Property protection trusts: the disadvantages nobody mentions

A property protection trust is a life interest trust written into a couple's wills. It holds the first to die's share of the home for the survivor to live in, then passes that share to the children. For the right couple it is a sound tool, and Aaron writes them regularly. It also has real limits that sales pitches leave out: it protects half the house at most, it puts trustees between the survivor and the front door, it saves no tax, it needs running, and it can be undone.

The family protection trust guide and the life interest will trust page describe how the trust works. This is the critical companion to both.

It only ever protects half

The trust holds one share of the home: the share of the person who dies first. That only works if the couple own the home as tenants in common. A joint tenant's share passes to the survivor automatically and never reaches the will. A joint tenancy can be severed in lifetime, for example by written notice, but not by will. The survivor's own share and savings stay in the survivor's name and are assessed for care in the ordinary way. In England, a person with capital over £23,250 pays their care fees in full. Capital below £14,250 is ignored, and between the two a tariff income applies. The share in the trust is not the survivor's capital, so it is left out. Everything else counts, subject to the usual disregards. The survivor's share of the home is ignored for the first 12 weeks of a permanent care home stay. It is also ignored while certain people who lived there before the move still live there, such as a partner or a relative aged 60 or over. A share of a home is valued at what a buyer would pay for that share. That can be less than half the home's value, so the example below is a worst case.

A short example. A couple own a £300,000 home as tenants in common, with £40,000 of savings. The first dies and their £150,000 share goes into the trust. Later the survivor needs residential care. The council assesses the survivor's own £150,000 share plus the £40,000 of savings: £190,000 of capital. The £150,000 in the trust is not assessed, and the family keeps it. The other half, and the savings, pay for care until the survivor's capital falls to the threshold.

It also does nothing for the care of the first person to die, because it does not exist until the will takes effect, and it cannot help a single person. The honest description is that it halves the exposure on the second person's care. It does not remove it.

The survivor cannot deal with the home alone

This is the drawback that surprises people most. After the first death the trustees hold the first to die's share. The survivor then cannot sell or remortgage alone, because the money must be paid to at least two trustees. A restriction on the Land Registry title normally enforces this, so a second trustee has to sign. If one trustee has fallen out with their parent, or lives abroad, a sale can stall.

The wording matters even more than the trustees. Aaron has read trusts, sold as protection, that gave the survivor a right to live in one named house and nothing else: no power to sell and buy somewhere smaller, no power to release cash. A trust like that traps the survivor. Good drafting does the opposite:

• The survivor is one of the trustees, so nothing happens to the home behind their back.
• The trustees have an express power to sell and buy a replacement home, with the trust's share carried into the new property.
• The trustees can advance capital to the survivor where there is a real need, and the survivor's consent is needed for any sale.

Ask to see those powers in the draft before you sign.

It is not a tax scheme

Some firms sell these trusts as inheritance tax planning. They are not. For a married couple or civil partners, the spouse exemption applies to the first to die's share whether it passes to the survivor outright or into a life interest trust, so there is no tax on the first death. On the second death the trust share is treated as part of the survivor's estate. The tax bill is the same as with a plain will. Unmarried partners get no spouse exemption, so for them the share counts for inheritance tax on both deaths. The nil rate band of £325,000 and the residence nil rate band of £175,000, both frozen until April 2031, are not increased by the trust.

The residence nil rate band needs care. It applies where a home, or a share of one, passes on death to direct descendants, such as children, step-children or grandchildren. A properly drafted life interest trust keeps it, because the share passes to the children when the survivor dies. A wrongly drafted trust can lose it: a discretionary trust on the first death, or a class of beneficiaries wider than direct descendants, can cost up to £175,000 of allowance on that share.

It comes with admin

A plain will is signed, stored and forgotten until it is needed. A will trust has a life of its own after the first death, and the trustees have to run it:

• Registration with HMRC. A will trust is excluded from the Trust Registration Service for two years from the date of death. After that, the trustees have 90 days to register. HMRC can charge a fixed £5,000 penalty for failing to register, although it normally writes first. Once the trust must be registered, a conveyancer selling for the trustees has to collect an excerpt from the register.
• Records. The trustees should keep a file: the will, the death certificate, the title, the registration reference, and a note of any decision they take, and update the Land Registry when a trustee is replaced or the home changes.
• Capital gains tax, sometimes. While the survivor lives in the home, a sale is normally covered by private residence relief. If the survivor has moved into care and nobody entitled under the trust lives there, a gain on the trust's share since the first death can be taxable in the trustees' hands. Often small, but check before a sale, not after.

None of this is a reason not to have the trust. It is a reason to know it needs looking after.

It can be undone or ignored

The trust protects the first to die's share from the survivor's choices. It does not bind the survivor's own half, or the family, for ever.

• The survivor can give away, spend or leave their own half to anyone. If they remarry and leave it to a new spouse, the children inherit the trust's half and nothing more.
• The council can still ask questions. A will trust that takes effect on death is not a deliberate deprivation by the survivor, who never owned that share. But the steps around it can be looked at: if the joint tenancy was severed when one of you was already in care, or clearly heading there, expect questions. And if the survivor later gives away their own half to avoid care fees, that is a deprivation in the usual way, with no time limit.
• The family can change it after death. Within two years of the first death the beneficiaries can vary the will by deed and take the share outright. If every beneficiary is an adult with capacity and they all agree, they can end the trust at any time. That includes anyone named to take if a child dies first. If any beneficiary is a child or not yet born, the court must approve. Ending the trust early can also have tax consequences. Trustees with a power to advance capital can hand the whole share to the survivor. Each time, the protection goes.

Who sells them and what they charge

Property protection trusts are sold hard, often by will writing firms that the Solicitors Regulation Authority does not regulate. Trading Standards and the Law Society have warned about the way they are sold, and a client of an unregulated seller has no route to the Legal Ombudsman when it goes wrong. Three things to watch for:

• The lifetime version. Some firms sell a trust you set up now, transferring the house into it while you live there. That is far riskier. It is a gift with reservation for inheritance tax, so the house stays in your estate whatever the seven year rule says. A council can treat it as deliberate deprivation with no time limit. And you no longer own your home. If your quote is for a trust that starts before anyone dies, get a second opinion.
• Fees that bear no relation to the work. Quotes can run to several thousand pounds, sometimes with an annual charge on top, or the seller named as a paid trustee. The document itself is a few pages within a will. Ask what the fee is for and who the trustees will be.
• The phrase asset protection. It is a marketing term, not a legal one. Ask what is protected, from what. For a will trust the answer is the first to die's half, from the survivor's future choices and care assessment. Anything wider, be wary.

When a mirror will is better

The honest comparison is this. If you are a couple in a first marriage with shared children, your estate is comfortably inside the inheritance tax allowances, and the care question does not much trouble you, a pair of mirror wills does the job. It is simpler, cheaper and needs no running. The trust earns its place where one of you has children from an earlier relationship, where most of your wealth is in the home, where a second marriage or pressure on the survivor worries you, or where halving the care exposure is worth having.

If you have been quoted for one, check the facts, then talk to a regulated solicitor before you sign. Aaron is an SRA-regulated solicitor and a full member of STEP. He does this work for a fixed fee, agreed in writing before any work starts, whether that is trust wills for a couple or a pair of mirror wills. The first conversation is a free 15 minute call, and if a trust is not worth it for you, Aaron will say so. The Plan Finder points you to the right starting place. The guide to protecting your home from care fees covers the wider options.

This page is general information about the law of England and Wales. Whether a property protection trust is right for you depends on your own facts.