Protective Property Trusts and Lifetime Mortgages

The use of Protective Property Trusts, sometimes known as Property Protection Trusts, Life Interest Trusts or Interest in Possession Trusts, is becoming increasingly popular. They are often advised by Will Writers for customers wanting to protect the equity in their home and ensure that their personal share of a joint property is secured for their intended beneficiaries. Unfortunately, the use of Protective Property Trusts is rarely compatible with Equity Release options including Lifetime Mortgages. As an Equity Release Adviser, it is impossible to make suitable later life recommendations without understanding the subject of Protective Property Trusts and the intentions of individual clients.  

In this article we will explore:

• The purpose and operation of Protective Property Trusts
• The conflict between Protective Property Trusts and Lifetime Mortgages
• Actions you need to take as an Equity Release Adviser to make suitable recommendations and defend potential complaints

Purpose of Protective Property Trusts

How Are Protective Property Trusts Used?

Customers are understandably concerned that the value of their home is protected for the next generation.

Although usually unspoken, a primary driver might be the desire to avoid equity being swallowed up in obligatory care costs and protect wealth for the next generation. This is a complex area which is subject to rules about the deliberate deprivation of assets which means the effectiveness of a Trust is not guaranteed. As an Equity Release Adviser without the necessary legal training, you should be careful to avoid being drawn into conversations which might later be construed as advice.

For couples who have met later in life, another common purpose might be to secure the value of their contribution to the marital home for their own direct beneficiaries. They might even be used by couples to prevent the value of the estate being diluted should a surviving spouse marry again following the death of their partner. Under a Property Protection Trust, the home would also be protected against creditors or being eroded by other financial obligations.

How do Protective Property Trusts Work?

As an Equity Release Adviser, you will be aware that the type of ownership effects how jointly held property will be transferred on the death of a joint owner. Joint Tenancy provides co-ownership with equal indivisible shares. The survivor will automatically inherit full ownership of the home on the death of their partner. However, for a Trust to come into force, the estate of each partner must retain control over their share of the property. This means the property must be held as Tenancy in Common.

Protective Property Trusts are sometimes arranged during the lifetime of joint homeowners although it is more common for them to be created on the first death. Mirror Wills are arranged which require that the defined share of jointly held property is placed in Trust. The Trust grants a ‘life interest’ for the surviving partner, giving them the right to live in the property for the rest of their lifetime but without them having full legal ownership.  On the second death, the property in Trust will pass to the ultimate beneficiaries, often the children of the original owner.

Conflict between Property Trusts and Lifetime Mortgages

Existing Trusts

 A Lifetime Mortgage provider will only lend if they are able arrange a first charge on the property. This can only happen where the occupiers have full Legal Ownership. If the property is held in Trust, this Legal Ownership will have been being transferred to the trustees. Beneficial Ownership allows the occupiers to live in the property during their lifetime but with only limited rights.

If the property is already held in Trust, a Lifetime Mortgage will only be able to complete if the Trust is unwound. Although this is usually possible, it can be a lengthy and expensive undertaking. The steps will include:

• Confirmation that the Trust Deed includes discretionary power for the trustees to transfer the property back to the settlors. Without explicit permission to do this, unwinding the Trust may need court approval
• Obtaining consent from all of the trustees. This could be difficult if, for example, trustees are also beneficiaries.
• Legal transfer of the property back to the original owners including updating the Land Registry to remove reference to the Trust.
• Obtaining details of any CGT or IHT implications from a qualified accountant.

Will Trusts

If Wills have been arranged to set up the Trust on first death, and that death occurs when a Lifetime Mortgage is already in place, mortgage providers have a couple of options.

Some lenders will use their charge over the property to prevent the formation of a Property Protection Trust. As a result, the borrower’s intentions for their estate are not capable of being fulfilled.

Other lenders will allow the formation of the Trust and rely on their charge to recoup the entire debt on the second death. However, any unused drawdown will be cancelled, and the surviving spouse will no longer be able to apply for a further advance or remortgage.

Advice About Lifetime Mortgages for Customers with Trusts

Failing to Deal Properly with Trusts

For an Equity Release Adviser recommending a Lifetime Mortgage, there could be far reaching consequences for failing to understand and properly manage client expectation regarding Protective Property Trusts.

If a Lifetime Mortgage application is submitted where a Trust already exists, the time and effort spent by both the clients and the adviser could be wasted. At the very least there will be a considerable delay while the mechanism is put in place to unwind the Trust. At worst, the application may be cancelled because either the unwinding process becomes too onerous, or applicants decide that the protection provided by the trust is more important than the financial objectives for Equity Release.

Where a Lifetime Mortgage has been put in place while both clients are still living, the surviving partner could be justifiably aggrieved when they discover that carefully laid plans for distributing the estate can no longer be executed. The surviving partner, their executors, attorneys or beneficiaries could submit a financial services complaint that could end up being adjudicated by the Financial Ombudsman Service. The advice file needs to be sufficiently bullet-proof to defend such a complaint.

Lifetime Mortgage Advice Standards

To ensure they provide the best possible service to clients, here are some basic steps that you should take as an Equity Release Adviser in every advice situation:

• Establish early on in the process whether a jointly owned property is held as Joint Tenancy or Tenancy in Common. If clients are uncertain, it will usually mean that the property is held as Joint Tenancy, and this should present no immediate problems. However, it  is worth appointing a specialist Equity Release solicitor who will check the land registry for issues as early as possible in the process. If the property is held Tenancy in Common, you should explore reasons why and understand if this has been arranged with a Trust in mind.
• Explore the issue of Trusts with clients to prove their understanding. Where the subject has already been considered when arranging Wills, we hope that they will know whether a Trust has been arranged or is anticipated on the first death. Unfortunately, their recall of the situation may not be entirely reliable, especially if it occurred a while ago and was generated by a Will Writer of Solicitor without a detailed explanation of the purpose and implications.
• Where a Trust exists, you will need to explore the relative importance of the objectives for releasing equity compared with the estate planning they already have in place. This will include an explanation of the difficulty and potential costliness of unwinding the Trust before a Lifetime Mortgage application can be made successfully. Although lenders are likely to allow completion simultaneously with the Trust being lifted, the potential delays may require the offer to be renewed several times at higher interest rates.
• Where the Trust is contemplated within each client’s Will, the consequences that Trust may not be executed should be considered and consequences discussed. Even where lenders appear happy to allow formation of the Trust, we cannot be sure that their approach will be the same in the future when the  first client dies.
• The outcome of these conversations should be included in the Suitability Report and shared with clients when presenting advice. The specific client circumstances would be covered with an explanation of the potential disadvantages where a Trust already exists or is to be arranged on the first death. Where a Trust has not been considered, it would also be good practice to include a warning in case clients are motivated to arrange a Protective Property Trust in future.

We hope this gives some insight into Equity Release Advice Standards. If you have any questions or feel we may be able to help with your quest to deliver gilt-edged equity release advice, please get in touch.