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Estate Planning & Trusts
A Will documents how you wish your assets to be distributed after you pass. A Trust protects your assets while you are still alive in order for your loved ones to benefit from them later.
Looking ahead
Trusts not only protect from disinheritance and help with inheritance tax planning they can also offer protection from bankruptcy, help to provide for benefit dependant beneficiaries and provide protection for vulnerable beneficiaries.
Protecting family
If a beneficiary to your estate was to pass away after receiving their inheritance a Trust can stipulate where the assets should then go. A trust would help to keep the assets in the family blood line and prevent disinheritance.
Peace of Mind
If you were to find yourself in a situation where care is required, Local Authorities have the powers to strip your assets down to just £14,250. If your estate is worth £300,000, they could reduce your family’s inheritance by £285,750.
Will Trusts
A Will Trust is an instruction in a Will for a Trust to be set up after the first passing in a marriage or long-term relationship, and its primary function is to offer protection from future care requirements.
The most common way for property to be owned is as Joint Tenants. This means the property is 100% owned by both partners and this can have significant detrimental impacts on the estate. With joint ownership, once the first spouse or partner passes, then the survivor is in full ownership of the property, and this means if the need for care arises then the full value of the property can be accessed by the local authority when deciding how much should be contributed towards long term care fees.
When a Will is created with the Will Trust instruction included, the property is registered as Tenants in Comon which means each person as an allocated percentage interest in the property (Usually 50 percent each). When the first owner passes their share is then set into the Trust meaning it cannot be taken to pay for care fees should the survive require care in the future. Only the survivors share can be taken into consideration.
Will Trust: Case Study
David and Claire have been together over 30 years, they worked hard to pay off their mortgage and have decided that the property should go to their son Robert when they die.
Unfortunately, after Claire's passing, David develops dementia and after being cared for by his family it reaches the stage where they are unable to cope with his needs. David is reluctantly placed into a care facility. As the property, which is valued at £250 000, is owned jointly, the local authority uses the full value of the property to pay for his care. Currently legislation allows the family to retain just £14,250. In this case Roberts inheritance was reduced by £235,750.
Had David and Claire protected their property with a Will Trust only David’s half of the property could be used to fund his care. Claire's half of the property would remain intact, and Robert’s inheritance would be increased by £125,000.
Living Trusts
A Living Trust is a legal document which offers a greater level of protection for your assets, it can reduce Inheritance Tax, offer protection from relationship failure, and can be used to protect your family’s wealth for generations to come.
Throughout your life you will accumulate assets such as the family home, pensions and savings. Your Will only comes into force after you pass and provides no protection for your assets while you are alive. A Living Trust is specifically designed to protect your assets while you are alive and provides peace of mind knowing they can be passed on for generations to come.
There are various forms of Living Trusts with different benefits, so it is important to speak to a Trust specialist to ensure the right Trust is taken and the appropriate clauses are written.
Reason for taking a Trust include:
No Probate or Delays – Probate can be requested on all estates over £5000, even where there is a Will in place and Solicitors administrating the estate can charge as much as 5% of the value of the estate. Assets held in Trust are not subject to Probate.
Failed Relationships – By “Ring Fencing” your assets for your children, if one were to suffer a relationship failure, their inheritance is protected against any claims by a previous partner or spouse.
Protection for Benefit Dependent Beneficiaries – If assets are inherited by someone who is dependent on benefits, either short term - such as unemployment or long term such as a congenital birth defect, they are unlikely to continue to receive state support. Where assets are owned in Trust your beneficiary would still qualify for state support and be able to benefit from the assets within the Trust.
Protection from Bankruptcy – If you or your beneficiaries are in business you may wish to protect your assets from unforeseen business debts, while a Trust will not stop someone being declared bankrupt, it can avoid your assets being taken to satisfy claims against you or your beneficiaries once you have passed.
No Claims on your Estate – Not all family situations are straight forward the law entitles relatives and dependants to claim “Reasonable Financial Provision” against your estate. Defending the claim can take years and is likely to run up thousands of pounds worth of legal costs. A claim cannot be made against any assets held in Trust.
Generational Inheritance Tax - Married couples who own property and have children have IHT thresholds of £1M, single people who own property and have children have IHT thresholds of £500K. Passing amounts through a Will could create significant IHT losses for your beneficiaries by pushing them over the relevant threshold level. A Trust used correctly will prevent generational IHT.
Sideways Disinheritance - If unfortunately, one of your beneficiaries died younger than expected but after they had inherited from you, their Will, if present, or the Laws of Intestacy would pass the inheritance to their husband or wife. Remarriage could create financial loss and may mean another family benefits from your assets and not your grandchildren. A Trust would ring fence assets for bloodline.
IHT Liabilities - Inheritance Tax must be paid as part of probate within six months of death. If there is not enough liquid cash available in the estate to settle the liability the Trustees can use or sell Trust assets immediately with no probate to settle the liability and free up the remainder of the estate.
Living Trust: Case Study 1
Jeff and Doreen have worked hard all their lives, they have a property valued at £300,000, savings of £100,000 and various other investments worth £50,000. They wrote a will leaving everything to their daughter, Lesley, and hoped it would provide financial stability for her in the years after their deaths.
However, shortly after Lesley inherits £450,000 from her parents’ estate her marriage is dissolved and £225,000 of Lesley’s inheritance is now with Jeff and Doreen’s ex-son-in-law.
If Jeff and Doreen had placed their assets in a Family Asset Trust and named Lesley as the beneficiary, then Lesley would have retained all the assets in the trust. Her ex-husband would have no stake or claim to Lesley’s inheritance.
Living Trust: Case Study 2
Lesley and Peter have 2 children, unfortunately their youngest son, Andy, was born with a congenital birth defect which as left him unable to work and preform many day-to-day duties. Their son receives various benefits which he needs to cover his care requirements and contribute to his day to day living. However, once Andy inherits from his parents, he will exceed the amount he is allowed to have while on benefits and his payments will be frozen. Andy will therefore not actually financially benefit from the inheritance left by his parents. Once Andys inheritance as depleted, he will need to reapply for benefits, but his current benefits may not be available, his condition will make the application stressful and long winded and ultimately, he may not get the level of funding he currently receives.
To prevent this, a Trust was set up for Andy’s inheritance which meant his inheritance did not affect his current claims and the money he received from his parents helps Andy by providing some financial stability.
Investors Living Trust
An Investors Living Trust is a legal arrangement designed for individuals who own property in addition to their principal place of residence. Its primary purpose is to protect these assets for direct descendants, ensuring that property remains within the family across generations.
Key Benefits
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Asset Protection: Properties transferred into the trust are safeguarded for the benefit of the settlor’s chosen beneficiaries, typically their children or other direct descendants.
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Capital Gains Tax Efficiency: Normally, selling or transferring property that is not your principal residence triggers a Capital Gains Tax liability. However, transferring property into an Investors Living Trust does not create this tax issue, provided the property is free from charges such as a mortgage.
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Probate Avoidance: Assets held in the trust do not need to go through probate upon the settlor’s death, which can simplify and expedite the inheritance process.
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Inheritance Tax (IHT) Planning: If inheritance tax is due, assets in the trust are not part of the deceased’s estate and cannot be sold to cover unpaid IHT, potentially offering significant financial advantages.
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Care Assessment Exclusion: Assets transferred into the trust are not included in financial assessments for care needs, which may help protect family wealth.
How It Works
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Transfer of Property: The settlor (the person establishing the trust) transfers ownership of eligible properties (those without outstanding mortgages) into the trust.
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Appointment of Nominees: The settlor appoints nominees, often themselves and their children, to manage the trust.
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Letter of Direction: While the settlor has mental capacity, they sign a Letter of Direction. This document provides instructions to the nominees regarding lifetime gifting and investment strategies, such as investing in Business Property Relief to minimise inheritance tax losses.
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Loss of Capacity: If the settlor loses capacity, the nominees follow the instructions set out in the Letter of Direction. It is important to note that an attorney acting under a Lasting Power of Attorney (LPA) cannot make gifts or investments to reduce IHT, so the Letter of Direction is a crucial step.
Legal Considerations
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Eligibility: Only properties free from charges (e.g., mortgages) can be transferred into the trust.
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Role of Nominees: Nominees are responsible for following the settlor’s instructions and managing the trust assets in accordance with the Letter of Direction.
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Business Property Relief: Investing in qualifying business assets may further reduce inheritance tax liabilities, as outlined in the Letter of Direction.
Summary
An Investors Living Trust offers a strategic way to protect family assets, optimise tax efficiency, and simplify inheritance processes. By placing property into trust and providing clear instructions for its management, individuals can ensure their wishes are respected and their descendants benefit from their legacy.
Carve out Trust to reduce Inheritance Tax
For many clients, the main residence is the primary factor in their estates exposure for Inheritance Tax (IHT). A Carve out Trust offers an effective solution for reducing IHT liabilities without the need to gift cash assets. This approach is particularly suitable for those who wish to retain access to their savings during their lifetime.
When gifting all or part of a property while continuing to reside there, the arrangement is typically classified as a Gift with Reservation of Benefit for IHT purposes unless market-rate rent is paid the asset remains in the estate and therefore does not reduce the IHT liability. However, If the property allows, a specific portion can allocated exclusively to the beneficiary. To qualify, the beneficiary must have a designated bedroom, personal possessions, and a designated area for relaxation or work, a key and unrestricted access to the property.
The beneficiary may have multiple residences and can elect any as their Principal Place of Residence for Capital Gains Tax purposes. For IHT the carved-out portion is not considered a Gift with Reservation of Benefit, as it is no longer used by the donor. The gift is treated as a Potentially Exempt Transfer; if the donor survives seven years from the date of transfer, the value of the carved-out portion is excluded from the estate for IHT calculations.
The Carve out Trust must be registered with both the Land Registry and HMRC to ensure proper documentation.
This strategy enables clients to reduce IHT liabilities without relinquishing access to cash or savings.
