It can easily be said that Protective Property Trusts (PPTs) are the most common type of Trust that are included in Wills but many people have no heard of them.
What is a Protective Property Trust?
A PPT is designed to take the deceased’s share in the home and give someone else (known as the life tenant) a life interest in the property which will give them the protection of knowing that they are able to live in the property for the remainder of their lifetime or earlier if the trust specifies such as remarriage. It also ensures that if the survivor requires long term care, at least half the property is preserved for the benefit of their beneficiaries who are normally the deceased’s children.
Who would benefit from a Protective Property Trust?
These types of trusts are normally used for married couples or civil partners to ensure the share of the home will ultimately pass to the children at the end of the trust period whilst still ensuring the interests of the surviving spouse are protected e.g. they are able to remain living there.
For example, a married couple want to leave their share of their house to their only child. They currently own the house as joint tenants. Their Estate Planning Consultant would sever the tenancy on the property registering them each as 50% owners (from joint tenants to tenants in common) They would then have their Wills written to say that if one died, their half of the property would be held on Trust for the benefit of their child but allowing the survivor to live in their share of the property for life or a specified period of time.
What does tenants in common mean?
Both tenants in common and joint tenants refer to how a property is held or owned and this ‘ownership’ is registered with the Land Registry. Traditionally, when houses were purchased, the owners would have been registered as joint tenants and this would be reflected on your deeds. This would have meant that if one tenant died, the other tenant would have inherited the whole property.
Holding the property as tenants in common means that each owner holds a share of the home which can be gifted via their Will – usually as 50% each.
When do you set up a Protective Property Trust?
A PPT is created when the Will is written, but it is not ‘active’ until the death of the first testator. The legal title will then be transferred into the names of the surviving spouse (as an example) and the trustees as tenants in common.
It is important to add here that a property cannot enter a life interest trust on death as until the mortgage has been settled, they are not seen to own the property. The simpler solution would be to ensure that both clients have life cover in place to cover the mortgage on first death. If on death there is still a mortgage on the property and there is nothing in place, the survivor does still have limited options such as selling and downsize as the PPT has downsizing provisions; or taking a cash loan to settle the mortgage.
Why do you need a Protective Property Trust?
There are many reasons why this might be needed but the main reason for a PPT is the protection it provides for the beneficiaries.
For example, if the share of the home is simply gifted to the partner directly, this could cause a number of issues – the main one being sideways disinheritance i.e. the surviving partner remarries and the house passes to their new spouse under the Will instead of the children as the deceased might have wished. A PPT will enable the partner to stay in the home but will avoid the risk of the partner potentially disinheriting the children.
The other reason for making this Trust is to protect half of the property against care fees of the survivor following first death.
Likewise, if a share of the home is gifted to the children directly while the spouse or partner has the other share, this could cause issues in that the children may want to force step mum out of the property or insist that she pays rent to remain in the property. A PPT prevents this from occurring and essentially protects both parties’ interest. It is important to add the beneficiaries will only own the share of the home when the PPT ends either due to the death of the life tenant or earlier.
What are the disadvantages of a Protective Property Trust?
The main disadvantage of a PPT is that this inherently comes with a loss of control over the property for the survivor, since they’d be limited in how they manage the property e.g. would need the trustees agreement to sell, would be unable to take out equity release if needed and do need to have paid off the mortgage for the Trust to even be active.
Probate would be required and there would be fees associated with setting the trust up and transferring the property to the trust. Probate is unlikely to be avoided completely unless all the assets are held jointly.
There is also the future inheritance tax liability that this creates since assets in the PPT would be treated as part of the life tenant’s estate for inheritance tax purposes. If they had directly inherited the property, at least they could have had the opportunity to carry out some lifetime planning to reduce this.
To talk more about Protective Property Trusts or if you have any other questions managing your estate please do not hesitate to contact me on firstname.lastname@example.org or 0115 878 0417.