Looking to protect your home and your family’s future? A Protective Property Trust (PPT) may be your answer. Your partner can live in the home for life and the property will be safe for your beneficiaries. A PPT can also ensure that a portion of the property remains protected for children’s inheritance. Read on to find out how PPTs work and what they can do for you.
Quick Facts
- A Protective Property Trust (PPT) protects property ownership by allowing the surviving partner to have a life interest and name beneficiaries so the property is managed properly in death.
- Benefits of a PPT include protection from long term care costs, prevention of sideways inheritance and security for family wealth through flexible property management.
- A PPT requires legal expertise, planning and ongoing management which includes monitoring tax implications and ensuring the trustee is accountable to beneficiaries.
- Principal Private Residence Relief can potentially eliminate Capital Gains Tax on the sale of a property if the life tenant resides in it.
What is a Protective Property Trust
A Protective Property Trust (PPT) is a legal arrangement that manages property ownership in a way that benefits both partners and their beneficiaries. It splits property ownership 50/50, giving the surviving partner a life interest without transferring full ownership. This way the property is protected and can be passed to chosen beneficiaries (e.g. children) when one partner dies.
To create a Protective Property Trust the property must be held as tenants in common, which means each partner owns a separate share of the property. This contrasts with holding property as joint tenants, where the surviving owner automatically inherits the entire property when one owner dies. When one partner dies, the legal title of the property transfers to both the surviving partner and the trustees of the trust. This way the surviving partner can live in the home for life without the risk of being evicted by the trustees.
The main purpose of a PPT is to ensure a portion of the property is transferred to chosen beneficiaries to protect their inheritance and to prevent the deceased partner’s share being used to pay for the surviving partner’s care fees. The deceased partner’s share is managed and preserved within the trust after one partner passes away, ensuring it is protected from being absorbed by care fees or passed to a new spouse. Understanding these key points shows how PPTs can give you peace of mind in estate planning.
How Does a Protective Property Trust Work?
A Protective Property Trust is a strategic tool designed to safeguard your share of the property from various risks, such as care home fees, sideways disinheritance, and remarriage. Here’s a step-by-step look at how it operates:
- Creation of the Trust: Typically, a couple who own their home jointly will set up a Protective Property Trust as part of their Will. This legal arrangement ensures that their property is managed according to their wishes after one partner passes away.
- Transfer of Property Share: Upon the death of the first partner, their share of the property is transferred into the trust. This crucial step prevents the automatic transfer of the deceased partner’s share to the surviving partner, thereby protecting it from potential risks.
- Life Interest for the Surviving Partner: The surviving partner is granted a life interest in the property. This means they can continue to live in the family home for the rest of their life without the fear of eviction. The life interest ensures that the surviving partner’s needs are met while preserving the property for future beneficiaries.
- Role of Trustees: The trust is managed by appointed trustees, who are responsible for maintaining the property and ensuring the surviving partner’s needs are met. Trustees play a vital role in managing the trust assets impartially and in accordance with the trust deed.
- Passing to Beneficiaries: When the surviving partner eventually passes away, the property is then transferred to the beneficiaries named in the Will, typically the children or other family members. This ensures that the property remains within the family and is distributed according to the original owners’ wishes.
By understanding these steps, you can see how a Protective Property Trust provides a robust framework for protecting your family home and securing your loved ones’ inheritance.
Benefits of a Protective Property Trust
Protective Property Trusts have many benefits that make them an attractive estate planning option. One of the main benefits is the protection against long term care costs. Placing the property in trust means the home can’t be sold to pay for care fees after one spouse dies and leave the estate for the intended beneficiaries.
Another big benefit is the prevention of sideways inheritance. This is when the surviving partner remarries and then leaves their estate to a new spouse or their heirs and potentially disinherit the children of the first marriage. A PPT keeps the surviving partner’s deceased partner’s share of the property for their children or chosen beneficiaries and keeps the inheritance intact.
Plus, Protective Property Trusts give the surviving spouse flexibility. They can live in the property for life and even downsize if needed and the proceeds can be re invested in the life interest trust. This way the property remains a valuable asset for future generations and provides security and continuity of family wealth.
How to Set up a Protective Property Trust
Setting up a property protection trust requires planning and legal expertise. First the property must be held as tenants in common so each partner owns a separate share. This split of ownership is key to the trust working as intended. The surviving partner can live in the property while ownership is transferred to the trust so the home is secure.
Choosing the trustees is a key part of setting up a PPT. At least two and up to four trustees are required to manage the trust. Trustees can reinvest proceeds if the trust property is sold so the life tenant benefits from the trust. A letter of wishes can guide the trustees on how to manage the trust and distribute the assets according to the settlor’s wishes.
Setting up a Protective Property Trust can cost between £500 and £4,000. This is because professional legal advice is important to navigate the complexities of trust law and get the protective property trust set up correctly.
With the right guidance a PPT can protect your family home and secure your future.
Role of Trustees in the Trust
Trustees have a key role to play in Protective Property Trusts to ensure the trust works for both the settlor and the beneficiaries. They manage the trust assets according to the trust deed. This requires integrity and diligence as trustees must act impartially and not favour one beneficiary over another.
Financial management is another important role of the trustees. They must keep accurate financial records and all decisions about distributing trust assets must be made collectively unless otherwise stated in the trust deed. This collective decision making process prevents conflicts and ensures transparency in the management of the trust property.
Beneficiaries can apply to the court to remove the trustees if they don’t do their job. This is why trustees must act with care and integrity at all times. Good trustee management is key to the trust protecting the property and the inheritance for future beneficiaries.
Tax implications of Protective Property Trusts
Knowing the tax implications of Protective Property Trusts is important for making informed estate planning decisions. Assets in a PPT are usually included in the life tenant’s estate for inheritance tax purposes. But surviving spouses often get the spousal exemption which reduces the immediate inheritance tax liability.
CGT is also important. CGT doesn’t apply to the deceased’s share at the time of inheritance but may apply if the property is sold after the first death and before the second. Care is needed to avoid unexpected tax liabilities. Income from the trust assets is taxed as personal income for the life tenant and must be included in their tax returns.
Other tax considerations are registering the trust with HMRC and updating it when changes occur to avoid penalties. SDLT applies to the property price and tax rates when the trust buys a new property.
The Residence Nil Rate Band also applies to inheritance tax when property is passed to direct descendants. Knowing these tax implications is key to getting the most out of a Protective Property Trust.
Practicalities of Implementation
Implementing a Protective Property Trust requires practical considerations. Regular trust reviews are needed to ensure it continues to meet the beneficiaries’ needs and circumstances. This is especially important as family dynamics and financial situations change over time.
Trustees must consider the tax implications of the rental income from the trust property. This income must be declared by the life tenant for income tax purposes. Local authorities will also scrutinise trusts if they think the trust was set up to avoid care fees especially if the settlor was already in need of care at the time the trust was set up.
Because of the complexities of trust law and administrative burden trustees may need specialist legal services to manage the trust. For example the Jones family protected their home from long term care cost assessments by putting it in an asset protection trust, so it’s not all theory.
Case Study: Real Life Example
Alf and Brenda’s case shows the real life benefits of a Protective Property Trust. If Alf had put his assets in a PPT, Charles would have inherited £74,250. A big number that shows how much protection these trusts can give to beneficiaries.
After Alf died Brenda’s estate was worth £150,000 so the trust had preserved the estate’s value. Brenda lived in their home for 2 years after Alf died so the trust gave her security and stability during a difficult time.
Brenda eventually had to go into a nursing home and the fees were nearly £30,000 per year. Despite these costs the trust still left a big chunk of the estate for Charles so you can see the practical benefits of a Protective Property Trust in protecting family wealth.
Myth Busters
There are several myths about Protective Property Trusts. One of the biggest is control over ownership. People worry that if they leave their share of the estate to the surviving partner they will be disinherited by their children from previous relationships if the surviving partner remarries.
Many think care fees will wipe out the children’s inheritance. This myth is that parents’ care costs will take away their financial legacy. While care fees are a concern, Protective Property Trusts means the property is protected and the children will inherit as planned.
There are also legal issues with property protection trusts such as high pressure selling to vulnerable adults and mis-selling by will writers. Also these trusts do not avoid probate as some people believe. Knowing these myths is key to using Protective Property Trusts effectively.
Other options to Protective Property Trusts
Protective Property Trusts are useful tools but there are alternatives. A common myth is that asset protection trusts are only for the wealthy or elderly but they can benefit anyone with assets. Another myth is that setting up these trusts is illegal or unethical but they are legitimate and effective estate planning tools if set up correctly.
Family Investment Companies (FICs) are becoming more popular as a trust alternative. FICs offer flexibility with different share classes so you can have different levels of control and wealth distribution to family members. Combining FICs with trusts can make tax efficient and add extra protection to shares especially for vulnerable beneficiaries.
Using asset protection trusts with FICs can give you a holistic estate planning strategy to manage your wealth and protect your assets. Knowing these alternatives will help you make informed decisions about your estate planning.
Conclusion
In summary Protective Property Trusts are a solid solution to protect your estate from unexpected events like care fees and disinheritance. They give you peace of mind that your loved ones will inherit as planned and flexibility for the surviving spouse to live in the family home. By knowing the benefits, setup process and responsibilities you can use these trusts to secure your financial future.
As you consider your estate planning options remember Protective Property Trusts are just one of the tools available. Family Investment Companies can also be very beneficial. Ultimately the right choice depends on your individual circumstances and goals. With proper planning and expert advice you can create a strategy that will protect your family’s wealth and legacy.
Frequently Asked Questions
What is a Protective Property Trust?
A Protective Property Trust is a legal arrangement that ensures property ownership is divided, granting life interest to both partners while guaranteeing that a portion of the property is passed on to designated beneficiaries after one partner’s death. This structure provides security and control over property distribution.
How does a Protective Property Trust protect against care fees?
A Protective Property Trust safeguards against care fees by ensuring that the property is held in trust, preventing it from being sold to cover these fees after a spouse’s death. This mechanism protects the estate for the intended beneficiaries.
What are the tax implications of setting up a Protective Property Trust?
Setting up a Protective Property Trust can have significant tax implications, including the inclusion of trust assets in the life tenant’s estate for inheritance tax. However, it may also offer benefits like spousal exemption, and considerations for Capital Gains Tax and Stamp Duty Land Tax should be taken into account.
What responsibilities do trustees have in managing a Protective Property Trust?
Trustees are responsible for managing the trust’s assets according to the trust deed, ensuring accurate financial records, making collective decisions impartially, and exercising care and integrity in all actions. Their adherence to these responsibilities is crucial for the effective management of a Protective Property Trust.
Are there alternatives to Protective Property Trusts?
Yes, alternatives to Protective Property Trusts include Family Investment Companies (FICs), which provide flexibility and tax efficiency, and a combination of FICs with trusts can enhance estate planning.
