What is it and what are the benefits?

The priority for most of us when we die, is ensuring that our loved ones inherit from us, and that our assets pass safely to them, without risk of being lost. This may not always be as simple as we would wish. Assets may be ‘lost ‘to our loved ones in a number of ways:

  • If our spouse/partner remarries after our death, our children may lose their inheritance to the new spouse.
  • If our spouse/partner needs long term care after our death, our property and assets may be used to pay the costs.

If we wish to secure our assets for our loved ones, we need to consider which type of planning in a carefully constructed Will is most appropriate for our circumstances.

The Estate Preservation Property Trust is a most useful tool in ensuring our loved ones inherit our assets as we wish. Since the Pre-Budget Report of October 2007, this type of planning has become much more important and relevant. As those married couples with estates up to £625,000 are much less likely to require Inheritance Tax planning, their property may be at risk of not passing to their chosen beneficiaries.

In simple terms, the Estate Preservation Property Trust allows couples to ‘Will’ their portion of the property on their death to their chosen beneficiaries, thereby preventing the loss of the inheritance as described above. The portion of the property ‘Willed’ on first death is then held in Trust for the chosen beneficiaries until second death.

It also means that as the surviving spouse /partner has the use of the whole of the property after first death, even though half has been gifted to the chosen beneficiaries in Trust, the available Nil Rate Band available on second death, for Inheritance tax saving purposes has not been reduced. So, the survivor will still have twice the prevailing rate available on their death.

How does it work?

Wills are written including an Estate Preservation Property Trust in each case, which leaves the share of the property ‘in Trust’ for the chosen beneficiaries. This Trust protects the interests of the survivor, allowing the survivor to live in the property until death, or until he/she cohabits or remarries.

If the survivor goes on to remarry, he/she cannot leave the whole of the property to their new spouse, as a portion is already owned by the Trustees on behalf of the chosen beneficiaries. The survivor can also move house if he/she so wishes, using the whole of the proceeds towards another property, or raise capital by purchasing a smaller property, a greater proportion of which will be owned by the Trustees.

Other Considerations

The way in which the property is owned by the couple must first be established. Most couples own as Joint Tenants. This means that both own the whole property together, and neither of them can then ‘Will’ the property to anyone on first death. The property passes by survivorship on first death, becoming solely owned by the survivor.

So, if the property is owned as a Joint Tenancy, it must be changed to a Tenancy in Common. As Tenants in Common, each one of the couple owns a definite share of the property, commonly 50%, and may ‘Will’ their share to their chosen beneficiaries.

Severance of Joint Tenancy – changing from Joint Tenants to Tenants in Common – is a simple procedure which can be easily arranged when Wills are prepared.

A Case History – How the Johnson children lost out on their inheritance

John and Amy Johnson lived in West Yorkshire. They owned their home jointly, which was worth £350,000, and a further £75,000 in cash and investments. Their existing Wills provide that they passed their assets to each other and, on second death, to their two children.

Amy died in June 2005 with all her Estate passing to John. John remarried in August 2006 to Julie, a family friend he had become close with after his wife’s death. They purchased a new property together after their marriage, and reminded each other that they needed to write new Wills, but had not done so when John died in October 2007.

The house automatically passed to Julie, by survivorship, as it was owned as a Joint Tenancy. The investments and cash also passed to Julie as she is entitled to the first £250,000 of his estate as his wife. His children inherited nothing.

How John and Amy could have protected their children

There is a straightforward way to protect the children’s inheritance against remarriage or care fees. An Estate Preservation Property Trust in each Will leaving each of the couple’s shares to the children ‘in Trust’ on death would ensure that they do not lose out completely. The survivor would be able to remain in the property, or sell it and buy another, until they die cohabit or remarry. After first death, the children own half of the property, in Trust, and may inherit the other half on second death.

If John and Amy had taken this step, then the children would have owned half of the property on the death of Amy, held for them in Trust. If the remarriage/cohabitation clause had been used, John would have had to pay the children their share of the property at this point. With this knowledge, he may also have purchased any new property with Julie as Tenants in Common, each again leaving half to their respective children in trust so that they do not lose out at all.

Had John instead needed to go into care as he got older, once again half of the property would already be owned by the children in trust on the death of Amy, and therefore safe from being used to pay care costs. The other half of the property, owned by John, may be difficult to sell to raise the funds to pay for care, as few people would want to buy half a house although the Local Authority are empowered to place a charge for John’s care costs.