Property Trusts & Inheritance Protection

We all know that making a Will is important. A Will ensures that your wishes are followed, and your assets are passed on how you intended when you die. Recording your wishes in a Will is especially important in blended families if you’ve remarried or have stepchildren.

Inheritance Protection

However, you can, and should think about the possibilities of what could happen after you pass away. Could the inheritance you intend for your children be diverted through future Wills if your partner or spouse remarries?

Let's have a look at a possible scenario:

Mr and Mrs A are married, they have two children and modest assets including a house and a small amount of savings. They have made Mirror Wills, which leave everything to each other, and shared equally between the children if they both pass away.

Mr A passes away. Mrs A inherits everything. After a while, Mrs A finds a new partner, Mr B and remarries. The remarriage nullifies the now Mrs B’s original Will.

Mrs B passes away, and under the rules of intestacy, Mr B now inherits everything. Mr B never liked his stepchildren, so he writes his own Will to pass everything to his own children.

The children of Mr and Mrs A never receive any inheritance from their parents. Let’s look at some possible ways to ensure that inheritance is passed to whom it is intended for.

Get in touch with our Wills solicitors in Hoyland and Penistone

If you’re worried about protecting your inheritance for your children, talk to us first. Our expert Wills and Trust solicitors in Hoyland and Penistone will offer all the advice and guidance you’ll need to make the right decision for your family.

We have local offices on Market Street in Hoyland and Market Street in Penistone. Give us a call, or fill in our online enquiry form and we’ll give you a call back as soon as possible.

The Pitfalls of Transferring Property

A simple solution to ensure your children inherit your property would be to simply transfer it into their names. It’s a straightforward solution, and it could work without issue in some circumstances.

However, there are several reasons why transferring property into your children’s name isn’t a good idea. We’ll explain why…

The main issue will be that you’ll no longer own your own home. Whilst initially that might not sound like too much of an issue, what happens if you were forced out of your home through no fault of your own?

Divorce

If your child/children marry or are married and then subsequently they divorce, your home could be included in any claims by an ex-spouse.

Bankruptcy

The same applies to bankruptcy. If your child was to be declared bankrupt, your home would be deemed as an asset and could be sold to satisfy any debts.

Family Feuds

Whilst relations within the family could be all rosy at the time of arranging the transfer, what would happen if things went south in the future. If you fell out with your children, they could decide to sell or rent out your property

There are other financial reasons why a simple transfer might not be the right solution too…

Asset Deprivation

If you were to transfer your property into your children’s names, it could be seen that you have deliberately deprived yourself of assets should you need to go into residential care. It is possible that a local authority could deem this to be the case. They could reverse the transfer to consider the property value for any care fee assessment.

Capital Gains & Inheritance Tax

There is a common belief that gifting a property becomes exempt from inheritance tax after 7 years. However, if you were to continue living in your home, then this could be treated as a ‘gift with reservation of benefit’. Under inheritance tax rules, the property will remain part of your estate, even if you live beyond seven years. One option could be to pay rent at the market rate for the privilege of living in your own home, but then your ‘landlord’ will be responsible for paying income tax on the rent you pay them.

With regard to Capital Gains Tax, if your children do not live in the property with you when you transfer the property, and the value of the property goes up, it will be subject to Capital Gains Tax when they sell. If you are transferring a second home, or an investment property, then you could be liable to pay Capital Gains Tax on any increase in value between the date you took ownership and giving it away.

How to Ensure Your Children Receive an Inheritance

We have seen how sideways disinheritance can result in your children not receiving an inheritance. We have also looked at reasons why transferring your property to them isn’t always a good idea. So, let’s take a look at a couple of ways that we can ensure that your children receive an inheritance…

Life Interest in a Property in a Will

One possible solution to ensure your children receive an inheritance is to create a Property Trust Will. In such a Will, the ownership of the property is severed with the Land Registry, changing the ownership of property from ‘Joint Tenants’, to ‘Tenants in Common’. Essentially, this splits the ownership of the property so each owner can do what they wish with their share.

When the property is owned in shares, either equally or unequally, the owner of those shares can write into their Will, to whom they want to pass their share when they die. For the purposes of inheritance protection, this would likely be your children.

Upon the first death, your children will not inherit your share of the property immediately. The surviving spouse or partner is granted a life interest in the property to continue living there, so they can’t lose their home to your children’s divorce or bankruptcy etc.

Your children will receive their inheritance upon the second death.

Let’s look back at Mr and Mrs A’s scenario with a Property Trust Will in place.

Mr and Mrs A are married, they have two children and modest assets including a house and a small amount of savings. They have made Property Trust Wills, which leave their shares of their home equally to their children if they both pass away.

Mr A passes away. His 50% share of the family home is passed equally in Trust to his two children. After a while, Mrs A finds a new partner, Mr B and remarries. The remarriage nullifies the now Mrs B’s original Will.

Mrs B passes away, and under the rules of intestacy, Mr B now inherits everything of Mrs B, but crucially, not Mr A’s 50% share of the house. Mr B never liked his stepchildren, so he writes his own Will to pass everything to his own children.

The two children of Mr and Mrs A each receive 25% of the property value.

Lifetime Property Trust

An alternative option would be to remove your property from your estate by placing it in a trust while you are still alive and residing there. A Lifetime Property Trust is designed to protect the family home from claims against it by third parties. A Lifetime Property Trust differs from a Will as it is in effect while you are alive. A Will only comes into effect when you die.

The family home is transferred into a ‘trust’. A legal entity that allows someone to benefit from an asset, without being the legal owner. You can continue to reside in your family home after you have transferred it to the trust, and you would become the ‘Settlor’. The Settlor retains a life interest to continue living in the property for the rest of their life.

Upon the death of the Settlor, the family home is held on discretionary trust for the beneficiaries, usually the children of the Settlor.

Transferring the family home into a Lifetime Property Trust will not assist with mitigating inheritance tax, as the property will be deemed as a ‘gift with reservation of benefit’. However, the Lifetime Property Trust will protect the property should any of the discretionary beneficiaries die or be declared bankrupt. In these circumstances, the Lifetime Property Trust would not form part of their estate. If a discretionary beneficiary was to divorce, the court could consider the likelihood of the beneficiary benefiting from the Lifetime Property Trust when dividing matrimonial assets, but the court would not make any order relating to the assets of the Lifetime Property Trust.

Let’s take a final look at Mr and Mrs A’s scenario if they were to put a Lifetime Property Trust in place…

Mr and Mrs A are now in their later years. Their two children have grown up and now have their own homes and families. Mr and Mrs A own their own home outright and have a small amount of savings. They decide that they want to make things easy for their family when they pass away, and they want to protect the family home for their children’s inheritance. They transfer their home into a Lifetime Property Trust with their two children as the discretionary beneficiaries.

Mr A needs to move into residential care. He never anticipated going into care, so this comes as a bit of a surprise. His 50% share of the family home is likely to be protected from Local Authority assessments as the property is in trust. Subsequently, after a few years of care, Mr A passes away. Nothing changes in terms of the property ownership and Mrs A’s right to carry on living there.

When Mrs A passes away, the family home is held on discretionary trust for the two children. They are now free to choose what they do with the home.

Talk to us first…

We have local offices on Market Street in Hoyland and Market Street in Penistone. Give us a call, or fill in our online enquiry form and we’ll give you a call back as soon as possible.

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