The Courts are familiar with families arguing over the division of the assets of a parent who died without a Will. If you don’t want to run the risk of putting your family at war and want to ensure your family is taken care of, here’s what you need to consider.
Lifetime trusts are often known as property protection trusts or asset protection trusts.
Unlike will trusts, which come into being on death, lifetime trusts are established straight away. Your home is gifted to the trust, which allows you to carry on living in it. The rationale is that if you need residential care at some point in the future, you no longer own a house and can only be assessed on minimal assets.
Anyone considering setting up a lifetime trust for this reason should be aware that a local authority may regard this arrangement as ‘deliberate deprivation of assets’. If this is the case, they can assess you as if you still owned the property (and refuse to fund your care).
By placing property outside your estate, lifetime trusts can reduce probate costs significantly.
The tax treatment of lifetime trusts is worth considering carefully. Because you gift the house to the trust, it can attract IHT if it is worth more than the nil-rate band (currently £325,000).
Those who transfer their property to a lifetime trust may face an immediate 20% charge on the balance over £325,000 (including gifts made in the previous seven years), while the trustees must submit tax accounts to HMRC. They may have a further tax bill every 10 years plus income tax on any payments from the trust.
Lifetime trusts are far more expensive than basic wills or will trusts. They are normally sold as part of a package.
Will trusts and lifetime Trusts can be either fixed interest (where the beneficiary has an absolute right to occupy the house and receive the income from any trust investments) or discretionary (where the trustees have a pool of potential beneficiaries and have a discretion how to benefit any of the potential beneficiaries).
Usually a discretionary trust also has a letter of wishes for the trustees to consider, which may give one beneficiary the trustees’ permission to live in the house or receive the income from investments. The tax treatment of fixed interest trusts is different from discretionary trusts.
Taxation advice, Trusts and Will writing are not regulated by the Financial Conduct Authority.
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This feature aims to give some informal hints and tips. McPhersons Chartered Accountants and McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters email@example.com or call our Head Office on 01424 730000 for a free consultation at mcphersons’ London, Bexhill or Hastings offices. www.mcphersons.co.uk