The first thing to be aware of is that when people use the term ‘property protection trust’, they may be talking about one of two things:
- An ‘Asset Protection Trust’, where you transfer your property into trust during your lifetime; or
- A Will Trust, where you put your share of your property into trust when you die.
Both are very different things so it’s important not to get the two confused!
Asset protection trusts
With rising care fees presenting an ever growing threat to your hard-earned wealth, it’s no wonder that you might have considered transferring your home into a so-called ‘Asset Protection Trust’ during your lifetime. The idea of this trust is that you no longer own the home and it cannot therefore be taken into consideration when the Local Authority assesses whether you have the means to pay for your own care.
At least, that’s the theory. In practice, if you transfer your home into trust with the specific motive of avoiding care fees, the Local Authority can use various powers to remedy this action.
The key consideration here is your intention behind making the transfer. The Local Authority will consider:
- Whether avoiding the care and support charge was a significant motivation;
- The timing of the disposal of the asset. At the point the capital was disposed of could the person have a reasonable expectation of the need for care and support?; and
- Did the person have a reasonable expectation of needing to contribute to the cost of their eligible care needs?
If the Local Authority believes the asset was given away to ensure it was not included in a means test, it may decide that you have ‘notional capital’ of equivalent value to that of the asset. Essentially, they will treat you as if you still own the property.
Some companies attempt to get around this issue by finding some other excuse for creating the trust. For example, they might record that the trust was created to avoid probate fees. Practically though, these trusts are problematic and have tax and risk implications. Further, the Local Authority can look beyond what is on paper and decide your true intention based on all circumstances.
Property trust in Will
The alternative type of property protection trust is a Will Trust which gives your spouse or civil partner an interest in your share of the family home for life, with the remainder to your children or grandchildren (as you choose). So what are the advantages of this type of trust?
Whilst you and your spouse or civil partner are alive, if one of you needs care (and assuming it has already been established that NHS Continuing Healthcare funding does not cover the cost) the Local Authority cannot take the family home into account when performing a means test. However, if following the first death the survivor needs care, the whole value of the family home and assets can be up for grabs, down to the last £14,250 (after you reach this threshold, the Local Authority takes over funding your care). This is the case if you’ve made a mirror Will leaving everything to each other and then the children.
Alternatively, if the survivor gets into financial difficulty, the whole estate can be lost to creditors. A further risk occurs where the survivor remarries – the whole estate then at risk of going to their partner, ultimately passing sideways out of the family. Someone else’s children or grandchildren could end up with the money you’ve worked your whole life for.
With a property trust in your Will, you give your spouse or civil partner the right to stay in your share of the family home for life. You can similarly protect other assets if you want to. If they don’t need the home, they can rent it out or sell it and invest the proceeds, with the permission of your trustees. After their death, your share passes to your chosen beneficiaries.
Should the survivor go into care, remarry or get into financial difficulty, their share is still available for care fees, down to the £14,250 threshold. In this respect they haven’t deprived themselves of any assets because it is only the first-to-die’s share that is held in a protective trust (and the first to die is not the person incurring care costs).
The one disadvantage of this type of ‘property protection trust’ is that if the couple previously owned their home as ‘joint tenants’, the property would have passed automatically to the survivor rather than by the Will. However, this is only really a disadvantage if there are practically no other assets in the estate (i.e. the estate might not have needed a ‘grant of probate’ to be administered). Further, when you contrast this disadvantage with the prospect of losing almost all of the estate to care fees, creditors or remarriage, clearly the benefits far outweigh the detriment.
Our team offer a free one-hour appointment to discuss making a Will which can include a property protection trust. Order our information pack below to find out more.