When you create a property protection trust and mention it in your Will, it allows someone to benefit from your estate after your death as if they owned the property without actually inheriting it.
By law, a property protection trust does not really exist. A property protection trust is nothing but a standard trust where the beneficiary has a life interest. It is termed as property protection insurance because the idea of protecting one’s estate from the government is very appealing for many people. This makes them pay higher fees for writing special agreement terms in their Will by an expert.
Why is property protection trust used?
If you die without having a legal Will in place, your spouse (if you are married) automatically inherits the first £250,000 of value in the property and half of the remainder of the valuation. If the value of the estate is above £250,000, half of the amount after the first £250,000 is passed over to the spouse of the deceased while the remaining half is inherited by their children.
Most people >write a Will to transfer all the property they own to their spouse (if they are still alive) and their children. The only intention of the testator when writing a Will is to ensure that their beneficiaries are able to live comfortably for the rest of their life. The joint wealth accumulated by both the parents is entirely passed on to the next generation. In such situations, property protection trusts are used to allow someone to benefit from your property without actually inheriting it. Consider this example to understand property protection trust better.
If your child is mentally challenged, it is obvious that they will not be able to manage their own financial affairs. In such a situation, you can opt to place your property in a trust. This way the property is managed by other family members for the benefit of your child. Thus, your child is taken care of with the trustees making the right financial decisions about how your estate should be used to do so.
The same mechanism is used to protect your property from the means tested fees applied by the UK government. Since, your spouse does not inherit from your estate; the property is not counted as part of the estate they own for means testing. Although, your partner does not inherit the property, they benefit from it equally. Upon their death, the remaining estate is passed on to other beneficiaries that inherit it.
Ethics and Legality
The main purpose to create such kinds of trusts is to slip under the threshold for means testing so that your survivors inherit a greater value of your estate. Alternatively, you can even use discretionary trusts to avoid inheritance tax. It has been widely used across the country for many years. However, it is entirely a personal choice whether to use these kinds of trusts or not. But setting up such trusts is completely legal.
Even though it is legal and it is possible for you to create a property protection trust, it possibly will not have the effect you intended it to have. Due to the current financial condition of the country, the local authorities are more likely to scrutinise any such mechanism or system that leads to the deprivation of assets for someone who needs to be taken care of.
But if the motive is clear enough that the trust was set up to avoid paying the care fees, then it is very much obvious that the life interest beneficiaries needed care. Then the local authorities can look through the trust and take the property into consideration in means testing.
Recently several cases have surfaced in the court wherein people were pressurised into buying such agreements by their service provider. There were several cases of mis-selling of this agreement. The Will writers tricked their clients into believing that the property protection trust will indeed protect their property in situations where in reality it legally could not.
Creating a trust in the Will costs nothing more than some additional pounds. All the solicitor or the Will writer has to do is add a few paragraphs of text in the legal Will of the testator. There have been certain situations where the solicitors have crafted a Will that nominates themselves as the trustees. In that position, they can charge further on-going fees for their work.
The main purpose of property protection trust is to provide benefits of use without the actual inheritance. One of the alternatives to setting up a trust is to give your estate to your beneficiaries (for example your children) while you are still alive. Remember it should be clear enough that you are not giving the property away just before you need care. However you need to think about certain things such as,
- If the people whom you give your estate to divorce, the estate will be divided equally between them.
- There may be inheritance tax consequences if you die within a certain time frame after the gift is made.
- The people whom you will be giving your property may not act as they promised: they may not offer same amount of care to your partner as you wished for or an unforeseen event may leave them bankrupt.