My wife fears if I die first my children will sell our property

My wife and I recently updated our will, leaving everything to the other in case one of us dies.

I was eager to explore a trust option where I could leave property to my three children. This option was advised against by our lawyer because we were not quite on the threshold for inheritance tax or capital gains tax.

My wife’s concern is that if I were to die first, my children would own 50 percent of our property and could technically sell it without her consent.

Is this the case or can I set up a nil rate band trust to protect my wife and our assets?

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Heather Rogers replies: From your question I understand that the children are yours, but not your wife’s.

I can understand her concerns, but this is a common problem and there is a fairly simple way to protect both your partner and your children, to whom, of course, you want to leave a portion of your wealth.

If your main residence is jointly owned by you and your wife, the first step is to determine whether the property is “joint tenants” or “joint tenants.”

If owned as co-tenants, the house automatically passes to the surviving spouse under the survivorship rules. Nothing you do in your will can override that.

If so, however, you can transfer ownership to common tenants so you get equal shares.

So you can leave your share as you wish. Your civil-law notary can make the necessary changes at the Kadaster for you.

Then you can set up a ‘life-interest trust’ to protect your wife and also the interests of your children.

Meanwhile your question refers to ‘properties’. If you and your wife own others besides your primary residence, you may want to consider a trust arrangement for these as well.

How Does a Lifetime Property Trust Work?

This means that if you were to die first, your 50 percent share of the property would pass into a trust created by your will.

The beneficiaries of the trust are your children, and they and your wife can be trustees.

Your wife would have the right to live in the property for the rest of her life, downsize and move to another property.

However, your share is ‘shielded’ from your children and this prevents disinheritance and cannot be reversed by the surviving spouse.

Likewise, the spouse cannot be forced to move, provided the home is insured, kept in good condition, and pays for all expenses on the property.

The trust may need to be registered and title changed at the Land Registry at this point, but as there is no income there is no need to file a tax return at this stage.

What happens if the surviving spouse has to downsize or sell the home for healthcare costs?

If the home is sold, to downsize or to go into care, 50 percent of the proceeds will go to the trust at that time.

A bank account must be opened and the money received by the trust must be invested.

At this point, you may need to file a tax return for the income from the investments.

The spouse can use his share to buy another home or pay for healthcare costs. The income from the investments in the trust goes to the spouse, but not the capital that remains in the trust.

The trustees are currently unable to distribute the capital to the beneficiaries.

An added bonus of this arrangement is that only 50 percent of the assets, the spouse’s share, can be assessed for health care costs.

If the trust was established for the protection of both the spouse and beneficiaries, it is unlikely to be considered “deprivation of assets” for the purposes of health care benefit assessment.

What happens if the surviving partner dies?

The 50 percent held in trust passes to the beneficiaries of the first to die. The surviving spouse’s share passes to the beneficiaries of their will.

Upon the death of the surviving spouse, the value of half of the trust’s property, as well as the surviving spouse’s value, will be part of their estate for estate taxes.

However, the trustees are responsible for any estate taxes on the value of the trust assets.

What about a nil rate band discretionary trust?

A property life interest trust is a version of a “possession interest” trust.

These differ from discretionary trusts, where the trustees have a say in how the trust assets are distributed.

You may want to consider a nil rate band discretionary trust, which can be set to take effect only upon your death first.

The trust would receive assets worth up to zero rate – the portion of the assets exempt from estate tax, which currently stands at £325,000.

A spouse can then benefit from the trust as much as they need, using the property or income.

The assets in the discretionary trust are outside the spouse’s estate for estate tax purposes.

There is then a period of two years from the date of the death of the first spouse to decide whether to keep the discretionary trust.

If it is then kept, it is not subject to inheritance tax on the death of the second spouse. The trustees can then give the surviving spouse a life interest after the two-year period has expired.

A zero-rate discretionary trust can also protect the first spouse’s zero-rate bond, which would be lost if the surviving spouse remarries but dies before his or her new spouse.

I would advise you to go back to your current attorney or consult another one to assess your assets and their value, as well as any estate taxes.

You can then decide whether a lifetime property trust or another option is best for you.

Ask Heather Rogers a tax question

Tax expert Heather Rogers answers our readers’ questions

Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic – tax codes, estate tax, income tax, capital gains tax and much more.

If you would like to ask Heather a question about tax, please email her at taxquestions@thisismoney.co.uk.

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If Heather can’t answer your question, so can you read more about help with tax matters here, including resources for free professional advice if you are older and/or on a low income.

You can also get in touch MoneyHelper, a government-backed organization that provides free assistance to the public in financial matters. The number is 0800 011 3797.

Here, Heather shares tips on how to find a good accountant, including when to seek help, hiring the right type of company, and typical costs.