What Happens to Property Left in Trust in a Will?
Placing property into a trust can ensure your loved ones benefit from your home after you die, and may lower the amount of Inheritance Tax they need to pay. However, this area of law can be complicated, so it is important to understand this legal tool and the relevant tax implications before you consider putting property into a trust.
For many of us, our family home is our most treasured asset. We often wish to leave our homes to our family or loved ones as inheritance, but life sometimes gets in the way. Care home costs can deplete the value of your estate, while remarriage or complex family scenarios can lead to disputes over how your assets pass to the next generation.
Property protection trusts can act as a protective barrier against many of these situations, ensuring that your home is protected against unforeseen circumstances and other legal pitfalls.
In this guide, we will explain what a will trust is, how you can set up a property protection trust will, what happens to property left in trust, and other considerations to make before setting up a trust.
If you have any questions we have not answered regarding property trusts and wills, our expert Wills, Trusts & Probate solicitors are happy to speak to you regarding your query and provide the legal services you need. You can contact us by completing the enquiry form below or by calling 0151 666 9090.
What is a Will Trust?
A will trust, also referred to as a "Testamentary Trust", is a trust that is created within a person's will to take effect after their death. It identifies trustees and beneficiaries (or potential beneficiaries in the case of a discretionary trust), and provides instructions for how the assets held in trust are to be managed and distributed.
Unlike a living trust, which takes effect during the lifetime of the settlor (the person creating the trust), a will trust only comes into operation after the settlor's death, upon the execution of the will.
People create will trusts for various reasons, including:
- To ensure that their children are taken care of and that their inheritance is managed until they reach a certain age.
- To provide for family members who need care without disrupting their eligibility for Government assistance.
- To protect assets from potential creditors or beneficiaries.
- To protect assets from care home fees.
- To provide for a surviving spouse or civil partner while also ensuring that assets eventually pass to children (especially in blended family situations).
There are many different will structures that can provide for specific needs. Whether you want to create a lifetime trust to provide for a surviving spouse, discuss discretionary trusts and their benefits, or explore creating a trust for Inheritance Tax purposes, contact our solicitors today for advice.
What is a Property Protection Trust Will?
A Property Protection Trust Will (PPTW) is a specific type of will trust designed to protect a portion of a property's value so that it can be passed to beneficiaries. At the same time, it ensures that the surviving co-owner can continue living in the property.
The primary aim of a property protection trust is often to safeguard the property from being used to pay for potential future care home fees, or against other risks like a new spouse inheriting the property if the surviving partner remarries.
Setting the trust up may involve a slight change in the structure of how the property is owned. A property is typically owned by two people as "joint tenants" which means that, upon the death of one owner, the property automatically passes to the surviving owner.
For a property protection trust to work, the ownership of the property needs to change from joint tenants to “tenants in common”. This change allows each owner to leave the half of the property they own to their own beneficiaries, usually their children, in their will.
What Happens to Property Left in Trust in a Will?
When property is left in a trust via a will, its management and distribution are determined by the terms set out in the trust document. The structure of each individual trust will determine how much control trustees have over the management of trust property, but here is a general overview of what typically happens when property is left in trust:
Trustees Take Control
Upon the death of the person who created the will, the named trustees in the will become responsible for the property. Their duty is to manage and administer their share of the property according to the instructions provided in the will and the terms of the trust.
Life Interest of Surviving Spouse
In many trust arrangements, especially property protection trust wills, the surviving partner or another beneficiary may be granted a “life interest” in the property. This means they can live in the property for the rest of their life, but they do not own the property outright. The property remains an asset of the trust. Under some arrangements, they may also be entitled to a portion of any income the trust generates.
Maintenance and Expenses
Trustees are responsible for ensuring the property is maintained. They will also handle related expenses, such as insurance, property taxes, and necessary repairs. Funds for these expenses might come from the trust itself or might be the responsibility of the person living in the property, depending on the trust's terms. If the trust generates income, the trustees will also pay income tax and manage any other financial considerations related to the operation of the trust.
Selling or Moving
If the person with a life interest wants to sell the property - for example, if they want to downsize - the trust's terms may allow this. In such cases, the proceeds from the sale would be split according to the trust's ownership percentages, with the trust's share reinvested in the new property or otherwise protected.
Death of Life Tenant (Surviving Spouse)
Once the person with the life interest passes away (or if there's a condition like remarriage or cohabitation), the property can be sold. The proceeds of the sale will be divided among the beneficiaries named in the trust. Alternatively, the property might be transferred directly to beneficiaries, depending on the trust's terms.
Once all trust conditions have been met (e.g., upon the death of the life tenant), the trustees distribute the property or its proceeds to the trust's beneficiaries as instructed in the trust terms.
Property Protection Trusts and Care Home Fees
A concern for many people during the estate planning process is the potential that they might require long-term care in a care home. This concern is not only about their well-being but also about the significant costs associated with a high quality of care. If a surviving spouse is transferred to a care home and they own their share of the family home, the entire value of the property may be included in the financial assessment.
If the value of their assets exceeds a certain threshold, they may be required to self-fund their care, which can quickly erode the value of their estate and inheritance for their loved ones.
However, if the property is placed into trust, only the surviving partner’s share of the house is assessed. The portion of the property in the trust is not typically considered an asset of the surviving partner, as the trust is a separate legal entity. Therefore, only half of the home's value (or whichever portion is outside the trust) is liable to be used towards care home fees, retaining some of the value for the ultimate beneficiaries.
This can be a shrewd way to protect your family home from being used towards future care home fees.
Contact Percy Hughes & Roberts
Navigating the complexities of property protection trusts can feel daunting, especially when it seems like so much is at stake in relation to your loved ones’ future. However, when structured correctly, a trust can offer invaluable peace of mind and ensure that your property is safeguarded against any eventualities that may arise for your beneficiaries.
It is vital you seek professional advice if you are thinking about putting a property in a trust in order to avoid any potential legal pitfalls along the way. At Percy Hughes & Roberts, we understand the intricacies and importance of protecting your assets for the future. Our dedicated team of Trust Solicitors brings years of experience and expertise in the field of Property Protection Trusts and estate planning.
If you require legal advice in relation to setting up a property trust, protecting your estate, or need assistance with anything else to do with wills, trusts and probate, Percy Hughes & Roberts can help. If you would like to contact one of our expert wills, trusts and probate solicitors you can do so by calling 0151 666 9090 or by completing the “Get in touch” form on this site.