If you’ve heard about the concept of protecting your assets when you write a will, you might be wondering exactly how this works.
The truth is that factors such as care fees and inheritance tax often mean that an estate will look very different between the writing of a will and the time when the assets actually get passed on. Making informed choices and using will trusts to protect your assets can sometimes help preserve as much of your estate as possible.
You might also have very specific ideas about how your money should be used by your beneficiaries, and want to make arrangements to ensure that your wishes are carried out.
What is a will trust?
A will trust is an arrangement sometimes included in a will that allows you to appoint someone – a “trustee” – to manage part of your estate, so that it can be passed onto your chosen beneficiary at the right time.
While will trusts are most commonly used when passing money onto children or grandchildren who are too young to inherit at the time, there are lots of different types of trusts, and a number of scenarios where using them could potentially help secure your assets.
You can learn more about how will trusts work in our article What is a will trust?
Protecting the value of your home against care fees
The cost of receiving care late in life can be prohibitively expensive, and one concern many people have is that their estate could be significantly depleted by care fees, leaving any beneficiaries with a much smaller inheritance. In particular, couples often worry that they will have to sell their home to meet these fees, which can be a real blow if you were hoping your children would be able to benefit from the value of your home.
The good news is that it is sometimes possible to use a trust to preserve your home, or at least part of its value in your estate, from care fees.
The cost of receiving care in England is calculated by your local authority based on the value of your estate. Currently, anyone with an estate worth £23,250 or over must pay their care fees in full. If your estate is worth less than this, or it dips under this threshold while paying for care, then you will be eligible for help with the fees.
There are very particular rules about whether your home is included in this valuation or not. You can read more about how your estate is assessed, and whether your home will be included, in our article How to pay for long-term care. However, in broad terms, your home will most likely not be included in the valuation if you, your spouse or any of your dependents still live there. On the other hand, if you were to die, your spouse were to move into residential care, and no dependents lived there, it would indeed be counted as part of your spouse’s estate.
To use one fairly common scenario as an example, let’s say you and your spouse both have “mirror wills”, where whoever dies first leaves all their assets to the other, and when the surviving spouse dies, it all goes to the children in equal shares. Your house is worth £200,000, and you have shared savings of £10,000.
If you were to die and your spouse were to need to move into a care home, the matrimonial home would likely be valued as part of their estate, for a total valuation of £210,000 (including the property value and the £10,000 in savings). Thus your spouse would need to pay their care fees in full. After using their savings to pay for the first few months, they might well be forced to sell the home afterwards to continue paying care fees.
If your spouse were to die after five years in care, paying £30,000 for care a year for a total of £150,000 in care fees, the estate they passed onto your children would be worth £60,000.
Now, let’s say instead that you opted to leave your 50% share of the home to a protective property trust rather than to your spouse. After your death, your spouse would own the remaining 50% of the home and could continue to live there.
Then, when your spouse enters residential care, only the 50% of the property that they own will be included in the local authority’s valuation of their estate. The part owned by the trust will not be counted. So, the valuation would come to £110,000.
If they sold the home and paid care fees at the same rate of £30,000 per year, your spouse would therefore reach the £23,250 threshold in their third year of care, and begin to receive financial assistance with their care fees. (Let’s say for simplicity’s sake that they no longer pay any fees after this point).
When your spouse dies in this scenario, they only pass on the remaining £23,250 in their estate. However, your 50% share in the home has remained intact in the trust, and passes to your children when your spouse dies, giving them a total inheritance of £123,250 – more than double what they would get in the previous example.
You should seek the help of a solicitor in order to set up a trust, as it is a complex legal process that requires specific wording. This is especially true if you want it to be a part of your will.
If you’re looking for a solicitor, you can find one through the Law Society’s free Find a solicitor service. Make sure you check reviews for the solicitor you’re planning to use, so you can see how other people have rated their service.
You’ll also need to find a person, people, or a company who are happy to take on being a trustee. Think carefully about who you know that is responsible enough for the role. You can choose a company such as a bank or solicitor’s firm, but they will charge for this service.
If you’ve been asked to be a trustee, ask questions and give it a lot of thought – you don’t need to say yes right away.
Can I give my home to my children to avoid it being used to pay for care fees?
If you anticipate that you or your partner may need care soon, you may be tempted to gift part of your estate or even your home to your children so that it will not be counted towards your care fees. However, you should be extremely cautious about this.
If a local council believes you have given away part of your capital to avoid care fees, they will consider this a “Deliberate Deprivation of Assets” and can take action to reverse these transfers and recover any costs, which will likely put you in a worse position.
You can learn more about this in our article Will I have to sell my home to pay care fees?
Exploring other options
You may feel more comfortable exploring different financial options for protecting the value of your estate or paying for care, such as renting out part of the home, downsizing, or equity release. You can read more about your options for paying for long-term care in our article How to pay for long-term care.
Using a trust to reduce inheritance tax
There are certain types of trusts that have their own inheritance tax rules. This means that once assets have successfully been transferred into trust, they’re no longer subject to inheritance tax when you die.
However, there will usually still be some inheritance tax to pay. For example, you’ll usually have to pay inheritance tax at 20% when setting up a trust on anything that exceeds the current £325,000 inheritance tax threshold. Any assets held in a trust will need to be revalued every 10 years and at this point a 6% charge will be imposed on the value of the assets, less the £325,000 allowance. Inheritance tax will need to be paid again at a rate of 6% when the trust is closed or any assets are removed.
If you’re valuing the estate of someone who has died, you’ll need to find out whether they made any transfers into a trust in the seven years before they died. If they did, and they paid 20% inheritance tax, you’ll need to pay an extra 20% from the estate. If the transfer was made longer than seven years ago, then it should become a ‘potentially exempt transfer’ and be exempt from inheritance tax altogether.
Safeguarding your money for other beneficiaries
There are a number of other reasons why you may feel more comfortable leaving your money in a trust or adding other forms of protective structure into your will, when it comes to beneficiaries other than your spouse.
- If you have a very young relative such as a grandchild, their inheritance can be kept in a trust for them until they reach a certain age and are able to manage it themselves
- If you want to make sure your money will be used properly by a beneficiary and doesn’t go to waste, a trust can withhold the money from them if they are making poor financial decisions, facing bankruptcy or going through a divorce. A trustee can also be given the power to decide how some of your money is split, if they feel one beneficiary needs it more than another
- If you have a beneficiary who is disabled, particularly vulnerable or otherwise not fully capable of managing their own financial affairs, you can place money in a trust and let the trustees make financial decisions for them. Doing so can also preserve any means-tested benefits that they might receive.
How do I set up a trust?
So-called “simple bare trusts”, such as stipulating that your grandchild only inherits when they turn 18, can usually be written into a will fairly simply. Anything more complicated than this will usually involve the services of a solicitor, and there may be a fee to pay. You will need to appoint trustees, and trusts must be registered with HMRC’s Trust Registration Service, though a will writing service or solicitor can do this for you.
Bolstering your will
Exploring trusts isn’t the only way to protect your assets and make sure your wishes are followed. When you write your will, there are a number of important steps you should take to make sure it can’t be challenged or misinterpreted, such as establishing mental capacity and making sure the people who are – and aren’t – included have a sense of what to expect. You can read more in our article 10 ways to make sure your will isn’t challenged.
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Making decisions around preserving your estate and arranging trusts can be extremely complicated business. You may want to seriously consider seeking financial and legal advice from a professional, as this will allow you to better weigh up your options and understand the best way forward for your specific circumstances.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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