Strategic Estate Planning: The Role of a Property Protection Trust
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For many people, the goal of estate planning is simple: to ensure their loved ones inherit their assets safely, without unnecessary financial risk. However, passing on wealth isn’t always as straightforward as it seems. Assets can be unintentionally lost in several ways, through long-term care costs, remarriage, or even changes in family circumstances.
A Property Protection Trust (PPT) is one way to safeguard your home for your beneficiaries while ensuring a surviving partner can continue living in the property. This blog explores how a PPT works, who it may be suitable for, and the benefits it offers in protecting one of your most valuable assets.
What is a Property Protection Trust?
A Property Protection Trust is a type of will trust that ensures your share of a property is preserved for your chosen beneficiaries; typically, your children, while allowing your surviving partner to continue living in the home.
This structure can prevent a situation where a surviving spouse or partner’s assets, including those inherited from you, are assessed for long-term care costs. By ring-fencing a share of the property in trust, it cannot be included in financial assessments for care funding, ensuring that it ultimately passes to your intended beneficiaries.
How Does It Work?
Setting Up the Trust: The property must be owned as tenants in common, rather than joint tenants. This allows each owner to specify how their share is handled upon death.
Trust Activation: On the first partner’s death, their share of the property is transferred into the trust rather than passing outright to the surviving partner.
Survivor’s Rights: The surviving partner retains the right to live in the property for life or until they choose to move, cohabit, or remarry. They may also sell the property and purchase another home, with the trust maintaining its share in the new property.
Final Distribution: On the death of the surviving partner, the trust ensures the deceased partner’s share is passed to the intended beneficiaries, such as children or other family members.
Why Consider a Property Protection Trust?
Many families assume that when one spouse dies, leaving everything to the surviving spouse is the best approach. However, this can expose the entire estate to risks, particularly:
Long-term care costs: If the surviving partner later needs residential care, their assets; including inherited property may be used to cover fees. A PPT can protect a portion of the home from being included in these assessments.
Remarriage risks: If the surviving partner remarries and leaves everything to their new spouse, the original family may be disinherited. A PPT ensures the deceased partner’s share is preserved for their intended beneficiaries.
Divorce settlements: If a surviving spouse later divorces, their inherited assets could be considered in divorce settlements, potentially reducing what is left for the children.
Real-Life Example: Protecting a Family Home
Let’s take the example of John and Sarah, a married couple in their late 60s with two children, Emma and James. Their home is worth £400,000.00, and they want to ensure their children inherit their share while also making provisions for each other.
They decide to set up a Property Protection Trust in their wills, ensuring that if John dies first, his £200,000.00 share of the home is placed in trust. Sarah continues to live in the home as a life tenant. A few years later, Sarah requires long-term care. When assessed for funding, only her £200,000 share is considered, John’s share remains protected in trust.
Without a PPT, Sarah’s full £400,000.00 estate could be assessed, potentially forcing her to sell the home to cover care costs. Thanks to the trust, at least half of the property is guaranteed to pass to Emma and James, safeguarding their inheritance.
Who may a Property Protection Trust be Suitable For?
A PPT is particularly beneficial for:
Married couples who want to protect their children’s inheritance in the event one partner dies first.
Couples who wish to prevent their entire estate being used for care fees, ensuring some assets remain intact for future generations.
Families who want to protect against disinheritance caused by remarriage or changes to the surviving partner’s will.
Homeowners with a mortgage, as a PPT does not impact existing mortgage arrangements or require lender notification.
Key Considerations
A PPT only takes effect upon the first partner’s death, meaning there are no immediate restrictions on selling, renting, or raising capital against the property.
The surviving partner cannot leave the entire property to a new spouse, as the deceased partner’s share remains protected in the trust.
The trust ensures the property is safeguarded from divorce settlements or other claims, preserving it for the intended beneficiaries.
Taxation Considerations
A Property Protection Trust has several tax advantages, including:
The trust structure allows the residence nil rate band to continue to be applied (where eligible), helping to reduce inheritance tax (IHT) liabilities.
Spousal Exemption: For married couples, the surviving spouse is treated as inheriting the trust property, meaning the spousal exemption for IHT applies.
The trust does not create additional IHT liabilities during the surviving spouse’s lifetime.
Capital Gains Tax: no CGT is payable on the testator’s death. When the surviving partner dies, the beneficiaries inherit the property share at its market value at that time
Seven-year rule for IHT: If the surviving partner voluntarily gives up their life interest and survives for seven years, the trust property falls outside of their estate for IHT purposes.
Final Thoughts: Is a Property Protection Trust Right for You?
For many couples, a Property Protection Trust is an effective way to protect family wealth while ensuring the surviving partner is looked after. It provides peace of mind that your share of the home will not be lost to care fees, remarriage, or unexpected changes in financial circumstances.
If safeguarding your family home is a priority, a PPT could be a key component of your estate planning strategy. Seeking professional advice will help you understand whether this trust structure aligns with your individual circumstances and long-term goals.