Discretionary Trusts v Protective Property Trusts

Putting a trust in your Will to make sure your loved ones inherit something is a very good thing. We commonly see PPTs (Protective Property Trusts) in Wills but sometimes think a DT (Discretionary Trust) might be a better solution in many cases.

Here's why.

Commonly a couple change the way they own their house so that on first death, they can leave half the house to their children but the survivor can still live in the house. The main motivation for this is to ensure that half of your property is ring-fenced for your children one day and cannot be lost if the surviving spouse re-marries or goes into care. This is usually done by setting up a PPT in your Will.

However, there are some pitfalls. The trust will cease on the death of the life tenant (commonly the surviving spouse), whereas a DT can protect the house for the family for up to 125 years. This means you could continue to protect it for the children/grandchildren against divorce, disability, bankruptcy, care fees and sideways dis-inheritance. (It can of course be closed down at any time if the trustees so wish).

Secondly, the Will is an instruction to the executor to set up the PPT, incurring extra cost, whereas the DT is set up via the Will.

Another big advantage of the DT is IHT planning. As the PPT ceases on the death of the life tenant, the value of the deceased's estate will become the estate of the beneficiaries and if they already have an IHT problem, it will make things worse. A DT avoids double taxation.

Furthermore, whilst the property does NOT pass to the life tenant, it is part of their estate for Inheritance Tax. This means that the beneficiaries of the life tenant's estate would pay the tax and NOT the ultimate beneficiaries of the property. For example, if you were widowed, found a new partner and wanted them to be able to live in your property until they die, their children and NOT yours would pay the tax on the property, even though your children would inherit the house.

It is not all one-sided. Whilst the DT offers more flexibility, the decisions are made by the trustees, who have ultimate discretion as to who benefits out of a pool of your potential beneficiaries. The PPT does ultimately state who is to live in your house when you die and who is going to benefit when that person dies, so you don't need to question whether the trustees (normally the children and/or a professional) will honour your wishes.

Another benefit of the PPT is that it will automatically include the additional RNRB IHT allowance of £175,000. This means that a couple, if leaving their home to their children, have to be worth more than £1,000,000 before they pay IHT. This planning can also be achieved via the DT, but needs some active planning on death.

If you have a PPT in your Will or indeed if you have no trust whatsoever in your Will, you may wish to give us a call.

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