Many people in the UK are concerned about whether their financial assets will pass on to their loved ones after they die. By planning ahead and taking steps sooner rather than later, you can enable the transfer of assets to run smoothly from one generation to the next and preserve family wealth.
Creating a Family Trust
A Trust is the formal transfer of assets (it might be property, shares or just cash) to a small group of people (usually two or three) or to a Trust company with instructions that they hold the assets for the benefit of others.
If the Trust is to be made in your lifetime, to take immediate effect, then it is usually evidenced by a trust deed. If it is to be created on or shortly after your death then the trust provisions must be set out in your Will - a 'Will Trust'.
Whether by lifetime settlement or by Will, the Trust document states who are responsible for looking after the gifted assets (the trustees), who are to benefit (the beneficiaries) and any rules or conditions that the trustees are bound by for the benefit of the beneficiaries.
Most Trusts fall into one or two main categories depending on how the income or benefit (dividends, interest, rents, free use of property etc) is dealt with:
- Interest-in-Possession Trusts are where the income or benefit must be given to the specific beneficiary - it is his or hers by right.
- Discretionary Type Trusts have several types but the common feature is that the benefits are allocated at the trustees' discretion to any one or more of several beneficiaries. The trustees might even decide, for a time, to benefit no one; the income being accumulated for future use.
Transfer of Property
This is one simple way of ensuring that your property passes to family members or a loved one. Property can be transferred outright or into joint names. However, it is very important that the following risks are considered:
- The recipient of the property may fail to support the person making the gift, leaving them vulnerable and at risk of losing their home
- In the event of the divorce of the recipient, their share of the property would be considered as part of their assets in any financial settlement
- If the recipient were to become bankrupt, their trustee in bankruptcy could claim against the recipient's share of the property when selling assets to pay creditors
- On the death of the recipient their share of the property would form part of their estate and would pass under their Will, or if no Will existed then to the next of kin under the intestacy law
- There may be adverse tax consequences for both the person making the gift and also the recipient
If you transfer assets, whether outright or into a Trust, with the intention of avoiding care fees, then you may be deemed as still owning the assets for the purposes of assessing your eligibility for Local Authority funding.
Severance of Joint Tenancy
Most couples own property jointly as 'Joint Tenants'. This means that if one Capital for the purposes of a Local Authority financial assessment as it is no longer theirs. The Local Authority cannot treat the family home as Capital whilst there is a surviving partner still living in the property. For more details see Planning for Long Term Care.
Deprivation of Assets
Where a person needs residential or nursing home care in England or Wales, the Local Authority will carry out a financial assessment to calculate how much should be paid towards the care fees. There are strict rules regarding 'Deprivation of Assets' where a person's objective is to obtain assistance with care fees. Therefore if someone disposes of assets with an intention to obtain help with care fees then the person making the gift can be assessed as if they still own the asset.
If the Local Authority believes you have given your assets away to avoid the payment of care fees, they may calculate your ability to pay as if you still owned those assets. In some circumstances, where the asset has been gifted within 6 months prior to the person going into care, the Local Authority could recover the cost from the person who has received the gift.
Generally, it is the motive and intention behind making the gift that is the important factor although there are no guarantees as there is no time period after which it can be said that the gift is likely to be successful. If the gift took place at a time when a person is fit and healthy and could not have forseen the need for a move to nursing or residential care, then it is more likely that the gift will be successful.