Lifetime Trusts Pt.2

This is the second part of two articles about Lifetime Trusts, their ongoing management, and potential problems to watch out for. The main purpose of this article is to:

Firstly, make members aware of their future obligations and the problems that can arise from not managing those obligations and, Secondly, and probably more importantly, to let you know that help is available.

In the first article I dealt with three impending trust issues, which are summarised again below: -  

Trust Registration

From the 1st March 2022 (only 18 months away) most Lifetime Trusts that hold assets in excess of £100/ IOU’s or property will have to registered with HMRC. Are you ready for this?   

Periodic Charges

Lifetime Trusts are subject to IHT charges on entry and exit, as well as, being assessed every ten years. If Trust assets exceed the Nil Rate Band an IHT charge is charged based on 6% on assets valued over the Nil Rate Band. With property values increasing and the NRB still at £325,000 it’s very easy for Lifetime Trusts to inflate over the NRB and create an IHT liability. What are you doing to review clients with lifetime discretionary trusts to avoid these issues arising?  

Inheritance Tax (IHT) & The RNRB

In 2017 the government introduced an additional IHT allowance that increased the amount you could leave tax free when you die to a potential £500k per person or £1M for a married couple. This new allowance is called the Residence Nil Rate Band (RNRB) and from April 2020 it is set at £175k. But, as with most HMRC concessions, there is catch – the new RNRB is conditional. How many clients do you have where the RNRB allowance will fail because the family home is either in lifetime discretionary trust or is directed into a discretionary trust by the Will?

But there are other trust administration issues to consider as well, particularly: –  

1. Trusts not being fully utilised.

2. Mis-selling of Lifetime Trusts.

3. Changing trustees.

4. Regular reviews.

Trusts not being fully utilised.  

When we are considering creating a Lifetime Trust there are, in my opinion, 3 main reasons for doing so: -  

Firstly, avoiding the costs and delays of probate. Any assets transferred into a Lifetime Discretionary Trust are held by the Trustees and do not need to go through the probate process. The problem with this of course is that most will writers protect the property but leave anything else outside the Trust, only doing half a job. This of course often means that probate may still be needed and the benefit of having the Lifetime Trust is not maximised. It also leaves the Trust exposed to potential claims that it is a sham by third party creditors. Remember that this probate benefit only applies if the legal title is able to be transferred and does not apply if only a restriction on the title is used.

Secondly, protecting wealth from sideways disinheritance. Similarly, if a client owns substantial other assets why would we not try to protect those other assets from ending up in the survivor’s name, and being exposed to risk, by using a Will Trust on first death or using the Lifetime Trust to protect more than just the property.  

Of course we all know that a Will Trust can only protect the first to die’s share of a property and that the survivor’s share is still exposed to sideways disinheritance and allows a local authority to dictate how care fees are paid if the survivor goes into care. Severing the tenancy and using a Life Interest Trust in a Will has always been good advice and effective estate planning and can never be deliberate deprivation as the person has died without going into care.

Thirdly, protecting beneficiaries from beneficiary issues. These are what someone referred to recently as the 7 deadly sins; sideways disinheritance, marriage and divorce, financial problems, IHT, unreliability, IPFD claims and loss of benefits. Clearly if considerable assets are left outside of the Trust and the Will does not include residuary Discretionary Trusts, we’ve only done half a job.

Mis-selling of Lifetime Trusts - Care Fees  

We’ve all seen lots of will writing companies blatantly selling Lifetime Trusts based on the prospect of avoiding care fees and using the clients’ fear of care to “sell”. Some of those companies have gone but whilst our profession remains unregulated and where there is money to be made, we will find unscrupulous individuals who mis-sell Lifetime Trusts. I’m afraid it is a scandal waiting to happen in 5, 10, or more years when people start going into care and their property is not protected. Clients and their families will not be happy and will look for someone to sue.  

Surely its better to explain that a Lifetime Trust will give you options in the future and put you in control IF you need to go into care. After all, if your Mum needed to go into care where would she and you want her to be? A good care home that you need to pay for, or the worst local authority run home?  

Placing a person’s property into a Lifetime Trust should not be “sold” as making sure they don’t have to pay for care, because that is not strictly true. What a Lifetime Trust does provide is CONTROL over how care is paid for. The beneficiaries have choices, they can renovate and rent it out, they can sell it and invest, they can move in and pay for the care using their own funds. Telling people, particularly in the current economic climate, that if they pay for a Trust for their house that the Government will pay for their care is neither the truth nor good advice.

Changing Trustees  

Many Lifetime Trusts have been formed using Professional Trustee for inappropriate reasons, and some of them are not as responsive as is often needed due to changes in circumstances, particularly as many were appointed on the basis of no fees being charged for the life of the Trust. While appointing professionals CAN be a good idea in some circumstances, for many families it is leading to a great deal of stress. You should review your trusts with your clients and change the trustees to family members where it is more appropriate, the process is quite simple and can greatly simplify matters in many cases.  

Regular reviews  

Lifetime trusts should never be looked at as “Form and Forget” planning. Tax legislation changes, property values change and people’s wishes change. You should be checking in regularly with these clients to ensure they understand the current situation, review any changes needed, review their tax situation, and generally ensure their planning is up to date.  

So, in summary, there are potential issues to be aware of but it’s not all doom and gloom. Of course, all the above potential problems can be avoided by you and your firm being proactive and making sure the Trust provider you’re working with can supply the service you and your clients deserve, not just in terms of drafting but also in terms of ongoing administration.

This article is written by Council member Paul Dodsworth, TEP and Managing Director of Estate Planning Solutions, with input from Alan McAloon, TEP and Managing Director of Acer Prime Law, who provides reserved legal activities for a number of independent Willwriting firms.