What is a property trust Will
Property Protection Trusts (PPTs) are by far one of the most common types of trusts included in Wills today.
The PPT is designed to take the deceased’s share in the home and give someone else (known as the life tenant) a life interest in the property which will give them the protection of living in the property for the remainder of their lifetime or earlier if the trust specifies i.e. remarriage. It also ensures that if the survivor requires long term care, at least half the property is preserved for the benefit of their beneficiaries who are normally the deceased’s children.
These types of trusts are normally used for married couples or civil partners to ensure the share of the home will ultimately pass to the children at the end of the trust period whilst still ensuring the interests of the surviving spouse are protected.
For example, a married couple, who have not been married before want to leave their share of their house to their only child. They currently own the house as joint tenants. Their Estate Planning Consultant would sever the tenancy on the property registering them each as 50% owners. They then have their Wills written to represent that if one died, their half of the property would be held on Trust for the benefit of their child but allowing the survivor to live in their share of the property for life or a specified period of time.
What is the point of a PPT?
The main reason for a PPT is the protection it provides for the beneficiaries i.e. the children, to ensure they are protected and ultimately receive a share of the home.
If the share of the home is simply gifted to the partner directly, this could cause a number of issues – the main one being sideways disinheritance i.e. the surviving partner remarries and the house passes to their new spouse under the Will. A PPT will enable the partner to stay in the home and will avoid the risk of the partner potentially disinheriting the children.
Likewise, if a share of the home is gifted to the children directly while the spouse or partner has the other share, this could cause issues in that the children may want to force step mum out of the property or insist that she pays rent to remain in the property. A PPT prevents this from occurring and essentially protects both parties’ interests. It is important to add the beneficiaries will only own the share of the home when the PPT ends either due to the death of the life tenant or earlier.
Can the property be sold?
A PPT can include powers allowing the life tenant to downsize and use the sale proceeds to purchase a substitute property for the life tenant to live in. The additional proceeds from the sale will remain in the trust and the life tenant can be paid an income from this. This can be useful where the life tenant may not be able to look after a large home as they grow older.
Any disadvantages of a PPT?
The main disadvantage of a PPT is that this inherently comes with a loss of control over the property for the survivor since they’d be limited in how they manage the property e.g. would need the trustee’s agreement to sell, would be unable to take out equity release if needed.
Probate would be required and there would be fees associated with setting the trust up and transferring the property to the trust. Probate is unlikely to be avoided completely unless all the assets are held jointly.
There is also the future IHT liability that this creates since assets in the PPT would be treated as part of the life tenant’s estate for IHT purposes. If they had directly inherited the property, at least they could have had the opportunity to carry out some lifetime planning to reduce this.
How is a PPT taxed?
For inheritance tax (IHT) purposes, the life tenant of the trust is treated as inheriting the trust property on the death of the testator. If the life tenant is the deceased’s surviving spouse or civil partner the spousal exemption will apply and delay any IHT until the life tenant’s death.
When the life tenant dies, everything in the PPT will be revalued and included in their estate for IHT purposes.
Where PPT’s are used between married couples or civil partners, the RNRB will apply if the share of the home passes directly to their direct descendants i.e. children.
Where there are unmarried couples it would be easier to explain using the example below:
Fred and Elsie own a property as tenants in common. They are not married. Fred has 2 children from an earlier marriage. If Fred includes a PPT in his will giving Elsie a life interest in the property until her death and names his children as the beneficiaries at the end of the trust, the RNRB will not apply. The reason for this is because the interest is seen as passing to Elsie and would therefore need to pass to her direct descendants for the RNRB to apply. If, however, Fred and Elsie get married, the RNRB will apply as stepchildren are classed as direct descendants.
PPT Wills are available at DanJo & Co for £399 including lifetime Will storage, call the team today on 01952 919210 and request further information.