Most people know that making a Will is very important for you and your family. At Co-op Legal Services, our Will Writers are seeing a growing trend of couples who are concerned about preserving wealth for their children and grandchildren when they die.
Unfortunately many couples aren’t aware of a potential trap that can significantly reduce the amount their children and grandchildren could inherit.
It’s best to illustrate the problem with an example:
Let’s take Mr and Mrs Smith. They are married with an adult child and are both 70 years old living in England. They own their house worth £150,000 and have savings of £50,000 between them. When they wrote their Wills, they wanted to keep things straightforward. Their Wills say that when one of them dies, everything passes to the survivor. Then, when the survivor dies, everything passes to their only child. This is a typical arrangement for married couples with children.
Now let’s fast forward 5 years. Mr Smith dies and, in accordance with his Will, his Estate passes entirely to Mrs Smith. Mrs Smith has all the assets transferred into her sole name including their family home. Mrs Smith now has assets worth £200,000 in her own right.
Now let’s fast forward another 2 years. Mrs Smith is struggling with her health and the practicalities of running her home by herself. She suffers a fall which leaves her unable to manage her affairs. Whilst her adult child offers support, he can’t look after his mother on a full time basis. Mrs Smith has to move into a residential care home.
Mrs Smith has her needs and finances assessed by the Local Authority. Because Mrs Smith has more than £23,250 she has to pay for her own care home fees. The cost of the care home is £30,000 a year. Mrs Smith stays in the care home for another 5 years until she dies, so the total cost amounts to £150,000.
Because of the cost of the care home, the value of Mrs Smith’s Estate reduces from £200,000 to £50,000 and her son receives an inheritance of £50,000.
For some couples this scenario is fine, but for many couples it won’t be. There is a desire among many people to try and protect as much of their wealth as possible from being used for care home fees.
Property Trust Wills
The good news for couples living in England and Wales is that, with the right advice, there is a way to protect at least half the value of the family home and keep it for the children. This is achieved by writing your Will in such a way that it puts half the family home into a type of Trust when the first spouse or civil partner dies. The terms of the Trust also mean that the surviving spouse or civil partner can continue to live in the property held within the Trust. These are called Property Trust Wills.
By preparing a Property Trust Will in the right way, the value of half the home is ring-fenced by the Trust so that it isn’t taken into account if the surviving spouse is financially assessed for residential care home fees. The reason is because half of it is owned by the Trust and the other half is owned by the surviving spouse or civil partner.
Let’s go back to Mr and Mrs Smith. They are still worth £200,000 but this time, when they put their Wills in place, they wrote Property Trust Wills instead.
Fast-forward 5 years. Mr Smith dies and, in accordance with his Will, his half share of the family home is now transferred into a Property Trust. The rest of his Estate passes to his wife. Under the terms of the Trust, Mrs Smith has the right to live in the property for as long as she likes.
Mrs Smith carries on with her life. She continues to live in the property and she also has all the money that her husband left her, so in practical terms, everything remains the same for Mrs Smith as in the first example. In addition, the Property Trust can allow for:
- The property to be sold if Mrs Smith wants it to
- The sale proceeds to be re-invested in a new property for her and
- Mrs Smith to have all the property (or the proceeds of sale) outright if needed
Fast-forward 2 years. Mrs Smith’s health deteriorates and she moves into a care home. She is financially assessed by the Local Authority. What does Mrs Smith own? Well the house is still worth £150,000 but now she only owns half of it because the other half is owned by the Property Trust, so that is £75,000. Her cash and investments are still valued at £50,000, so in total she is worth £125,000.
Mrs Smith remains in the care home for 5 years again at a cost of £30,000 a year, amounting to £150,000 in total. The value of Mrs Smith’s Estate reduces below £23,250 after 4 years, at which point the Local Authority offers financial support. When her assets drop below £14,250 Mrs Smith receives the maximum financial support from the Local Authority.
When Mrs Smith dies, her Estate is only worth £14,250 but the value of the Property Trust remains untouched by the care home cost and is still worth £75,000.
So how much do you think her son inherits? In the first example he receives £50,000. However in the second example, with the Property Trust Wills, he inherits £89,250 (£14,250 from Mrs Smith and £75,000 from the Property Trust).
You can see that by Mr & Mrs Smith putting in place a Property Trust Will, their son would have received an additional inheritance of £39,250. This is all because Mr & Mrs Smith took the decision to look beyond a simple Will and planned ahead for the future.
At Co-op Legal Services, our award winning Wills team specialises in Property Trust Wills and can help you understand your options.