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Ineffective property trusts

Protective property trusts in Wills are becoming a popular estate planning tool, largely due to the decrease in use of the Nil Rate Band trust and the more aggressive nature of local authorities when assessing for care fee liability. The trust, used in conjunction with a severance of tenancy, place the deceased share of the property into trust for future beneficiaries and grant a life interest to the surviving spouse. The nature of the trust allows the survivor to remain in the property, often with a power to sell and purchase alternative accommodation. Should the survivor need long term care in the future the assessment by the local authority can only take into account the survivors share of the property; the other share being protected in the trust. Care is needed when drafting the trust to ensure that it is effective. We have come across a number of Wills recently where the ultimate beneficiaries of the property (after the expiration of the life interest) have not been named and the property is left to be dealt with under the residuary provisions in the Will. This is perfectly acceptable where the life tenant and the residuary beneficiary are not the same person. Of course, in the majority of cases, the surviving spouse is granted both the life interest and the first level of residue. A common misconception is that, because the life interest will terminate on death the provisions in the second level of residue (often leaving the estate to children) will take effect. This is not the case. To be entitled to the residuary estate a surviving spouse is normally only required to survive for the survivorship period before obtaining a vested interest in the residue. We have now seen Counsel’s opinion on the effect of leaving the reversionary interest to residue where the life tenant and residuary beneficiary are the same person. Where the surviving spouse holds both a life interest and a vested interest in the remainder of the property the two interests will merge. This concept was explored in the case of Re Bellville [1964] and means that the spouse is absolutely entitled to the deceased’s share of the property, defeating the object of the property trust. The easiest way to avoid a failure of the trust, and possible action for negligence, is to specifically state the beneficiaries who are to inherit after the termination of the trust. If you have written Wills leaving the property to the residuary estate on termination of the life interest you will need to review the Wills carefully to ensure the property trust will not fail. If you need more information please call us

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