Trusts and Protecting Your Assets
We’ve written a few articles about the government’s planned increases in probate fees. A plan which, if implemented as intended, has been dubbed a ‘stealth tax’. Unsurprisingly, amid widespread condemnation, we’ve seen a marked increase in enquiries from clients about the potential benefits of setting up trusts. Can this approach mitigate inheritance tax liability and increased probate fees?
So, here’s a brief guide as to why you might use a trust and what’s involved.
Protecting your property for the future
When you’re gone, you’ll want all your hard work to fully benefit your family and loved ones. But there are some risks attached to passing on wealth – such as your house – in your Will or leaving gifts (including property) to loved ones whilst you are alive.
The main motivators behind signing over the family home are:
- to avoid over-paying for future care costs
- to avoid Inheritance Tax and or probate fees
- to provide children with a foot on the housing ladder
Pitfalls to signing over your property before you die
1. Care fees – be careful!
Many believe that passing on their home to family members can help them to avoid the value of the property being considered when they are assessed for care home fees.
However, in practice, most local authorities will still include the property in their assessment if they suspect an ulterior motive. They will investigate the timing and motives behind the transfer. Despite many people believing the contrary, it’s a misnomer that they can only look back a few years – theoretically, there is no time limit.
If this is your main reason for the gift and there are no other substantial reasons it will be classed as a deprivation of assets – and this is potentially a criminal offence.
2. Tax & probate fees
When it comes to avoiding Inheritance Tax (IHT), those who transfer ownership of their home but continue to live there will fall foul of the “gift with reservation of benefit rules”. This means that after death the house would be counted as part of your estate because and therefore liable to IHT.
Equally, if you have transferred your house to your children but are later forced to sell, Capital Gains Tax may be due on the increase of the value of the property between the original ‘gift’ and the sale.
If Inheritance Tax is not an issue, you may consider that the savings to probate fees are a worthwhile exercise if your estate falls into one of the higher brackets.
3. Helping the kids – relinquishing control carries risks
It’s not uncommon for families to fall out and the implications can be enormous financially as well as emotionally.
As soon as the transfer is complete, you will be potentially at the mercy of your family (and their spouse and their families too). Financial pressures can complicate matters and the situation can easily escalate.
Events in the family such as death, divorce or bankruptcy may mean you wished that you had not entered into the transaction – you must assume the worst-case scenarios may very well happen.
Additionally, there may be unintended consequences in relation to First Time buyer relief and second property tax for stamp duty if/when your children go to buy their first or second house.
The role of trusts
Whilst there are several serious pitfalls to consider if you want to give your children your home while you’re alive, there are ways to plan a smooth and cost-effective transfer after your death.
Creating a trust is usually considered when planning anyone’s estate. There are numerous benefits of using trusts. For example, creating a trust does, in some cases, mean that you to avoid the probate process, which can sometimes be complicated and expensive for your beneficiaries.
People will often choose to create a trust to make sure their property is dealt with exactly how they would like it to be. They derive peace of mind that it is in a safe place and will be dealt with easily and quickly after their death. It also creates certainty as to the destination of the asset; particularly important in second marriage situations where there are two sets of children and you’re keen to avoid an argument.
On the flip side, rather than establishing a trust, a well planned and executed Will can be a far better way to control the destination of your assets. Whilst probate can be complicated and time-consuming, the cost is comparable to setting up trusts in life.
Furthermore, it is possible to change the Will when/if required without consulting the rest of your family. This is particularly important if your circumstances have changed, for example, divorce or a second marriage.
Whatever you decide, it’s essential that you are aware of all the potential risks and benefits. And take specialist advice when you need it.
If you would like more information or is you would like to talk through issues that concern you, please contact us to see how we can help.
Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.