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Having worked hard to buy your own home, paying off your mortgage over several decades perhaps, you understandably want to ensure that it will ultimately pass to your family and that it will be protected for their benefit.
Worryingly, there are many different ways in which your home, or indeed part of it, could be lost to them.
For example:
Probate Fees Did you know that Solicitors, banks and professional executors charge a percentage of your estate to handle the probate on behalf of your beneficiaries. Banks may offer you a free Last Will and Testament, but they also write themselves in as the main executors for anything up to 10% of your estate value. Solicitors and Barristers also charge similar fees, and some may even charge an hourly rate on top of their percentage fee.
For example, if you have a home worth £200,000, and a professional executor charges 5%, your home value alone is £10,000 in fees.
By placing your home into a Family Trust, it does not need to go through probate, as your beneficiaries become the legal owners after you die. This benefit of the trust alone makes it a worthwhile investment for your family’s future, but there are more benefits……
Bloodline Protection Should you or your spouse pass away, and the other remarry at some point in the future, the new spouse might legally be entitled to half of your home after living there for a period of time. If they outlive your spouse, then your family home may be lost to their beneficiaries, and not your own children.
The same applies to your beneficiaries. Should they divorce after inheriting some or all of your family home, the divorce proceedings can award half of the inherited property to the outgoing spouse.
By placing the home into a family trust, you protect your bloodlines inheritance, which passes from you to your children, and then to their children. Spouses can have no access to the home.
Creditors Should you or your family fall into financial difficulty, the home being in trust, prevents creditors placing a charge onto the property in pursuing a debt. Whether it is protection for yourself or your children after inheriting, the same rule applies.
Intestacy Should you pass away without a Will, or without a valid Will, the Rules of intestacy will apply to your estate. If this happens, your intended beneficiaries might see cousins, or aunts and uncles appear that they’ve never met, as they may want a piece of the pie, and have been informed that they are entitled to it. The construction of a Family Trust names the beneficiaries of the family home in the trust deed, so any new family members will have no claim on what is most likely the largest value of your estate.
Full Faculties We don’t like to think about our health deteriorating in our latter years, but the plain truth is, as we get older, our bodies change. We may develop dementia, or Alzheimer’s Disease, which affects our mental health, or physically, we may suffer a stroke, losing the ability to talk, or move some of our limbs. Nobody knows what our future may hold. By placing the home into a family trust, your trustees will be able to make decisions relating to the home on your behalf. They will be the ones who have your best interests at heart, as you named them for that purpose.
Its worth noting that should your children need to make decisions on your behalf, without a trust or a Lasting Power of Attorney in place, they will have to apply to the Court of Protection to be able to do so. This will cost in the region of £5000, but may even be more depending on the circumstances.
Children Inheriting. Whilst most of us wish our children to inherit our home, timing can make all the difference. If a child is having issues with drugs, alcohol, gambling, or they are vulnerable and easily led, their share of your home could be lost to other parties and not pass to your children or grandchildren as you intended.
By placing the home into trust, you can appoint trustees to act on behalf of your beneficiary who may have some of the above issues. The trustee, who may be another sibling, can use the trust at his or her discretion, in a bid to protect the wayward beneficiary from him or herself.
Transferable The trust is completely transferable, and completely flexible. Should you wish to sell the home at some point in the future, you can sell without any problems. If you are selling to downsize, you can purchase a new home, and place it into the trust. Or you can sell, and simply unravel the trust.
Your beneficiaries can also benefit from the flexibility of the trust. They might decide to sell your home after inheriting to pay the mortgage off their own home. They can then use the trust to place their home into it, protecting for their children’s future.
IHT Planning The Family Trust cannot be used to avoid inheritance tax, but its function will help to plan for your inheritance tax, if you happen to be over the threshold of £650,000. (£325,000 for a single person)
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It is important to know that during your lifetime nothing changes on a day to day basis; however you have the peace of mind that you have secured your property for the long term future prosperity of your family. You carefully select your trustees – these are people you trust, such as your children. We like to call the trustees ‘babysitters’ as they are simply looking after your home; it does not legally belong to them, it belongs to the Trust – they are simply babysitting your property!
Your home is placed into the Trust by drafting a trust deed which we will call the ‘Rule Book’. Your home is registered in the names of your chosen trustees at the District Land Registry. The Rule Book has a list of potential beneficiaries who can benefit from the Trust, typically these would include you, your children, your grandchildren and any other people you might wish to benefit.
Your trustees permit you to live in your home until your death. The Rule Book gives you the power to hire and fire the trustees; therefore if the trustees do not comply with your wishes, you simply remove them as trustees and appoint replacements who will comply with your wishes. To date we have not experienced any such issues with trustees as they generally have your best interests at heart.
WHO CAN SET UP A FAMILY PROTECTION TRUST?
Any homeowner, single or a couple, can set up a Family Protection Trust as long as they enjoy full ‘mental capacity’, which means that you must have an understanding of what the Trust does and the implications of setting it up.
Ideally homeowners should not have a mortgage or charge on their home; if you do please speak with us prior to your application.
Why haven’t I heard of this Trust before?
Schemes such as this are not widely publicised and not many law firms specialise in such trusts. The Family Protection Trust is best explained face to face with our clients rather than trying to explain the benefits in an advertisement.
Is it worth it?
The Trust will ease your estate administration and protect your house for your family – obviously it’s worth it.
Am I still in control?
Yes, it is important that you remain in control and are involved in any decisions involving the Trust. Therefore the Trust ensures that your permission is necessary prior to any decision being made.
Can we move home?
Of course. Should you wish to move home, in conjunction with your trustees, your home can be sold and a new one purchased in the name of the Trust.
Who will be the trustees?
Trustees should be people you trust; it is usual for adult children or trusted family or friends to be trustees. You should appoint between two and four trustees. There is no need to have solicitors or other professionals as trustees.
How will my trustees know what my wishes are after my death?
Fortress Wills can draft a ‘Letter of Wishes’ for you that will explain to your trustees how they should deal with the Trust after your death if required.
Will the Family Protection Trust protect the home from Inheritance Tax when I die?
No, as the settlor and beneficiary of the Trust the home will still form part of your taxable estate upon your death. We can refer you to an Independent Financial Advisor to discuss this if you are over the IHT threshold of £325,000. (£650,000 for a couple)
Will there be any taxes to pay when I set the trust up?
No, providing the value of your home placed in the Trust (or your share of your home) is below £325,000 there will be no Inheritance Tax to pay and there is no Stamp Duty Land Tax to pay. The Trust will not generate income so there will be no income tax to pay. Capital Gains Tax will not be payable on any increase in value.
What if I have other assets I wish to protect?
Some companies advise that other assets such as bonds, savings and investments should also be placed in the Trust. We do not advise this, as it is likely to be problematic in the future and give rise to taxation. Most of our clients simply wish to protect their home at a reasonable cost, but there are other trusts available for such. We can refer you to a trusted Independent Financial Advisor in this case.
Why don’t I just sign my home over to my children now?
The most potent of questions that we receive. Signing away your assets is never advisable, no matter who they might be. Lets look at each issue though:
Divorce – Your child gets a divorce, but they own your home, so half of its value goes to their spouse. You could easily end up out on the street.
Family Quarrels – What happens if you fall out with the child you have signed the house over to? They legally own your home, and can evict you at any time.
Debts – We touched on this above. Should your child fall into financial difficulty, the creditors of their debts can now place a charge on your home, or worst case scenario, take the home in its entirety through bankruptcy proceedings.
These are obviously all very high risk scenarios in your lifetime, but what about after that?
What about the capital gains tax liability? Rising house prices may see your children paying Capital Gains Tax when they eventually sell your house if it was not their principle private residence; this means they will have a tax bill on any gain that your home made after you signed it over to them.