We all want to protect our most treasured assets and provide for future generations. Trust planning can help achieve just that.
Right to Occupy
A Right to Occupy allows a beneficiary the right to occupy your property for a set timeframe after your death. This could be for their lifetime, or with a Right to Occupy Trust, its more common to limit the occupation period to a set number of years.
The beneficiary does have an interest in possession limited to the property but not in the proceeds of such sale of the property.
In the case of a Right to Occupy, the Trustees (who manage the Trust) are not able to sell the property without the occupant’s permission in writing.
Its common to include such a Trust when you are the sole owner of a property but have another person living with you in the property (such as a partner or spouse). You may want to secure the surviving partner or spouse’s occupancy in the property for a set timeframe but want to ringfence the capital for your children.
Property Protection Trust (PPT)
Property Protection Trusts (PPTs) are by far one of the most common types of trusts included in wills.
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.
When is it set up?
The trust would be set up on the death of the first person to pass away. The legal title will then be transferred into the joint names of the surviving spouse (as an example) and the trustees.
It is important to add here that a property cannot enter a life interest trust on death as until the mortgage has been settled, they are not seen to own the property.
When we assist clients with PPTs, if there is an outstanding mortgage on the property, we advise they have suitable life cover in place to settle the mortgage upon first death and are able to make the required introductions to trusted and regulated IFAs that we work closely with.
However, if on first death, there is still an outstanding mortgage and a PPT included in the Will, the survivor does still have limited options:
- They can sell and downsize as the PPT has downsizing provisions; or
- A cash loan could be taken out to settle the mortgage.
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 the survivor out of the property or insist that they pay rent to remain in the property.
A PPT prevents this from occurring and essentially protects both parties’ interest. 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 survivor end the trust sooner?
If the survivor (life tenant) decides to revoke their life interest, they would simply inform the trustees that they want the life interest to end, and the share of the home will be distributed to the beneficiaries.
However, if the life tenant also owns a share of the property, this does mean there is a risk that the children, now owning a share of the property, could attempt to force a sale of the property.
If the life tenant decides to revoke their life interest, as it will be earlier than death, the distribution to the beneficiaries will be classed as a Potentially Exempt Transfer (PET) from their estate and therefore they will need to survive the 7 year period for it to not form part of their estate for Inheritance Tax (IHT) purposes.
Joint tenants or tenants in common?
When considering a PPT, it is important to be able to distinguish the difference between tenants in common (TiC) and joint tenants (JT). The reason for this is that the property must be held as tenants in common to enter the trust.
What does this mean? To simplify, both TiC and JT refer to how a property is held or owned, and this ‘ownership’ is registered with the Land Registry. Traditionally, when houses were purchased, the owners would have been registered as joint tenants. This would have meant that if one tenant died, the other tenant would have inherited the property by virtue of survivorship.
Holding the property as tenants in common means that each owner holds a share of the home which can be gifted via their Will.
If our clients require assistance with drawing up PPTs in their Wills, we firstly establish how the property is held with the Land Registry. If the property is owned as JT, we deal with the severance of joint tenancy (Form A restriction and Notice of Severance) to change the ownership to TiC on our client’s behalf.
Can the property be sold?
Flexible Life Interest Trust
Flexible Life Interest Trusts (FLITs) are sometimes described as “the ideal modern family trust”.
The reason for this is because it allows a person to benefit immediately on the death of the person passing away, while at the same time protecting the assets for others i.e. the children.
A FLIT arises when a beneficiary, normally a surviving spouse, is given a life interest in the assets contained in the estate. The trustees have the power to pay income and often capital to the survivor (life tenant). While the life tenant is alive, the trust is treated as an interest in possession trust. However, on the death of the life tenant, the trust automatically turns into a discretionary trust and is therefore treated as a relevant property trust.
These types of trusts are therefore very flexible and ideal where the testator wants to provide for their surviving spouse during their lifetime whilst offering ongoing protection of trust assets for the other beneficiaries, up to a period of 125 years.
How does a FLIT work?
On the death of the testator, the residue of the estate is put into trust. The life tenant will be entitled to receive all income of the trust during their lifetime and will be treated as the main beneficiary. Trustees will still have discretion with regards to capital which can be given absolutely or loaned to the life tenant.
It is important to add that the flexibility of giving or lending capital does not extend to just the life tenant but the other beneficiaries also. For example, the trustees could exercise their discretion to use some of the trust funds to pay off a child’s mortgage if they request this.
Given the flexibility with this type of trust, where the person making the Will would like the trust funds to be distributed in a certain way or have concerns that they would like their trustees to be aware of, this should be set out in a supporting letter of wishes.
Discretionary Trust
Discretionary Trusts are commonly used to safeguard money from a beneficiary who is currently going through, or likely to go through a divorce. They are also used for beneficiaries who may be financially unstable or have gambling, alcohol, or drug addictions.
Holding funds in Discretionary Trust will also protect your beneficiaries’ inheritances from any potential creditors or bankruptcy. A discretionary trust can be used to ensure agricultural property relief or business property relief is used. In addition to this, these types of trusts are also commonly used by those looking to drip feed money to vulnerable beneficiaries to avoid them from losing any benefits they are entitled to.
To go into more detail, a discretionary trust is a type of trust where the trustees are given complete discretion to pay or apply the income or capital of the assets for the benefit of one or all of the beneficiaries. They have control over how much to distribute at any given time, when to make distributions and who to make them to. No particular beneficiary has an interest in the trust or an entitlement to the trust funds – they only have a potential interest until the trustees actually exercise their discretion in their favour.
As the trustees have complete discretion over the trust funds, it is advisable for the testator to write a letter of wishes accompanying the Will which provides some guidance to the trustees in how they would like the assets to be distributed. It is important to note that letters of wishes are not a legally binding document and therefore there is no obligation placed on the trustees to follow them.
The aim of this type of trust is to provide flexibility. This could mean that trustees have the flexibility to adapt the money paid to beneficiaries in accordance with their changing needs.
A discretionary trust can also be used to preserve funds for a minor until they attain an age where they can manage the money for themselves, or to protect funds for beneficiaries beyond their age of majority – even if there are no concerns of addiction. Some beneficiaries may have already reached the IHT threshold and do not want the inheritance they are to receive to increase the size of their own estate. In this situation, the trustees could simply lend the money to the beneficiary.
It is important to remember that a discretionary trust requires a minimum of two beneficiaries due to the discretionary factor the trustees have. Beneficiaries can either be individuals or classes i.e. “my children.”
A discretionary trust can last for a maximum of 125 years; therefore, it is important to consider who the default beneficiaries will be i.e. those who will inherit the trust fund when the trust ends.
A discretionary trust is subject to the relevant property regime. Therefore, if the funds in the trust exceed the nil rate band, anniversary and exit charges will apply.
It is important to note that where a main residence passes to a discretionary trust, the RNRB will not apply. However, the RNRB could be recovered if the property is appointed out to direct descendants within 2 years of the testator’s date of death due to section 144 of the Inheritance Act 1984. However, this is likely to cause extra expense to the estate so we would advise the main residence is addressed separately in the Will.