Will Trusts Vs Lifetime Trusts
Andrew from our Protect team (the ones who deal with Estate Planning, Wills, Trusts and Lasting Power of Attorney) chats about Trusts and explains why a Will Trust and a Lifetime Trust are completely different when it comes to protecting your assets from care fees.
Unfortunately, there’s some unscrupulous advisers out there selling Lifetime Trusts door-to-door as a way to protect your home from care fees. But the problem is a Lifetime Trust can’t do anything of the sort. Sadly, people are only discovering the truth when it’s too late.
What is a Lifetime Trust?
A Lifetime Trust is essentially a Trust that’s active throughout your lifetime.
When you set one up for your property, you’re gifting your home to the Trust, while still allowing yourself to live there.
The assumption is that if your house is owned by the Trust it can’t be taken into consideration by the Local Authority when they carry out an assessment for care fees.
What’s wrong with this?
Well, there’s some misconceptions and risks you might not know about, including:
- The care system doesn’t recognise a Lifetime Trust and will assume the house is still yours, meaning you’ll be slapped with a care bill if your assets are over a certain amount, but effectively won’t own your home as you’ve gifted it to the Trust. This means you can’t sell it and only have the right to live there, but still have to find enough money to pay your care fees.
- The Local Authority will class a Lifetime Trust as something they call the ‘Deliberate Deprivation of Assets,’ which means you deliberately tried to get rid of your property to avoid care fees. If you’re in your 50s, 60s, or 70s it’s more than likely this’ll be the conclusion they draw. They’ll assess you as if the house is still yours and you will have to pay your care fees.
- Many believe for an asset not to count towards care fees, you need to have given it away more than seven years ago. However, this seven-year rule only applies to Inheritance Tax and not care fees. In fact, the Local Authority can go back as many years as they wish to look for the Deliberate Deprivation of Assets.
And all this is before you get into the realms of the potential tax issues with a Lifetime Trust.
What are the tax issues?
If you put your property into a Lifetime Trust, you could face a 20% charge on anything over the nil-rate band (the total limit where there’s no inheritance tax to pay) which is currently £325,000 and your trustees must submit tax accounts to HMRC. They also might need to pay a tax bill every 10 years of 6% of the value over £325,000, plus income tax on any payments from the trust.
An example of this is:
Your house is worth £425,000, which means you’d pay 20% of the £100,000, which is over the £325,000 nil-rate band limit. Your trustees need to pay 6% (£6,000) of that £100,000 every 10 years in tax, but obviously this will change as the house increases in value.
If your trustees sell the property, they may be subject to Capital Gains Tax, even if a Trust is liquidated and everything has already passed to them.
So, why is it important?
Deciding whether to take your Defined Benefit/Final Salary pension out of its scheme or leaving it in place is a big decision and the Government has put certain safeguards in place to make sure your money’s protected, including making it a requirement to get professional and regulated advice if your Defined Benefit pensions are worth £30,000 or more. This makes sure you get all the information on the risks and benefits of a transfer.
The Gold Standard is simply an extension of this – a way for you to be reassured you can get what you want the way you want and know you have all the information to make the best decision for your future.
Keith Richards, CEO of the Personal Finance Society, commented:
- “The retirement landscape continues to evolve with professional advice playing a crucial role in meeting consumer financial planning needs. The pace of change has led to some areas of concern and unintended consequences for consumers, especially those entering draw-down without having consulted a professional adviser or Pension Wise guidance.It is essential that we introduce initiatives that address these rising areas of concern, via sector agreed ‘good practice’ and a ‘voluntary code’ which consumers and PI Insurers can rely on. Protecting the excellent progress of the profession and the growing financial planning needs of the public is at the heart of the Taskforce’s purpose.”
It’s also a great way to understand how financial advice firms are working harder to make sure their advice gives you the security and comfort of being impartial, unique to you and the best you need to get the lifestyle you want.
All advisers who sign up to the principles are saying they’ll follow the nine promises when helping you make a decision on your transfer.
Are there different types of Will Trusts?
There’s a few different Will Trusts you can choose from depending on your circumstances, including:
- A Property Protector Will Trust – This is where your home is registered as ‘Tenants in Common’, making it two equal 50% shares owned by each partner. Your Will then states that the share owned by the one who dies first will be held in trust for your children (or the local dogs home if that’s your preference) protecting it from care fees.
- A Savings Protector Will Trust – A Savings Protector holds yours and your partner’s separate savings in Trust when you die, protecting them from being taken in care fees but still allowing your partner a lifetime interest in the funds and ultimately protecting it to pass to your beneficiaries.
As many couples don’t realise it’s possible to do this, they make the mistake of bundling their assets together.
However, if you put your 50% share of the property, savings or investments into Trust on your death and give your partner a lifetime interest, when they need care, only the 50% share they own will be used, as yours is safely stored in Trust for your children, or whoever you choose, to inherit.
Ultimately, it’s about making sure the things you put in place will do what you need them to. Always make sure the adviser you’re using is legitimate and gives clear transparent advice.
Our free Protection Survey meeting will answer all your Will Trust, Lasting Power of Attorney and Estate Planning questions. It will also show you what risks you’re carrying in relation to care fees.
So, if you’d like to find out whether Estate Planning can help you make sure your assets go where you want them to, get in touch on 033 0133 3035 and we’ll chat about your circumstances.