My spouse and I have recently updated our wills to include a provision in which we leave our entire estate to each other in the event of one of us passing away. However, I had the idea of setting up a trust to specifically allocate my portion of the property to our three children. Our solicitor advised against this option because we are not close to the threshold for inheritance tax or capital gains tax.
My wife is concerned that if I were to pass away first, our children would then own 50% of our properties and could potentially sell without her consent. Is there a way to protect my wife and our property assets using a “nil rate band trust”?
Heather Rogers replies: Based on your question, I understand that the children are biologically yours but not your wife’s. I can appreciate her concerns, but there is a straightforward solution to protect both your spouse and children and ensure that your assets are distributed according to your wishes.
Firstly, you need to determine whether your main home is owned as “joint tenants” or “tenants in common”. If it is owned as joint tenants, the property will automatically pass to the surviving spouse under the survivorship rules, and your will cannot override this. However, if you change the ownership to tenants in common, you can have equal shares and leave your portion as desired. Your solicitor can assist with making the necessary changes at the Land Registry.
To protect both your wife and children’s interests, you can establish a “property life interest trust”. Under this arrangement, if you were to pass away first, your 50% share of the property would be transferred into a trust created through your will. The beneficiaries of the trust would be your children, and your wife and children could serve as trustees. Your wife would have the right to reside in the property for her lifetime and make changes as necessary, such as downsizing or moving to another property. However, your share would be ring-fenced for your children, ensuring that they are not disinherited and that these arrangements cannot be undone by the surviving spouse. As long as the property is insured, well-maintained, and the expenses are paid, your spouse cannot be forced to move out.
If you and your wife own other properties apart from your main residence, you may also consider setting up trust arrangements for those assets.
In the event that the surviving spouse needs to downsize or sell the home for care fees, 50% of the proceeds will go to the trust. A bank account will need to be established, and the funds received by the trust can be invested. At this point, it may be necessary to complete tax returns for the income generated from the investments. The surviving spouse can use their share of the proceeds to purchase another property or pay for care fees while the income from the investments in the trust goes to the spouse. However, the capital remains in the trust and cannot be distributed to the beneficiaries at this time.
One advantage of this arrangement is that only 50% of the property, the spouse’s share, will be assessed for care fees. If the trust was created with the intention of protecting both spouse and beneficiaries, it is unlikely to be considered as “deprivation of assets” for care fee assessment purposes.
When the surviving spouse passes away, the 50% held in trust will be distributed to the beneficiaries of the first to die, while the surviving spouse’s share will be distributed according to their own will. The trustees of the trust will be responsible for any inheritance tax portion on the value of the trust assets.
Another option to consider is a “nil rate band” discretionary trust. This type of trust can be set up to take effect only if you were to pass away first. The trust would receive assets worth up to the nil rate band exemption from inheritance tax, which is currently £325,000. The surviving spouse can benefit from the trust through the use of the property or income. The capital in the discretionary trust is outside the surviving spouse’s estate for inheritance tax purposes. There is a two-year period from the date of death to decide whether to keep the discretionary trust, and if it is kept, it will not be subject to inheritance tax on the second spouse’s death. The trustees can then provide the surviving spouse with a life interest after the two-year period.
It’s advisable to consult with your solicitor or seek advice from another professional to review your assets, their value, and any potential inheritance tax liabilities. They can help you determine the best option for your situation, whether it’s a property life interest trust or another approach that suits your needs.
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