Trusts are often established as part of the estate planning process, and can be used as a tax-efficient means of passing on assets such as land, money and shares to your Partner or children. Due to the complexity of this area of estate planning, there are often many misconceptions around trust formation. This guide aims to dispel some of the mistruths around what can be an effective measure of asset protection.
Lifetime trusts and elderly care assessment
Assessment for care fees in England is based on what’s called ‘properly assessable capital’. If the individual has more than Â£23,250 of capital, the local authority will not contribute to care fees. For the first 12 weeks of permanent care, the family home does not count as ‘properly assessable capital’. After this time, however, the property will be assessed and depending on the circumstances of the case the placing of a property into a lifetime trust can in certain circumstances offer an effective solution
Aside from care fee assessments, lifetime trusts can also be useful in other circumstances. One such instance would be where an older divorcing couple place the property into a trust to allow a mutually agreeable way of leaving it to the children whilst allowing one party to remain living in the house in the meantime.
Trusts and estate planning
Will planning can be an effective way to ensure that at least half of the family home is ring-fenced from assessment for care fees. A flexible life interest trust under the Will ensures that the share of estate of a deceased spouse is not used to pay for the care fees of the surviving spouse. This leaves the surviving partner a life interest in half of the total assets owned by the first to die. Whilst the survivor’s own share in the house will form part of his or her capital, the value of that share will be less, usually much less than 50% of the whole. This is because the open market value of the survivor’s half share will be determined by how soon a purchaser of the survivor’s half share can realise the value of their interest by forcing a sale of the property.
Capital Gains Tax on gifted property
Where the family home is ‘gifted’ to the children outright, Capital Gains Tax (CGT) will be applicable if and when the property is sold. So for example, a property that was gifted in 2001 and has subsequently risen in value, say from Â£100,000 to Â£250,000, the CGT liability would be over Â£25,000. Where the property is transferred into a trust, however, the principle private residence relief will usually be upheld and this level of CGT can be avoided.
Immediate lifetime charge to Inheritance Tax
Clients need to be aware that lifetime transfers into trust in which the value exceeds the nil rate band are subject to an immediate 20 % charge to Inheritance Tax. This rule formerly only applied to discretionary trusts, but has now been extended to cover many other forms of trusts.
For more information about forming a trust or for trust advice tailored to your specific circumstances, please contact a trust solicitor in our wills and probate team.