July 03, 2013
What happens with a Property Protection Trust when the first of the two clients dies, and are there any disadvantages?
The first thing to appreciate that there are many advantages to a PPT; not least for the classic reasons such as second marriage syndrome, protecting inheritances for children from previous relationships and also care fees mitigation. The technique of course only works for clients where either the property is solely owned, or more commonly where it is owned as tenants in common (or pro indivisio in Scotland).
It’s important to appreciate that, as far as England/Wales is concerned, there are two distinct aspects to property ownership – the legal title and also the beneficial interest. The first refers to who actually owns the legal title to the property – the freehold. When one of the co-owners dies, regardless of whether the property is owned as joint tenants or tenants in common, the survivor takes the legal title. This is because a legal title is owned jointly and a co-owner of the legal title cannot ‘will’ this to a.n.other.
With regards to the beneficial interest, this refers to the value that the property is ascribed to hold. It is this, which increases and decreases according to the property market. As we know, it is possible to gift some of this value to another, usually through a declaration of trust. This is typically where a sole owner has a partner living with them and chooses to own the VALUE of the house equally from that point on. So, holding the legal title alone does not imply that the holder also owns all the value of the house – legal title and beneficial interest can be independent of each other.
Where a property is owned as joint tenants, then when that property was conveyed to the co-owners there was an agreement that a surviving co-owner not only takes the legal title but also the full value of the house via survivorship. If we were to then sever the tenancy on the property we have then split out the beneficial interests so each of the co-owners can leave their beneficial interest now to whomever they choose. Scottish Associates will be aware of a more apt and descriptive statement specific to Scottish law – evacuating the survivorship destination: a great term to describe removing the survivorship destination from the joint tenancy of the beneficial interest.
Concerning Scottish treatment of the same process, legal and beneficial interests are considered slightly differently: in Scotland, the evacuation of a survivorship destination is considered to be a conveyance, whereas in England / Wales it isn’t.
So, when the first of the co-owners dies, and there is a property protection trust in the Will of the deceased, it’s important to understand that the legal title passes via survivorship to the surviving co-owner. It is the BENEFICIAL INTEREST, which the Will transfers into the trust created by the Will of the deceased.
One of the downsides of the trust then flows from this transfer into trust. Where a property is owned as joint tenancy then the probate value of the deceased’s estate does not take into account the share of the house owned by the deceased – this is because as we have discovered above, the legal AND the beneficial interest of the property pass to the survivor by survivorship. When we administer this person’s estate the process we follow is to notify the Land Registry of the death of the joint owner.
However, where the house is owned as tenants in common and the beneficial share owned by the deceased is destined for the property protection trust, the estate administrator has to transfer this share into the hands of the trustees, and register that interest with the Land Registry. In other words, the share of the house has a ‘probate value’ and so the cost of administering the estate where there is a discreet share of a house is usually slightly higher to reflect this additional workload.
The position in Scotland is slightly more complex because, as described above, the transfer is deemed to be a conveyance of a share of a property into the hands of the trustees to the trust, and again this is reflected in additional costs to administer the estate of the deceased.
