Property is the biggest investment that most of us will ever own. Having worked hard to pay for our homes, naturally, we want to know that when we die, our loved ones will benefit from the value of our estate.
Making a will feels like a logical step to ensure this will be the case. Although what most people don’t know is that a will doesn’t always offer guarantees about where your assets will actually end up. That’s because your family’s circumstances may change after your death. Or, a will may not state certain conditions you consider to be a given in writing.
With so many uncertainties that can threaten your share of a property after you die, taking out a property protection trust can put your mind at ease.
Here is an overview of what a property protection trust is, along with the advantages and disadvantages to consider before you go ahead.
What Is A Protective Property Trust?
A property protection trust is also known as a family protection trust, a property preservation trust or an asset protection trust.
However, legally speaking, there is no such thing as a property protection trust. Instead, the legal term is a life interest trust which is a type of will.
However, to ensure clarity, we will refer to the process as a property protection trust throughout this article. Property protection trust is the most commonly used term associated with this type of estate planning.
It’s good to note that if you are thinking of taking out a property protection trust it is a formal legal arrangement. Upon the death of the first spouse (either you or your spouse), any executors would need to apply for a grant of probate to deal with their share of the property. The Land Registry would also need to be updated with details of how the property is owned.
Why Would I Need To Set A Property Trust Up?
Most of us will need additional care as we age. The money to pay for care has to come from somewhere. For those unable to self-fund for care, your property may be used to offset care costs. This would mean that when you die, any inheritance could be completely swallowed up by care fees, or at the very least significantly reduced.
Furthermore, if you have a complex family dynamic such as children from a previous relationship, or if you die before your spouse and they remarry, this could also mean any property you own isn’t distributed in a way that is agreeable to you after you die.
How Do Property Protection Trusts Work?
The reason someone would take out a property protection trust is to ensure that their surviving spouses or partners can continue to benefit from their share of the property after they have died.
Normally, if you die before your spouse then any shares of your property automatically pass to them. However, a property trust allows a surviving spouse to benefit from a share of a property without actually owning it. This ensures that when the surviving spouse then dies, your original shares in the property are distributed to your chosen beneficiaries.
If you die before your spouse and they remarry, or if you have children from a previous relationship, it may not be a given that any children you have will benefit from your estate.
Also, as we mentioned at the start, someone may also take a property protection trust to ring-fence any funds that could otherwise be used for care home fees.
In summary, there are two main facets to a property protection trust:
- To ensure that your share of any property owned with your spouse is passed onto your chosen beneficiaries after you die, rather than your share being passed to your spouse and then your spouse’s beneficiaries when they die.
- The desire to protect some of the estate value being used to pay for care fees.
How Much Does A Property Protection Trust Cost?
Typically, a property protection trust costs between £1,500 and £3,000 to draw up.
The reason for the high cost is that property protection trusts have to be created by a legal professional. So unlike wills which sometimes can be drawn up for free, there is a heftier cost attached to a property protection trust.
The true cost will depend on the complexity of your estate. However, the cost of not drawing up a property protection trust could be far greater if your final wishes are not followed. Though if the cost is a concern, it’s certainly worth asking your solicitor what alternatives exist.
Here at Retirement Expert, we also have a wide number of articles based on managing your finances in your senior years, which you may also find helpful.
Property Protection Trust: Explained Scenario
John and Sandra are a married couple with two children. They own their own property and are set up as Tenants in Common by their solicitor giving them a 50% share each.
A mirror will is drafted up meaning all assets are left to each other. However, John has decided to protect his 50% share in the property. This means that when either of them dies, although the other spouse will receive all of the assets listed in the mirror will, Sandra will not receive John’s share in the property.
John dies. Sandra is able to remain in the home but only has 50% ownership, as John stated in his trust that his 50% share should be passed to their two children when Sandra dies.
Sandra marries Peter and they remain happily married for 20 years until Sandra dies. Instead of John’s original share of the home being passed to Peter, John’s share still goes to the two children he had with Sandra.
Without a property protection trust in place, John’s share of the home would have gone to Peter and his children or beneficiaries. That’s because John’s share would have automatically been passed to Sandra when he died, and then onto Sandra’s beneficiaries when she died.
So although there’s no way of predicting whether a spouse may remarry or have further children, putting a property protection trust in place considers all eventualities. It outlines a clear path for how your share of your property will be distributed after you die. When buying a new home it can be an important decision to consider.
Lynda Bellingham: A Public Example Of When A Property Protection Trust Would Have Been Invaluable
It can be difficult to understand property protection trusts on a tangible level. However, a recent public example of where a will went bitterly wrong is the death of actress and Loose Women panellist Lynda Bellingham.
When Lynda died of cancer in 2014 she was newly married to her husband Michael Pattemore. Lynda and Michael had made a mirror will, with Lynda leaving everything to Michael, with the expectation he would leave her share of her assets to her sons.
However, Lynda’s wishes were not formally stated in the form of a property protection trust.
Sadly, Michael did not follow Lynda’s wishes, and Lynda’s sons had to fight a nasty legal battle which remains ongoing to try and claim their inheritance. Although reports suggest that Lynda’s sons were able to receive one of Lynda’s properties, the mortgages on the property mean that this is a nominal amount.
Michael is also set to remarry, which adds another unfortunate complexity onto the matter.
Unfortunately, trust in another person is not always enough to ensure your final wishes will be carried out. That’s why estate planning can be worth its weight in gold, especially if you have children from a previous relationship. Or, if there is a chance your spouse could remarry.
Property Protection Trust Advantages
- If you die first and your spouse remarries or has children, you can ensure your money will not bypass any of your beneficiaries.
- When either you or your spouse dies, 50% of the value of the property cannot be used to pay for care home fees because it has been allocated to the beneficiaries to be paid out when the surviving spouse dies.
- If the surviving spouse moves into sheltered or rented accommodation, they will still benefit from the trust property.
- The surviving spouse has greater access to the money in the property and can also rent the property out despite not having full ownership.
- A property protection trust can apply to assets other than property including cash bank accounts or shares, so long as they are jointly owned.
Property Protection Disadvantages
- A property protection trust cannot be used for the sole aim of avoiding care fees.
- There can be unexpected tax consequences, which is why thorough planning and consultation is needed.
- There is always the possibility of the trust not working as expected, especially as family circumstances may change after you or your spouse dies.
- Property protection trusts aren’t as well known as general wills, meaning they aren’t always put in place and this can lead to children being disinherited.
Property Protections Trusts: In Summary
Property protection trusts or life interest trusts as they are legally known are certainly complicated to get to grips with..
However, being aware of the ability to take one out is essential if you are worried about any estate value from your property being reduced, or distributed in an unfavourable way after you die.
As always, for help with any legal matters, we’d recommend consulting a solicitor. The earlier you do so, the better to ensure your wishes will be carried out after you die. Plus, you can avoid any stress or tensions with the family at an already difficult time, should your family be left to sort out your estate themselves after you have died.