Asset Preservation Trusts
Thousands of families are disinherited every year
The main reasons: Remarriage, Divorce, Bankruptcy or Long term care.
Remarriage – The Problem
Mr and Mrs Green have assets worth £600,000; their main asset is their home which is worth £400,000 and they also have £200,000 in various investments. They have made wills that leave everything to each other and then their estate is to pass to their two children.
Mr Green dies and Mrs Green remarries; her will is thereby revoked and should she die before her new husband, much of her estate will pass to him and not to her children.
When her husband dies, the assets will pass to his own family and not to Mr and Mrs Greens children. Clearly, this is not fair and certainly not what Mr and Mrs Green would have wanted.
Even if Mrs Green makes a new Will after her remarriage, she may subsequently divorce, which could put half of the property at risk of being lost in the divorce proceedings. This loss of (part of) the house in the divorce of course means that the property will never pass to the children.
Divorce – The Problem
We all hope that our children (and grandchildren) will make good marriages but, with around 40% of marriages ending in divorce, it is important to at least consider the possibility of divorce. When your children inherit your estate, a future divorce settlement would take that settlement into account and your hard-earned assets could become the property of an ex-spouse.
Bankruptcy of beneficiaries – The Problem
If your children suffered bankruptcy, their inheritance could be considered by the court as an asset to be included in a settlement with their creditors effectively ending the cascade of your wealth through to future generations.
Long Term Care Fees – The Problem
Since the introduction of the Community Care Act 1990, thousands of estates have been wrecked by the imposition of paying for Long Term Care fees. Around 480,000 people are resident in nursing and residential care homes; less than 20% of these are cared for by the Local Authorities, families are paying the cost either directly or through the loss of their inheritance. It is currently estimated that around 70,000 homes are sold each year to fund Long Term Care fees which could be as high as £2,000 per week (with £1,000 per week now being the nationwide average). The children will see their inheritance disappearing week by week and they may inherit as little as £13,000.
The Solution – Asset Preservation Trust
Goodwills can draft an Asset Preservation Trust in your Will and when the first dies, their assets are held in a protective trust. The trustees may be the surviving spouse and adult children or a trusted family member; this means that you and your family remain in control. The trust gives the surviving spouse an absolute right to live in the home and a life interest in all the other assets; this means that they have an indefeasible right to the income produced and if they do require capital, the trustees can simply make cash advancements.
If the surviving spouse remarries, the assets held in trust are not part of their estate and remain in the trust to pass to the children when the survivor dies.
Upon the second death, all of the family’s assets pass to a ‘discretionary trust’ with the children as the discretionary beneficiaries. This means that if they should divorce, the inheritance is protected from the ex-spouse. Similarly, in the event of bankruptcy, the inheritance is protected from creditors.
In the event that one of the beneficiaries is considered as a ‘vulnerable person’, the trustees shall hold ‘their share’ in trust to ensure that their inheritance is not squandered or cause them harm.
If the surviving spouse goes into Long Term Care, the local authority cannot take into account any assets there are held in trust; they can only take into account income and assets outside of the trust. The local authority is likely to disregard the value of the property altogether but you can be certain that at least half of your estate is protected for your children to inherit. The surviving spouse may sell the house and move to another property; in effect nothing changes.
Inheritance tax planning
Although lifetime gifts are tax efficient, it is difficult to know how much to gift to your children whilst you are both living. After the first death, the survivor may decide that the income they are receiving is in excess of what they need; they may surrender their life interest in any part of the trust assets (Potentially Exempt Transfers) and this will be free from Inheritance Tax as long as the surviving spouse lives for 7 years: on average, widows live for 9 years. Even if the surviving spouse dies before 7 years has elapsed, Inheritance Tax is saved on a pro rata basis, so that if they survived for 6 years, 80% of the tax liability would still be saved.
Your children’s estates may have a liability to Inheritance Tax when assets pass to their children. Your children are not compelled to take the full inheritance into their own estates but only what they need, or more likely, borrow what they need from the trust and create a ‘friendly debt’ on their estate which will be paid back to the trust upon their death thereby avoiding any liability to Inheritance Tax. The Asset Preservation Trust may run for up to 125 years after the first death. There may be a Periodic Charge every 10 years on assets in excess of the Nil Rate Band.
How we set up the trust
The effectiveness of the Asset Preservation Trust relies on you owning your joint assets as ‘tenants in common; if your home is owned jointly, (as more are), we will register a ‘severance of tenancy’ with the Land Registry so that each of you owns half of the property. If you own capital assets jointly, we will draft an agreement stating that your assets are owned as ‘tenants in common’; none of this actually affects you.
Only when the first dies is the trust actually set up (which is known as being ‘settled’). Upon the second death, the trustees may end the trust and settle the assets upon the beneficiaries (your children) or they may continue the trust for up to 125 years, this will ensure the protection of the assets from divorce, bankruptcy and vulnerable beneficiaries and mitigate future Inheritance Tax Liabilities.
Summary of the main benefits of the Asset Preservation Trust
- Assets are protected from Remarriage
- Assets are protected from Divorce of Beneficiary
- Assets are protected from Creditors
- Assets are protected from Vulnerable Beneficiaries
- Assets are protected from Long Term Care fees
- Assets are protected for Future Generations
- Enables IHT planning for Future Generations through ‘friendly debts’
- Spouse can be given Cash Advancements or Loans
- Spouse can make Potentially Exempt Transfer to avoid IHT
Goodwills Asset Preservation Trust is a vital element of Estate Planning for couples who own their home or have significant assets.
The Asset Preservation Trust must be put in place prior to the first death.
Goodwills can draft the Asset Preservation Trust into your Wills and ensure that your wealth and property will cascade down the generations of your family.
This information is based upon our understanding of revenue practice at the time of issue.