Whenever you choose to make your Will it will be a time for you to think of the future and decide what you want to happen to your wealth. This might be a simple decision, but what if things change after you have passed away, and your money does not ultimately reach your intended beneficiaries ?
Most couples want their partner to inherit their combined estate and use it or spend it as they like and then, when they have both died, pass it on to the intended beneficiaries - often their children. But what happens if the surviving partner remarries ? If they do not get around to making a new Will the first £250,000 of their estate would pass to their new spouse and the children might be accidentally disinherited.
Another major concern for many of our clients is the cost of long term care, which at the current rates of between £450-£700 per week can errode the estate very quickly.
People often say "I will not sell my house to pay for care - I want to give it to my children now". The sentiment is nice but in reality is is not a good course of action for the following reasons:
1. The local authority are empowered to disregard, without any time limit, any transaction which they consider to be "self-deprivation" - and a gift by a person at a time they could foresee the need for care would almost certainly fall into that category.
2. If you give your house away but continue to live in it, it is not a "true gift" in law unless you pay a full market rent to your child as the new owner, and income tax on the martket rent is payable every year.
3. From the date of the gift (unless the recipient lives with you) the house is not the principal private residence of the new owner so your child would have to pay capital gains tax at 18% on any increase in its value between the date you give them the house and they sell it.
4. If your child become involved in divorce or bancruptcy then YOUR house will be one of THEIR assets to be claimed in legal proceedings.
5. If your child dies before you then YOUR house will be part of THEIR estate and will go to the beneficiaries named in THIER Will.
6. If your relationship with your child breaks down then your ability to live in YOUR house could be prejudiced.
Clearly these factors making gifting a risky and expensive process, especially as at the moment only about 1 person in every 6 goes into care.
However, if you own assets either in your own name or jointly with your spouse or partner there are steps that can be taken in conjunction with your Will to ensure that your own share of the assets will eventually pass to your chosen beneficiaries.
Firstly, ownership of any joint property (your home, for instance) needs to be changed to "tenancy in common" so that each of you owns a distinct share (usually 50/50 but other shares can be agreed if appropriate). Each Will then gives the deceased's share of the house to a trust (your partner and children could be the trustees) which permits the surviving partner to live in it for their lifetime - powers can also be included to move if they wish, or to benefit from the income from its value if they no longer live in it. When the surviving spouse dies, however, the first partner's share of the house is owned by the trust and not by the second partner's estate so it does not pass with their own half of the houseand their own assets but to the trust beneficiaries. This type of life interest trust is a particularly useful tool where the testator wants their spouse to have the use of their property but also to protect the interest of children from previous relationships.
Using life interest trusts also severely limits the amount that local authorities can charge for care. For example, if the house is worth £200,000 the effect (in round figures using £20,000 as the lower assset threshhold at which no more charges are made) would be as follows:
"Standard" will leaving everything to the surviving partner who later requires long term care:
Property value £200,000 minus threshhold £20,000 maximum levy for care = £180,000.
If the first partner to die had left a life interest trust Will:
Half property owned by trust, value £100,000 is secure for the beneficiaries nominated by the first partner.
Surviving spouse's property value £100,000 ( * maximum - see below) minus threshhold £20,000 maximum levy for care = £80,000
So in the example this perfectly legal and acceptable procedure saves the eventual beneficiaries £100,000 and carries none of the risks of gifting. There is no additional charges for life interest trusts when Just Inheritance draft your Wills. The only cost would be severing any property is owned as joint tenants into tenancy in common, at a cost of £50 per property. Clients contemplating this scheme should, however, be aware that equity release or remortgage may not be possible once one of them has passed away as half will then be owned by the trust, and that Probate will be required after first death to pass the deceased's share of the property to the trustees.
* It is arguable under the so-called "Palfrey principle" that when one half of a house is owned by a trust and the trustees decline to sell, then the survivor's half actually has little or no value (as nobody would want to buy half a house) so the survivor's care levy may be reduced further.