Will Trusts & Protecting the Family Home

The Family Home

The most valuable asset which most people have worked hardest to obtain is the family home. It is also the asset they most want to pass on to their children on death. Unfortunately, with the current rules on paying for long term care and Inheritance Tax (IHT) there is no certainty that this will happen. Unless steps are taken to legally protect the family home there is every possibility that children will not benefit as much as their parents might wish.

Home Ownership

A family home is most usually owned jointly by couples whether married/Civil Partners or not and held by them as ‘joint tenants’. They both own the home such that on death of either partner, the property automatically becomes solely owned by the survivor. This means that they are unable to leave their interest in the house to anyone else. Less frequently, home buyers have been and can be advised to own the house jointly as ‘tenants in common’. As tenants in common they each own a separate share in the property and, importantly, have the right to dispose of that share in their Will to whom they wish.

A Will can deal only with assets which are solely in the deceased’s estate and a house held by joint tenancy cannot be part of this.

By transferring ownership of their property to a ‘tenancy in common’, joint owners own their own share each – normally half of the property. Now, on the first death, half of the home is in the deceased’s estate and can be disposed of in his or her Will.

If the Will of the first to die leaves the deceased’s half share in the house to the survivor, then he or she has the whole house in their name and nothing has been achieved to mitigate against the main threats to the family’s assets. To take advantage of the tenancy in common, the share of the first to die must be left to someone else. If it is left to the children directly it is in their estate and the right of the surviving spouse or partner to live in the house could be affected. The way around this is to set up a trust within the Wills.

Decisions about setting up a trust will depend on family circumstances, relationships and on the wealth and wishes of each person and couple.

Will Trusts

Trusts might be described as a ‘safe box’. You, for example, include in your Will a clause which sets up a Trust on your death. In your Will you say what assets are to pass into the Trust and you appoint others (trustees) to manage and distribute the assets to your chosen beneficiaries. In many cases you will be asked to write a Letter of Wishes which gives direction to the Trustees as to how the assets are to be used, for what purpose and for whom.

Trusts have the sole purpose of protecting assets and there are many reasons for setting them up:- for example to protect assets for minor children, for a disabled person (without adversely effecting the latter’s State disability benefits), to protect the value of the family home, to secure the home for a survivor after the first death, to secure life insurance, investment and pension policy proceeds and, when appropriate, to mitigate the impact of inheritance tax (IHT).

There are three main trust types that can be considered. The first is a Property Protection Trust which can be used to protect a share in the family home; but it is not suitable for IHT planning. The second and third, are Discretionary Trusts which can accept cash, the family home (or a share in it) and other assets; they can be used for IHT planning if personal circumstances justify it.

The suitability of the types of trusts needs to be discussed with an advisor so that there is a clear understanding of which is the best fit to the individual circumstances.