Robert Cartmell explores the benefits of using lifetime Trusts as opposed to using Will-Trusts to protect assets.
What are the usual factors and implications for putting your property into a lifetime trust structure, by Estate Planning expert Robert Cartmell.
I, Robert Cartmell, have worked in estate planning for over 25 years and during this time we have often been asked to assist in advising couples and individuals on whether to place their main asset, their home, into a lifetime trust structure, or whether to leave it within a Will-Trust structure.
Will-trust structures are now commonplace. Those take place or become activated on death. A lifetime trust is created during lifetime (not on death). What is the impact on our clients and families of using a lifetime trust structure?
What is a Lifetime Trust?
In this note, we are concentrating on one style of Trust that can have various aspects relating to it and thus no specific name or label but which we would call a ‘Flexible Family Trust’. Technically it would comprise a ‘Discretionary Trust’ with a settlor retained ‘life interest’ element within it where such an interest is necessary or desirable.
Retaining Control
The use of the lifetime trust (or “Living Trust”) is one method whereby you can retain a considerable degree of use and control over the assets for your lifetime but also to put in protection to ensure smooth succession by your chosen family members on your death.
An example:
Take a basic situation of an individual in their 70s who has children. The individual is retired from work and is relatively settled into later life. They continue to own their own property but wish to ensure that their estate planning arrangements are set in stone and crystalised to benefit their children.
The individual needs to retain the property for their own use for life and the right to sell the property and use the proceeds for providing another property or to have the income if invested. They express the wish not to retain rights to use the capital or underlying ownership.
In particular, they are concerned at how they are increasingly vulnerable – relying on care now or expected in the future. This might be provided by one of their two children or by a private care company or even the state.
Their main wish is to protect their main asset (the property), against future vulnerability such that it passes free of challenge or claim to their children equally and possibly also protected, if possible, for any successive generations such as grandchildren.
In that scenario, the Trust we might arrange is the lifetime flexible family trust (“the Trust”).
The Trust can be viewed as being like a ‘family box’ which is managed by the family members (as trustees) for the benefit of the family members (as beneficiaries).
The ‘box’ is in fact just one document called a “Settlement”. The clauses in the document guide the operation of any assets that are deemed to pass into the box.
Protection against ‘vulnerability’ for an individual
Vulnerability in this context means with reference to comparing the position of the individual in the above example, rather than if we were dealing with a couple.
The individual (say a widow(er)) is likely to be in a much more vulnerable position than a couple, who are no doubt entitled to rely on each other’s support and care.
Protecting against future irrationality or steps taken in gifting assets from a perceived dependent perspective might be important.
How Does the Trust Operate?
In the above case, the individual transfers legal title or the equity in the property to the Trust but reserving within a full ‘life interest’ in the property’s use for life.
That means that the individual (termed the ‘Settlor’ within the Trust documents) has all the usual rights of occupation and use of the property, including the right:
- to live rent free in the property,
- to rent it out and receive the income,
- to sell the property, move to another home of same value or less on the same basis.
But the underlying capital ‘ownership’ is held with the Trust and it falls outside of the individual Settlor’s own Will.
Benefits to you and your Family
The Trust is effectively a protection ‘box’ aimed at ensuring that the only people who can benefit from it are yourselves and your family.
There are several reasons for you placing the property into a lifetime trust structure, including:
- Protection of your wishes: Whereas will trusts can be changed by you unilaterally, the lifetime trusts ensure more protection. From the moment of their creation, there is the involvement of Trustees to act and help you in the decision-making process. The Trust you create shall own the asset but you shall also be one of the trustees for your lifetime and as life-tenant of the asset(s) you still retain the day-to-day control and use of the asset or assets in the trust.
- Probate fees: there is still much talk about a possible new tax/levy on applying for probate that is linked to the value of estate assets held on death. If you place the property into Trust during your lifetime, there is no capital asset owned by you on death, it is not part of the valuation for probate purposes and it might save your estate extra money in possibly not having to apply for Probate.
- General protection from claims of 3rd parties: claims on the asset by third parties are more limited due to the fact that the Trust owns the asset. On death, the value can be protected against 3rd parties by loaning the value to your children/grandchildren according to your Trust provisions – the effect might mitigate their own IHT position; or potentially protect a claim on a divorce.
Additionally, as a further indirect consequence, it may provide protection against claims for paying care fees.
Should any other Trustees be appointed?
You do not have to appoint additional trustees at the initial stage as you can add in further trustees in future. It may be a good idea to have an expert advisor trustee appointed and particularly one who understands the future operation of these trusts. Please seek guidance from us in this regard. We have a set of notes available on the role of trustees and are happy to provide those to you for your guidance.
Where does this stand with regard to future legislation or interpretation?
It is important that all options (including loaning value or gifting etc) are available to the trustees and that decisions are taken that are appropriate to the time, and according to the prevailing laws and interpretation. That is why a regular review and update is a good idea so that you are kept up to date with legislation. It is flexible to make outright gifts if there is a taxation reason not to adopt the loan structure.
Are these sorts of trusts only for the super-wealthy?
The answer is firmly, no. They are for people owning property who are simply interested in ensuring that their children inherit their assets in the best and most protected way.
What are the limitations on setting up a Property Trust?
There are limitations in terms of the value that can pass through a Trust; there are taxes that apply for assets in a Trust over £325,000 in value. Therefore, we generally advise that the value passing into the Trust is capped at £325,000 which is possible even if the home itself is worth more.
Conclusion
The lifetime Trust is a popular and cost-effective method of choice for protecting their family home for themselves and their family and it ensures a crystallisation of wishes.
Consult with us at the earliest opportunity.
Make sure you prepare and plan. That is what we are here to help you with.
Remember to plan, not panic!
Contact Us
For more information and for advice please contact us on:
Email: info@protrustestateplanning.co.uk
Telephone: 0207 123 6189