Cohabiting couples: the importance of making a will
Dispelling the myth that cohabiting couples form a ‘common law marriage’ that gives them legal protection.Read more
If your spouse or partner remarries after your death or, if either or both of you have children from a previous marriage, then there could be unforeseen consequences when your estate is distributed on your death.
If you leave your estate on your death to your spouse outright and they remarry after your death without making other provision, all your estate, together with your spouse’s, could pass to their new spouse. Marriage revokes any will your spouse made whilst you were both alive, and so the new spouse could either inherit under the Laws of Intestacy or under their will.
Your children, for example, would not be relatives of the new spouse or partner and your estate could pass outside the family to someone you have never even met.
A property trust will can ensure your assets are protected and pass to the people you have specified.
If you have children from a previous relationship, it is likely that you will want to make some provision for both your new spouse and your children. Unless your estate is substantial, this can be hard to achieve, as there may be insufficient assets to go around. If you leave all your estate to your spouse outright, then your assets could pass ultimately to their children rather than your own.
By having a property trust will, you can make provision for your new spouse for their lifetime, whilst also ensuring your assets ultimately pass to your children on your spouse’s death.
With people living longer, more and more of us potentially require residential or nursing care in our later years. Property trust wills can sometimes help to protect a share in the property from the effects of care fees.
In the first instance, you will usually be expected to pay for this care and it is currently only when your capital has reduced to £23,250 that the Local Authority is obliged to assist. Even then, the Local Authority will only make a contribution towards the fees, until your capital falls to £14,250. At this point, you would not be required to make any further contribution towards the cost from your capital, although throughout you would still be expected to contribute from your income. If you are funded by the Local Authority you are still able to choose your own residential care home, however, if the fees exceed those the Local Authority is prepared to fund, then a third-party would have to agree to ‘top-up’ your fees to make up the shortfall.
Whilst it is, of course, possible that both spouses or civil partners will need care at some point, it is more likely that the survivor may go on to need care after their spouse or partner has died. If the first one to die leaves their estate to their surviving spouse or partner outright, and the survivor subsequently requires care, then all of their assets will be taken into account, and potentially used to fund the costs of care.
It is important to note that should the survivor require long-term care very soon after the death of their spouse or civil partner, the Local Authority could try to claim that insufficient provision has been made for the survivor (regardless of their wishes). Although this is possible with either a right to reside or life interest (see below), it is less likely such a claim would be brought (or indeed succeed) with the life interest option.
This is because the surviving spouse would be entitled to benefit from the income which would be assessed towards their care.
Rather than leaving your share of your property (and any of your other assets if required) outright to the survivor on your death, a property trust will allows the survivor to benefit from your share of your property (or other assets) without actually owning them. This ensures your assets pass to your chosen beneficiaries on the surviving spouse’s death.
This is a formal legal arrangement and so on the death of the first spouse, their executors would need to apply for a grant of probate in order to deal with their share of the property. The ownership of the property would also need to be updated at the Land Registry to reflect how the property is held.
Fundamental to the working of property trust wills is the way in which you own your property.
Most couples own their property as ‘joint tenants’. This means that when one of them dies the property will automatically pass to the survivor, regardless of what any will says.
It is, however, possible to sever the joint tenancy, so that the property is owned as ‘tenants in common’. This means that you each own an identifiable share in the property (eg 50%), which can be gifted separately by the Will of each owner. On the death of one of the tenants in common, the deceased’s share does not automatically pass to the surviving owner but instead passes under their will (or according to the Laws of Intestacy if there is no will).
The will itself can be written to match your specific requirements, but generally, there are two options:
In each case, your share of the property is left to your trustees (who may include the surviving spouse or civil partner) to hold on trust, with the property passing to your specified beneficiaries (eg. children) when the survivor’s interest comes to an end.
During the period that the trust is in place, the survivor would be responsible for all the outgoings in respect of the property such as water, gas, electricity, council tax etc. The survivor must also keep the property in a good state of repair and it must be insured in the names of the survivor and the trustees.
As the name suggests, with this option, the surviving spouse is entitled to reside in the property for as long as they wish, subject to any restrictions. Therefore, this option can only relate to a specific property and if the surviving spouse chooses to leave it, or is unable to carry on living there for some reason (eg. if they have to go into long-term care), then the trust comes to an end. The share of the property then passes to the named beneficiaries.
This can be adapted to allow a different property to be purchased, on the same terms, as the survivor might prefer to move to a smaller property, or to another location to be nearer other family members.
This provision allows the survivor to benefit from the property held in trust for the rest of their life, rather than just until they no longer wish to live in a specific property.
The advantages of this are three-fold. Firstly, if the survivor wishes to move into rented or sheltered accommodation, then they will still be entitled to benefit from the trust property. The property could be rented out or sold and the proceeds invested, with the rent or investment income passing on to the survivor. This gives the survivor a greater access to the assets held in trust and makes more provision for them.
Secondly, this provision can apply to assets other than a property (or a share of a property), for example, cash bank accounts or shares. These other assets must be owned in individual names. This is because if they were held in joint names, as with a property owned as ‘joint tenants’, they would pass to the surviving owner outright, regardless of what the will said.
It is possible for the will to be drafted for either a right to reside or a life interest to end if the surviving spouse re-marries or starts to co-habit with another person as spouses.
Right to reside: Mr and Mrs B own a house valued at £200,000. They own the house as tenants in common. They have property trust wills with a right to reside. Mr B dies. Mrs B then wants to move to a property valued at £100,000. Mrs B could use her £100,000 towards the new property. Mr B’s £100,000 would then be paid straight to the beneficiaries under his will.
However, Mrs B could, if she wished, use Mr B’s £100,000 to purchase the new property and Mrs B can then do as she wishes with her £100,000. The Trustees of Mr B’s estate would own the new home but Mrs B would have the right to live there for as long as she wanted, and the beneficiaries under Mr B’s will would receive £100,000 when Mrs B dies (or chooses to move out).
Life interest: Mr and Mrs C own a house valued at £200,000 owned as tenants in common. They have property trust wills with a life interest. Mr C dies. Mrs C then wants to move to a property valued at £100,000. The house can be sold and Mr C’s ‘life interest trust’ of £100,000 can be used to buy the new home. Mrs C can then do as she wishes with her £100,000, as Example 1. The Trustees of Mr C’s estate would own the new home, but Mrs C would have the right to live there for her lifetime.
Alternatively, Mrs C could use her £100,000 to buy the new home so that she owned it outright and the trustees could then invest Mr C’s trust money of £100,000. Mrs C would have the right to receive the income (eg interest or dividends) it generated, but not the capital, as this would ultimately go to the beneficiaries under Mr C’s will when Mrs C dies.
Furthermore, if the new house is priced at say £150,000, Mrs C could again use Mr C’s £100,000 trust and add £50,000 to it herself. Thus, Mrs C would own 1/3 of the property and the trustees of Mr C’s estate would own 2/3 of the property.
If Mrs C subsequently needed care, then Mr C’s £100,000 could be invested for her to receive the income to contribute the costs of her care, but the capital would be protected.
The main difference is that without a life interest if any of Mr B’s trust money is released following a sale, it will be paid to the beneficiaries and cannot be invested for Mrs B’s benefit.
You can move. The terms of the trust can be flexible. We can ensure that the person living in the property has the option to move to a new property if he or she wishes. Perhaps the home would be too large and there would be a wish to move to a smaller property, or nearer to family.
No. The terms of the trust dictate that the children will only be entitled to the property when the trust comes to an end.
No. Since your spouse has rights to use your half of the house this is regarded as though he/she owns the property for the purposes of calculating inheritance tax. In some cases, this can have adverse inheritance tax consequences, particularly if your estates are substantial and your other beneficiaries are different. Please ask for more advice if this is the case.
For assistance with creating a trust or writing a will, call us on 01332 226 162 or fill in the form below.
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