THE MORTGAGE TRUSTTM
There is a belief that policies that cover mortgages should not be written under trust because of their link to the mortgage. However, this is fallacy and we believe that it will not be long before advisers are faced with legal action and miss-advising claims because of this.		The Trust Drafting ProcessTM Frequently Asked Questions Application form

There are three problems with writing a mortgage protection policy and not placing it under trust:

Probate
In the event of death a death a claim is made, but the proceeds cannot be accessed to clear the mortgage until probate is obtained. This can take many months, and there can often be problems in obtaining it. Most grants of probate take at least four months to be obtained. This is four months of mortgage payments that need to be paid, four months of interest that has to be met. And what happens if grant of probate takes longer? How would you feel if you were the surviving spouse? How will you feel being the IFA? How long do you think it will be before questions are asked about why you didn’t use a trust to avoid the problem?

Inheritance Tax
It is true that insurance to meet a debt can be tax neutral as the debt cancels out the mortgage. That assumes you use an insurance company trust. If The Mortgage Trust is used and it is a single life policy, then the funds paid from the insurance can remain in the trust rather than being paid onto the mortgage. Because of the loan provisions within the trust, the surviving spouse can borrow from the trust to clear the mortgage. In doing this they create a debt on the estate, thus reducing the IHT by the amount of the loan. Imaging if you did not do this, and the client found out that you could have done, what action do you think the client will take?

Re-Marriage
If one spouse dies, and the survivor receives the insurance pay out and clears the mortgage, then re-marries, what happens to the value of home? It falls into the marriage estate (remember pre-nuptial agreements have no standing in English & Scottish Law) The new husband/wife now gets the benefit of the insurance as it paid off the mortgage. What happens if they then divorce? The benefits of the insurance are effectively included in the estate for divorce? Is that what the client wants?

Advisers Responsibility
When an adviser uses an insurance company’s trust, it is the adviser that is responsible for the trust working. This means that using the trust creates a long-term risk to the adviser and their practice. Even noting that the client should obtain independent legal advice is no protection for the adviser, a point confirmed by the ombudsman.

The Mortgage Trust^TM
The solution to all of these problems is The Mortgage Trust

The Mortgage Trust is written as a Discretionary settlement that has been designed by our consulting Solicitor Solicitors and settled by Counsel.

The Mortgage Trust gives the trustee the “discretion” between beneficiaries. The trust is set up with the standard three classes of party. The person creating the trust is the settlor, the person or persons who are due to receive the proceeds are the beneficiaries and the person holding the assets is the trustee.

The settlor sets out “classes” or “categories” or people who will benefit. These can be “My brother John Smith ” “My children Paul Jones and Martin Jones” etc. but can also be corporations or companies. It will be the trustees job to decide who gets what from the trust within the categories.

For example, if you left the proceeds to “My children Paul Jones and Martin Jones” the trustees would have to pass the benefits to these children. However, it would be up to the trustee to decide how much each child received and when. It is the “discretion” that give the flexibility that is usually required in the event of death, simply because you do not know what will be happening at that time.

The Mortgage Trust has been specifically designed by our consulting Solicitors and settled by Counsel to meet the criteria of our clients. Each trust is individually drafted by Wills & Trusts Independent Estate Planning Ltd and certified by the Solicitor. This means that, unlike using an insurance company’s own “fill in the blank” style trust you will have a fully bespoke trust that meets your requirements and is certified with independent legal comment. The trust is written in such a way as to be portable between Mortgage Companies. This means that the trust is unaffected by re-mortgage or house moves.

The trust pulls the benefits away from the client’s estate so that the benefits are held by the trust, and not by the estate. This means that, in the event of death the proceeds can be paid out without the grant of probate. Even more important is that fact that the funds will be outside of your estate and so not liable for Inheritance Tax and, even more importantly, protected from divorce & re-marriage.

However, another very important point is that the proceeds held within the trust can be retained outside of the beneficiaries’ estate. This means that, in the event of death of the person insured, the proceeds will be held in the trust and used by the beneficiaries, but without the proceeds falling into their estate. This can potentially avoid another layer of Inheritance Tax which is payable in the event of the beneficiaries death.

If the policy that covers the mortgage is a single policy, then the money paid into the trust can be taken by the survivor as a loan, to create a debt on their estate and thus avoid IHT to the value of the debt. It is important to note, that IHT advantage can only happen on single policies.

The Trusts are designed to “carve off” any critical illness benefits through use of an assignment deed. This deed is written in addition to the trust to provide this important provision and avoid the typical problems of split trusts.

Trustees
As you can see the appointment of trustees is very important. The trustees will not only have control of the funds from the policies upon a death claim, but will also decide when the beneficiaries receive the funds. Your clients need to think long and hard as to whom they would feel comfortable appointing as trustees. There must always be a minimum of two trustees and a maximum of four. The Settlor can also be a trustee of the trust.

Beneficiaries
When deciding on beneficiaries it is important to remember the control that the trustees will have. You will be deciding on classes of beneficiaries from which your trustees will decide. The more classes included the more flexibility the trustees have when it comes to disburse the funds held in the trust.