Setting up a Trust, whether during your lifetime or in your Will, allows you to make provision for family members or vulnerable individuals without making an outright gift.
Trusts can be useful tools in tax and estate planning and are not just for the "super rich". However, they are also governed by specific legislation and tax rules.
The steps available to you can include:
- Updating your Will
- Establishing a trust (in your Will or during your lifetime)
- Severing the joint tenancy on your property, if applicable.
Lifetime Trusts/Asset Protection Trusts
One of the most common forms of asset protection would be to establish a lifetime trust. A lifetime trust is often used to protect assets and the main features of such a trust would be:
- The trust can be created by you or both you and your spouse.
- You retain possession of the asset or house at all times.
- The beneficiaries of the trust are often yourself and your children.
- The trust lasts during your life or joint lives.
- You retain possession irrespective of your circumstances.
- There are usually two trustees.
- The house or assets are transferred to the trustees’ subject to the terms of the trust.
The trust is maintained by the trustees, but they do not have ownership. They only look after it for you during your lifetime.
It is perfectly safe and secure for you as you retain rights of possession throughout the duration of the trust.
You can move house and the trust continues wherever you are.
Please note that the house must be in your name (or joint names) and free of mortgage.
There are also disadvantages to establishing a trust and we will of course advise you of these before you proceed.
Please note that settling assets on a trust is not an effective Inheritance Tax planning tool.
Transfer of Property
This is one simple way of ensuring that your property passes to family members or a loved one. Property can be transferred outright or into joint names.
However, it is very important that the following risks are considered:
- The recipient of the property may fail to support the person making the gift, leaving them vulnerable and at risk of losing their home.
- In the event of the divorce of the recipient, their share of the property would be considered as part of their assets in any financial settlement.
- If the recipient were to become bankrupt, their trustee in bankruptcy could claim against the recipient's share of the property when selling assets to pay creditors.
- On the death of the recipient their share of the property would form part of their estate and would pass under their Will.
- If no Will exists then the property would pass to the next of kin under intestacy laws.
- There may be adverse tax consequences for both the person making the gift and also the recipient.
- If you transfer assets, whether outright or into a Trust, with the intention of avoiding care fees, then you may be deemed as still owning the assets for the purposes of assessing your eligibility for Local Authority funding.
Severance of Joint Tenancy
Most couples own property jointly as "joint tenants". This means that if one of you dies the property automatically passes to the other, regardless of what is in any Will.
However, there is a way in which you can leave your respective share of the property under a Will to someone else, for example, to the children.
In order for such a gift to take effect it is necessary to change the joint ownership by way of "Severance of Joint Tenancy" so that you become "tenants in common". You would then each have your own specified share of the property which you can leave to your children in your Will.
By severing the joint tenancy and making a Will, you are ensuring that your children receive a share of the family home on the first death. In addition, should the surviving partner have to go into full time residential care, the share given away should not be treated as Capital for the purposes of a Local Authority financial assessment as it is no longer theirs.
The Local Authority cannot treat the family home as Capital whilst there is a surviving partner still living in the property.
Deprivation of Assets
Where a person needs residential or nursing home care in England or Wales, the Local Authority will carry out a financial assessment to calculate how much should be paid towards the care fees.
There are strict rules regarding "Deprivation of Assets" where a person's objective is to obtain assistance with care fees. Therefore, if someone disposes of assets with an intention to obtain help with care fees then the person making the gift can be assessed as if they still own the asset.
It is therefore extremely important that legal advice is obtained before any steps are taken to transfer property, whether as an outright gift or as a Trust.
If the Local Authority believes you have given your assets away to avoid the payment of care fees, they may decide that you have deprived yourself of assets and calculate your ability to pay as if you still owned them. In some circumstances, where the asset has been gifted within 6 months prior to the person going into care, the Local Authority could recover the cost from the person who has received the gift.
Generally, it is the motive and intention behind making the gift that is the important factor. There is no time period after which it can be said that the gift is likely to be successful. If the gift took place at a time when a person is fit and healthy and could not have predicted the need for a move to nursing or residential care, then it is more likely that the gift will be successful. However, there are no guarantees.
Protect Your Assets with the Experts at Garratts
Garratts solicitors can help make a Trust work for you. Our team of experienced private client solicitors have substantial experience in drafting both lifetime and Will Trusts on behalf of clients. We specialise in all forms of Estate Planning/Asset Protection Trusts, Discretionary Trusts and Will Trusts.