So many couples make “Mirror Wills” that leave everything to each other, assuming their estate will benefit their partner for life and then go to their children or grandchildren.
Sadly, that’s not always what happens…?
What is a Mirror Will
Mirror Wills are simply identical Wills that a couple make, leaving everything to each other and then often the children.
However, what most people don’t anticipate is that if you leave everything to your partner in a Mirror Will and they then need care in later life, the Local Authority is likely to take most of the assets you have worked so hard to build up together.
Even if your partner does not need care, a Mirror Will won’t guarantee that your children or grandchildren will receive any of your assets. In fact, your estate can pass sideways outside of your family if your partner remarries, gets divorced or has financial difficulties.
It’s best to illustrate the problem with an example:
Let’s take Mr and Mrs Smith. They are married with an adult child and are both 70 years old. They own their house worth £200,000 and have savings of £50,000 between them.
Their current Wills say that when one of them dies, everything passes to the survivor. Then, when the survivor dies, everything passes to their only child.
Let’s fast forward 5 years. Mr Smith dies and, in accordance with his Will, his entire Estate passes to his wife. Mrs Smith now has assets worth £250,000 in her sole name.
Now let’s fast forward another 2 years. Mrs Smith is struggling with her health and running the home by herself. She suffers a fall which leaves her unable to manage her affairs. Whilst her adult child offers support, he can’t look after his mother on a full-time basis. Mrs Smith must move into a residential care home.
Mrs Smith has her needs and finances assessed by the Local Authority. Because she has more than £23,250 (including the family home) she must pay for her own care home fees. The cost of the care is £769 per week or £40,000 per year. Mrs Smith stays in the care home for 5 years until she dies, so the total cost amounts to £200,000.
Because of the cost of the care home, the value of Mrs Smith’s Estate reduces from £250,000 to £50,000 and her son receives an inheritance of £50,000.
For some couples this scenario is fine, but for many couples it won’t be.
Protective Property Trusts
The good news is that with the right advice, there is a way to protect at least half the value of the family home and keep it for the children. This is achieved by writing your Will in such a way that it puts half the family home into a Trust when the first spouse dies. The terms of the Trust also mean that the surviving spouse can continue to live in the property held within the Trust. These are called Protective Property Trusts (PPT).
By preparing a PPT the value of half the home is ring-fenced so that it isn’t considered if the surviving spouse is financially assessed for residential care home fees. The reason is because half of it is owned by the Trust and the other half is owned by the surviving spouse.
Back to Mr and Mrs Smith. They are still worth £250,000 but this time, when they write their Wills, they contained Protective Property Trusts.
Fast-forward 5 years. Mr Smith dies and, in accordance with his Will, his half share of the family home is now transferred into a PPT. The rest of his Estate passes to his wife. Under the terms of the Trust, Mrs Smith has the right to live in the property for as long as she likes.
Mrs Smith carries on with her life. She continues to live in the property and she also has all the money that her husband left her, so in practical terms, everything remains the same as in the first example. In addition, the Trust can allow for:
- The property to be sold if Mrs Smith wants it to
- The sale proceeds to be re-invested in a new property for her
- Mrs Smith to have all the property (or the proceeds of sale) outright if needed
Fast-forward 2 years. Mrs Smith moves into a care home and the council carry out their financial assessment. They can only take account of Mrs Smith’s share of the house because ownership of Mr Smith’s half has not passed to her.
At first glance, you might think that this would enable the council to take £100,000. But they can only take account of the market value of Mrs Smith’s share. Since willing buyers of a half-share of a house in the market are scarce, Mrs Smith’s share is not worth £100,000 on the open market, more like half of that. So, the available funds to pay for Mrs Smith’s care drops from £200,000 to £50,000, and out of that £14,250 must be retained and protected, this means that the sum available to the council drops to £35,750.
Mrs Smith remains in the care home for 5 years, again at a cost of £40,000. When Mrs Smith dies, her Estate is only worth £14,250 but the value of the Property Trust remains untouched by the care home and is worth £150,000.
So how much do you think her son inherits? In the first example he receives £50,000. However, in the second example, with the Protective Property Trust, he inherits £164,250!! (£14,250 from Mrs Smith and £150,000 from the Property Trust).
You can see that by Mr & Mrs Smith putting in place a Protective Property Trust, their son would have received a much greater inheritance. This is all because Mr & Mrs Smith took the decision to look beyond a simple Will and planned for the future.
At Farsight Wills we specialise in Protective Property Trusts and can help you understand your options.
Call us now on 01793 433705.