Home Protection Scheme
Many people work hard all their lives to amass their assets and pay off their mortgage. However, their desire to provide for a surviving spouse on their death may be clouded by the uncertainty of third party claims, such as:
- A surviving spouse may remarry and predecease their new partner, leaving the assets to the new partner, and disinheriting the children from the first marriage.
- The surviving spouse may be at the mercy of third parties who may be manipulative. Even children can exert pressure on a surviving parent when they become older. These third parties may take advantage of an opportunity to deprive the survivor of both property and liquid assets.
- Intended beneficiaries, such as children, may go through a divorce or separation where the third party could have a claim against their former partner’s inheritance, or the children may go through financial hardship or be spendthrifts; they may even have drug or alcohol problems.
So what is the solution to these problems?
Those creating a Trust (known as “Settlors”) should be aware that they are able to retain control over assets, and preserve them for future generations by putting assets into a Trust. By doing so, the assets are “ring-fenced” from the problems stated above. For most people, their main asset or concern, is the preservation of the family home. They can transfer the property into trust and continue to live there for the rest of their lives. The Trust is prepared in such a way that the interests of the Settlors are paramount during their lifetime.
How does the Home Protection Scheme work?
- The Trustees hold the legal title to the property on trust.
- The Trustees can be the homeowners themselves, together with their children or professional Trustees.
- The purpose of this Trust is not to mitigate or avoid Inheritance Tax.
- The disposal by gift into trust of the principal residence does not attract Capital Gains Tax liability.
- A deed permitting the Settlors (property owners) to occupy or sell the property during their lifetime is prepared, along with the trust documents, which gives them the right to remain in the property.
Advantages of a Home Protection Scheme
- The Settlors remain in control during their lifetime, and can control the direction of assets in the Trust after their death, by instructions to the Trustees given when the Trust is created.
- The incapacity of either or both Settlors is irrelevant as the Trust holds the property and follows the terms of the Trust. Should one or both go into care, the property can be sold and the proceeds invested for the beneficiaries.
- Probate costs can be mitigated or avoided by this device, as the property no longer forms part of the Estate.
- If a beneficiary becomes bankrupt or has creditor claims against them, they have no call on the assets in the Trust. Similarly, if they divorced, the third party cannot claim against the assets.
- Any claims by disgruntled beneficiaries will not be entertained against the assets held in the Trust.
- If Settlor’s children are well-off, the Trust can be used to “generation-skip” for the benefit of grandchildren.
Understandably, there is a concern whether Asset Protection Trusts of this nature can protect against Care Home Fees.
The main fear is that the family home will be taken from them and sold, so that nothing is left for future generations.
This is a complex issue and involves the consideration of the concept of “deliberate deprivation”. Any act carried out whereby assets are transferred, sold or used may be considered as “deprivation” – but not all such acts are “deliberate”.
The CRAG (Charging for Residential Care) Guidelines state that avoiding care home fees must be a significant reason for transferring assets into trust in order to prove “deliberate deprivation”. CRAG also states that the timing is important in establishing motive, and that it would be unreasonable to decide that a resident had disposed of an asset in order to reduce his charge for care home fees, when the disposal took place at a time when he was fit and healthy, and could not have foreseen the need for a move to residential accommodation.
Why not just gift the property?
So why not just gift the property without the use of a Trust? We do not recommend this for the following reasons:
- Once the property is given away, the client loses all control over the property.
- If the recipient gets divorced or becomes bankrupt, the property will be open to attack from third parties, and the client may even be forced to vacate their home.
- House-moves are entirely dependant on the recipient agreeing to the sale and purchase of the new property.
- The new owner may press the client to vacate the property prematurely, to go into care!