The priority for most of us when we die is ensuring that our spouse or partner is cared for and our children (or other dependents) receive our assets, for which we have worked all our lives, without risk of being lost. This may not always be as simple as we would wish. Assets may be “lost” to our families in a number of ways.
If our spouse or partner remarries after our death, our children may lose their inheritance to the new spouse. Often this can happen quite accidentally if proper Wills are not prepared on remarriage.
If our spouse or partner needs long term care after our death, our property and assets may have to be sold to pay the costs.
If we wish to secure our assets for our loved ones, we need to consider which type of planning in a carefully constructed Will is most appropriate for our circumstances.
The Estate Preservation Property Trust is a most useful tool in ensuring our children or dependents inherit our assets as we wish.
In simple terms, the Estate Preservation Property Trust allows couples to ‘Will’ their portion of the property on their death to their children or other chosen beneficiaries, thereby preventing the loss of the inheritance as described above. The portion of the property ‘Willed’ on first death is then held in Trust for the chosen beneficiaries until second death.
In the meantime the surviving spouse or partner has the use of the whole of the property after first death, even though half has been gifted to the chosen beneficiaries in Trust. The available Nil Rate Bands on second death, for Inheritance tax saving purposes, has not been reduced. So, the survivor can still have twice the prevailing rate available on their death.
Wills are written including an Estate Preservation Property Trust in each case, which leaves the share of the property ‘in Trust’ for the surviving spouse or partner and then to the children or other chosen beneficiaries. This Trust protects the interests of the survivor, allowing the survivor to live in the property until death, or, if desired, until he or she cohabits or remarries. The survivor can also move house if he or she so wishes, using the whole of the proceeds towards another property, or raise capital by purchasing a smaller property, a greater proportion of which will be owned by the Trustees.
If the survivor goes on to remarry, he or she cannot leave the whole of the property to their new spouse, as a portion is already owned by the Trustees on behalf of the children or chosen beneficiaries.
Discretionary Trusts
Since the 9th October 2007 it has become less important for married couples to consider the use of discretionary trusts in their Wills in order to avoid inheritance tax.
However, it is still be important to consider such Trusts for other reasons.
Where couples wish to ensure that on the first death assets pass to children from a previous relationship. A Discretionary Will Trust would protect such assets from a new second spouse or partner, who may otherwise leave everything to someone else on the second death. Thus part of the estate is preserved for the children.
After the first death, if the surviving spouse or partner has to go into long term care, then a Discretionary Will Trust can protect the home from being 'invaded' by the local authoity to help pay for the cost of care, by leaving the first spouse or partner’s share of the house to the Trust.
There is also a case for using a Discretionary Will Trust in situations where half the value of the home is worth at least the value of the nil rate band, and is likely to increase by more than the nil rate band over time. The Trust can be index-linked so that on the second death the amount owing to the Trust is more than the prevailing nil rate band at that time. This would reduce the potential inheritance tax liability on the second death.
Discretionary trusts can also be used to protect assets where children might be in danger of divorce. They can also be extremely effective in cases where potential beneficiaries might have drug related issues. The trust owns the assets, the beneficiaries do not.
Unmarried couples still need to seriously consider using Trusts to mitigate inheritance tax.
Special Needs
The object of the trust is to preserve the state benefits received by the special needs person, but to make available income and capital to supplement those benefits. The trust fund can be a specific sum, the whole or a part of a residuary estate.
