiary.
Alternatives
The idea behind a property protection trust is to give benefit of use without ownership.
One alternative to creating a trust is to give your estate to your beneficiaries (such as your children) during your lifetime, with an agreement that they will use them to look after your spouse.
Provided that it is clear that you are not giving the assets away just before you need care (and thus depriving the state for your own care), this could be a viable alternative. However you need to think about:
if the people to whom you give your estate divorce, the assets would be divided equally between them (divorce has no effect on a will but once the assets are distributed they may be split between a divorcing couple)
there may be inheritance tax consequences if you die within a certain time period after the gift is made
there may be capital gains tax consequences if the property is not your principle home
the people to whom you give your estate may not act as they promised: they may not give the same amount of care to your spouse as you hope; or an unforeseen event may leave them bankrupt
Making a will
Net Lawman offers a free online will service that allows you to create trusts, should you want to do so.
The service is free because we believe that everyone should be able to make a will regardless of financial situation.
We also provide some of our more straightforward templates absolutely free with no catches or conditions. We offer nine templates (three free) in total that together cover thousands of possible variations of wishes. There will be one to suit your situation.