Dispelling the myths surrounding trusts and their role in administration of estates

A trust is created when you give assets to people you choose (the trustees) to hold for the benefit of others (the beneficiaries). It can be set up during your lifetime or upon death and can be used as a practical tool for inheritance tax planning.

You certainly do not need to hold vast amounts of money in the bank to protect your assets and offer security for your family. Trusts can be an effective way of managing your assets, both now and in the future.

A trust can have many purposes including helping to manage your loved ones’ inheritance, holding your pension and protecting assets from care fees.

There is often a lot of confusion surrounding what happens to someone’s property in the event they should go into care and what value will be taken into account when financially assessing someone for the purpose of care fees. Unfortunately, we occasionally come across clients who have been encouraged, by seemingly professional organisations, to simply place their whole property into a trust or sign it all over to a family member, in the interests of avoiding their property value being used towards care fees in the future. This is known as a ‘Deliberate Deprivation of Assets’ and such a move is not only completely ineffective in protecting someone’s property from care fees but it also leaves the individual concerned and their families in a very messy position.

An aging population and an increased need for individuals to be cared for in residential and nursing homes has led to an increase in care home fees. On average, it costs around £800 a week for a place in a residential home and £1,078 a week for a place in a nursing home.

The Local Authority (LA) is responsible for covering the full cost of residential care for those with capital assets below £14,250. For those with assets valued between £14,250 and £23,250 the LA will make a contribution towards care fees. However, Local Authorities will not assist with care home fees in circumstances where an individual has capital assets over £23,250, except in exceptional circumstances.

The increasing value of properties, especially in the Dorset area, means that an individual’s capital assets often exceed the LA threshold and therefore they will be liable to pay care home fees in full.

One option that is available for spouses and civil partners is to include a Life Interest Trust in their Wills, in favour of the survivor on first death. This avoids the full impact of care home fees and safeguards their children’s inheritance as far as possible. However, careful drafting is required for the Wills to have the desired effect. In particular, careful consideration will need to be given to how the property is held to ensure that Life Interest Trust Wills will operate as intended.

In the UK there are two different ways in which property can be owned jointly, either as ‘joint tenants’ or as ‘tenants in common’. If a property is held as joint tenants this will mean on the first death of a married couple, the property will automatically pass to the survivor by survivorship, regardless of what is stated in their Wills. This means that the survivor will become the sole owner of the property and the Will Trust will be ineffective. As a result, the full value of the property will be taken into account if the survivor subsequently has to go into care.

However, in order to avoid this situation, it is possible to ‘sever the joint tenancy’ which coverts the joint ownership so that the property is held as ‘tenants in common’. This means that each of the joint owners is able to pass their respective share of the property under their Will, as they wish, including into a Trust. 

In the case of a Life Interest Trust, the survivor would be given a life interest in the half share of the property held in the Trust which will be created by the Will of the first to die with, typically, the share eventually passing down to their children on the second death. The terms of the Trust will allow the survivor to live in the property rent-free for the rest of their life. Importantly, based on current legislation, the LA cannot take into account the value of the half share of the property held by the Trust when assessing the survivor’s liability to pay care fees, should they have to go into a home in the future.

Some people have concerns that the money they leave to beneficiaries may not be spent wisely or they may have concerns that a beneficiary would struggle to manage a lump sum of money given to them. In this instance the money (or other asset such as a property share) could pass into a trust and be looked after by your chosen trustees for the benefit of one or more beneficiaries. Furthermore, it is possible to leave a letter of wishes expressing how you would foresee the money being utilised.

Many people look to set up trusts, either in their lifetime or on their death under their Will, in order to help manage any potential tax liability. We would often advise clients to place discretionary trusts in their Wills, specifically where they are keen to maximise any inheritance tax reliefs that might be available, such as Business Property relief or Agricultural Property Relief.

Aside from these reliefs, discretionary trusts are often included in Wills as a vehicle for distributing an estate. The advantage of a discretionary trust is that if the assets are distributed within 2 years from the date of death, the tax position is the same as if the distributions had been specifically directed under the Will. Therefore, many clients choose to include discretionary trusts in their Wills to allow their trustees the opportunity to review the tax position at the time of death and adjust any distributions accordingly. The Will would usually be accompanied by a detailed letter of wishes so the trustees are aware of ideally how the estate should be distributed.

Although trusts may be subject to tax, consulting an expert for guidance can help you manage and mitigate any tax liability. We would strongly recommend that you speak with a financial adviser as well as one of our specialist trusts lawyers who can help you understand the tax rules associated with your trust.