The Benefits of Property Trusts

A Trust is a way of managing assets (money, investments, land or buildings) for people. They have been around since the Crusades, so they are nothing new or exotic – at least the ones I would use are not.  Most homeowners, and especially business people should contact me for a no-obligation chat on the benefits of Protective Property Trusts. Clearly, this page is just a basic introduction to the subject which is far too widely ignored. For most people, the situation is very straightforward, and potentially the best possible piece of estate planning, if not the cheapest.

It is also important to discuss the Inheritance Tax situation, as this may affect the advice I give, especially on property trusts.

To understand Trust jargon:

• the ‘settlor’ – the person or persons who put assets into a Trust.
• The ‘Trustee’ – the people who manage the Trust.
• The ‘beneficiaries’ – the people who will or may benefit from the Trust.
• The “Trust Deed” is the document setting out the intention of the trust.
• “Severance of Tenancy” changes the ownership of a property from each owning all of it to (typically) each owning half.

How Trusts can benefit your family:

Trusts are set up for many reasons, including:

• To allow flexibility as to who should benefit – a typical Will is perhaps 20 years out of date, and benefits people who don’t need help and leaves small legacies or nothing to those family members who do need help. Changing such a Will usually involves everyone who will lose out agreeing, gaining Court permission if any of them are under 18 or don’t have mental capacity, and legal fees.  Trusts can have far more flexibility.
• To protect family assets – every business person should consider protective property Trusts as should most homeowners.  But they are far more effective setup years in advance. At the time of writing, a home in Trust may be sold and the proceeds passed to beneficiaries a year or more earlier after a death.  The original can cost potentially be recovered just from savings on probate fees alone, never mind avoiding the delays.
• All Wills will have Trusts to protect beneficiaries under 18.
• Beneficiaries who are unable to manage their affairs can be protected by special Trusts potentially with tax advantages.
• Spendthrifts can be protected by having spending controlled by trustees which also protects against exploitation.
• Trusts can be used to pass on assets while you’re still alive – but wish to retain at least some measure of control, and maybe prevent gold diggers taking advantage of your children or grandchildren.
• To pass on assets when you die (a ‘Will Trust’): the most usual is the Protective Property Trust where the home ownership is amended and a Trust set up on first death to protect both the survivor and the assets of the person who died first.
• Second marriages or relationships are now almost usual as people live longer and don’t want to be lonely. These often have the same effect as the next (malicious) concern, purely because sensible precautions are not taken to protect both sides and their families.  It is easily done early on.  Please don’t accidentally deprive your family, just have a free chat with me. You will be surprised how unpleasant and greedy people can be and relying on an under-pressure second spouse to do the right thing is not prudent, and Wills are easily destroyed. Full Property Trusts are far more reliable at ensuring fairness.
• Predatory marriage is an increasing scam where younger people marry older widows and widowers and inherit the assets of BOTH partners when they die, cutting out the family entirely. With a protective property trust, the asset remains protected and if the marriage turns out to be genuine – no harm has been done.  More information on this growing problem at the foot of the page.   See also my article on Blended Families.
• Family Wealth Management: Trusts can be established to manage family wealth across generations, ensuring that assets are preserved and managed for the benefit of descendants this can be for property or investments.
• Trusts are often used by Financial Advisers to allow tax-efficient management of investments or to save Inheritance Tax.  This may interact with Property Trusts so MUST be taken into account as well as for Life Insurance benefits to avoid probate.
• Pilot Trusts are often established for the payment of death in service and other benefits, to avoid them being directed into the estate and becoming taxable under the IHT Rules.
• Trusts may be automatically created under the rules of intestacy if someone dies without a Will.
• Many people set up Trusts for Charitable purposes.

What the settlor of a Trust does

The settlor decides who the assets in a Trust should (or could) benefit, and sometimes gives details of how this should be achieved and the type of investment.  This is usually set out in a document called the ‘Trust deed’.  The Trust Deed may allow considerable flexibility – or not.

Sometimes the settlor can also benefit from the assets in a Trust – this is called a ‘settlor-interested’ Trust and has special tax rules the main one being that it remains in their b.

What Trustees do

The Trustees are the legal owners of the assets held in a Trust. Their role is to:

• deal with the assets according to the settlor’s wishes, as set out in the Trust deed or their Will.
• Manage the Trust on a day-to-day basis and pay any tax due.
• Decide how to invest or use the Trust’s assets within the parameters laid down by the Trust deed.
• Ensure the Trust is correctly registered and the register is kept up to date.
• Keep records of their decisions.

If the Trustees change, the Trust can still continue, but there always has to be at least one Trustee and ideally two for a Trust containing a property.

Beneficiaries

There might be more than one beneficiary, like a whole family or defined group of people and often the default beneficiary who inherits if no other possible beneficiaries remain is a Charity. Depending on the intentions of the settlor they may benefit from:

• the income of the Trust only, for example from renting out a house held in a Trust.
• The capital only, for example getting shares held in a Trust when they reach a certain age.
• Both the income and capital of the Trust.

What types of Trust are there?

 

The most usual: Right to Reside Trusts.

Simply the survivor has the right to live in the property (and usually to move) either for life, until they go into care, or just for a set period.

But they don’t generally have any right to the capital.

An example. A home valued at £400,000, currently owned as Joint Tenants (so the survivor would automatically own all of it).

1. Ownership changed to Tenants in Common (shares – in this case, half each).
2. Option A) New Wills leaving right to reside to survivor, then (in this case) one partner’s share goes to his 4 children, the others to her 3 children.
3. Option B) Two lifetime Trusts are created, and the shares are transferred into Trust A and Trust B with each choosing their own Trustees.

On the first death, the survivor is fully protected, as is the fair distribution of the deceased’s share, once the survivor has died or gone into care.

Option A is cheaper initially, but there is more work to be done on the first death. Protection is

Option B provides greater protection as it provides protection on both halves of the property.

The rest of this is more general.

Bare Trusts

Assets in a bare Trust are held in the name of a Trustee. However, the beneficiary has the right to all of the capital and income of the Trust at any time if they’re 18 or over (in England and Wales). This means the assets set aside by the settlor will always go directly to the intended beneficiary.

Bare Trusts are often used to pass assets to young people – the Trustees look after them until the beneficiary is old enough.

Interest in possession Trusts

These are Trusts where the Trustee must pass on all Trust income to the beneficiary as it arises (less any expenses).

Discretionary Trusts

These are where the Trustees can make certain decisions about how to use the Trust income, and sometimes the capital.

Depending on the Trust deed, Trustees can decide:

• what gets paid out (income or capital)
• which beneficiary to make payments to
• how often payments are made
• any conditions to impose on the beneficiaries

Discretionary Trusts are sometimes set up to put assets aside for:

• a future need, like a grandchild who may need more financial help than other beneficiaries at some point in their life
• beneficiaries who are not capable or responsible enough to deal with money themselves

Accumulation Trusts

This is where the Trustees can accumulate income within the Trust and add it to the Trust’s capital. They may also be able to pay income out, as with discretionary Trusts.

Mixed Trusts

These are a combination of more than one type of Trust. The different parts of the Trust are treated according to the tax rules that apply to each part.

Settlor-interested Trusts

These are where the settlor or their spouse or civil partner benefits from the Trust. The Trust could be:

• an interest in possession Trust
• an accumulation Trust
• a discretionary Trust

Non-resident Trusts – not our area of expertise.

This is a Trust where the Trustees are not resident in the UK for tax purposes. The tax rules for non-resident Trusts are very complicated. Should you need this sort of advice, I would introduce you to a suitable firm.

Find out more about Predatory Marriage.

Their mission seems to be to protect those with dementia, but the reality is that anyone lonely is potentially vulnerable, and the current law is likely to ensure that a legal spouse inherits in preference to the family even if the couple no longer has anything to do with each other.  The situation could be rectified by a new Will, if anyone is even aware of the problem, but if mental capacity should become doubtful, that starts to get very complicated with potential involvement from the Court of Protection.  Who amongst us has never been deceived only to discover the motives of the contact are less than honourable?