Family Trust Protection

Family Trusts can be used to protect family assets as well as reducing potential tax burdens and care home fees.

People set up family trusts for various reasons, including:

• protect assets for beneficiaries who can’t look after the assets themselves;
• protect assets from divorcing spouses or business creditors;
• protect beneficiaries’ entitlement to state benefits where an inheritance may compromise this;
• provide for children under 18 in an income tax-efficient way;
• ensure that a current spouse and children from a previous relationship are all cared for;
• Reduce or avoid inheritance tax for family members and their estates.

Blended-family protection trusts – case study

Mr and Mrs X booked in with Kwil after their recent marriage. Both clients are in their late forties and this marriage is a second marriage for both of them. They each have 2 children from their first marriages.

Mrs X has come to the marriage with assets of around £500,000. She owns the marital home in her sole name. Mr X sold his property as part of his divorce proceedings and currently has assets worth around £250,000.

Mr and Mrs X want to ensure that they are both looked after upon the death of the first of them, but they also want to ensure that their respective children benefit from their estates. Mrs X is particularly concerned that the house should go to her two children but she does not want Mr X to have to leave if she dies first.

Advice:

Mrs X – Kwil advised Mrs X that she may wish to consider using a family protection trust within her will to allow Mr X to continue living in the house if she was to die first. This would mean that when she passes away, the house would pass into the trust and allow Mr X to continue to live there until he dies, or until he was to remarry or cohabit if she chose that option.

The trust would be flexible to allow Mr X to sell the house and downsize, if he chose to, and the new property would be held on the same terms. He would not be able to sell the house and keep the proceeds of sale for himself. At the point when Mr X passes away the house will pass to Mrs X’s two children.

This trust will ensure security for Mr X, whilst preserving the house for her children.

Mr X – Kwil advised Mr X that he may also want to consider using a family protection trust for his cash assets. This means that if he were to die first then his assets would pass into the trust and Mrs X would be entitled to the income generated from the capital. Kwil also recommended that he may wish to consider giving the trustees overriding powers of appointment, which would mean that the trustees could advance Mrs X some of the capital of the trust if she was in need of it, and only at their absolute discretion. When Mrs X passes away, the capital will pass to his two children. The trust will ensure in income for Mrs X whilst protecting the capital for his own children.

Outcome:

Both Mr and Mrs X were very pleased and relieved that they were able to structure their affairs within their wills to ensure that they are both taken care of after the first one of them should die, with the peace of mind that their assets will ultimately pass to their own children. It is a very good way of preserving assets for your children whilst ensuring financial and residential security for the surviving spouse or partner and works particularly well for blended families. It avoids the pitfalls of sideways disinheritance, which happens so often to families who do not take proper advice.