Interest in possession trust

[StarStuddedNight]

My partner and I have mirror wills. A year ago his longstanding financial adviser pushed us to redo our wills – he wants us to become tenants in common (we are currently joint tenants) and then one share of the house can pass into trust on death of either partner. This is supposedly to protect the house for our kids, although the FA also mentioned protecting this asset from being used for care home fees.

We are getting married next year so our situation is changing. The FA is saying we just need to add a clause about our upcoming marriage and to keep the wills as already drafted. I feel uncomfortable about this trust. Is it a legitimate strategy - and are there pitfalls?

Yes, this is a legitimate strategy. It ensures that, if you die first, your share of the house will pass to the children whatever happens. He can't deliberately disinherit them, he can't accidentally disinherit them by remarrying and failing to make a new will, and your share of the house won't be used for care home fees. It doesn't guarantee what will happen to his share of the house - that could be swallowed up in care home fees or he could, either deliberately or accidentally, disinherit your children. But it guarantees that they will inherit your 50% of the house.

Provided the will is correctly written, the surviving spouse will be able to downsize or move elsewhere. The additional clause the FA is talking about will, if correctly written, ensure that your wills remain valid after you marry.

This is a common approach that is recommended if you want to ensure that your children inherit.

Thank you.
I suppose I'm concerned that there will be hidden costs / hassle / and perhaps restrictions. I'm worried that if either of us wanted to downsize and sell, we couldn't access raised capital from the trust share of the house? Also, could it mean ending up in a sub-par care home if funds are tied up in the trust?

If the surviving spouse wishes to move or downsize, all of the capital from selling the family home will be available for them to use. If they are downsizing, they will get 50% of the surplus from the sale. The other 50% would be invested with the surviving spouse receiving any income produced by that investment, but with the capital being preserved for your children. So the surviving spouse will have no problems downsizing or moving.

Regarding care home fees, the vast majority of old people never go into a care home. For those that do, the average stay is around 18 months. If you go for a life interest trust, the surviving spouse will have access to 50% of the equity in the house to pay for care home fees. The other 50% will not be considered as their asset, so won't be counted by the LA when assessing their entitlement to funding.

You need to decide which is more important - protecting your children's inheritance or having as much money as possible for care home fees. I'm afraid you can't do both.

Depending on the values involved would such a trust not give rise to the drawback of there being a possible IHT liability on the first death when contrasted with a will where the surviving spouse inherited?

Not what was asked I appreciate.

No. Anything that goes into the trust is treated as if it was left to the surviving spouse so is exempt from IHT.

It means that if the surviving spouse ends up needing residential care and does not have any assets over £23.5K, they will have no say in the care home they will be able to move to, the LA will have to pay towards care home fees and by default everyone who pays Council Tax will be contributing. But if they own half the house and the DC own the other parents half, that half would need to be used to pay for the care home.

👍

My personal experience of trusts is very negative. Solicitors always seem keen to set them up because when the person dies it won’t be a simple task and a solicitor will need to be involved as we found out when my FIL died.
There is a bit of a public outcry about people avoiding paying for their care home costs so I don’t think it is long before the laws around trusts will be changed.
If I end up in a care home then I think it is only right that I pay for it.

The reason solicitors are keen on them is not to generate more income. It is because a lot of people, particularly in blended families, want to ensure that their spouse cannot disinherit their children, either deliberately or accidentally. This is the way to do it.

I am not aware of any public outcry about people not paying for care home costs but, even if there is, it is highly unlikely the government would ever try to take the capital from life interest trusts. Since the property in the trust does not belong to the surviving spouse, that would probably be a breach of the ECHR and the Human Rights Act. Perhaps more significantly, whoever was in opposition would make the case that the government was taking money from the children to fund the parent's care, which would likely lead to a huge outcry against any such move.