Freedom to release

The UK’s Equity Release Council (ERC) represents the interests of 90 per cent of the equity release sector. Under the ERC standards, a member selling an equity release scheme (the Advisor) cannot proceed with the transaction unless they receive a certificate from the independent solicitor, barrister, licensed conveyancer or chartered legal executive advising the client, confirming they have discussed the risks and rewards associated with the recommended equity release scheme, and the client’s ongoing obligations under the contract. The Advisor is also expected to discuss in detail the implications of any plan for the client and their family, and to clearly document the reasons should the client request that the family is not consulted.

One of the ERC’s ‘required customer outcomes’ is: ‘customers will be confident that they will be able to live in their own home for as long as they wish, or move to a suitable alternative property’. This is often the focus of attention for the potential client/s.

The first 26 pages of the ERC standards ensure that Advisors have appropriately documented the transaction and that the client is aware of the benefits and drawbacks of any scheme to avoid potential mis-selling claims. However, despite the fact that most clients’ home represents the bulk of their estate, there is only one line in the standards that touches on the question of wills and that is that ‘advisors should recommend that customers seek advice from a solicitor with regards to arranging a will or power of attorney if appropriate’. The client may miss the importance of this when receiving the plethora of other information the Advisor is required to provide to them.

However, what is the underlying issue that is of concern as far as wills are concerned?

Impact of equity release on a will

There are a number of providers of equity release schemes, many of which have a number of different products on offer. The two main product lines are a lifetime mortgage and a home reversion plan.

Within these lines are a number of variations. For example, some include ‘downsizing protection’ and others include a ‘no negative equity guarantee’. The terms and conditions attaching to these variations will differ depending upon the actual scheme provider. Some providers specify that they do not accept life interest trusts.

Many schemes will terminate when the client dies or goes into long-term care. If the client is a couple, the scheme will usually terminate when the last of them living in the home dies or goes into long-term care. When the scheme terminates, the provider will want to recover the monies then due to it and will invariably have power to sell the property or to enforce a sale. This could effectively undo any inheritance planning that the client/s had put in place, especially if the property is sold while the client, or the last surviving client, is still living (in long-term care).

In the light of this, it is important that the independent legal advisor required to advise the client on the risks of the selected equity release scheme should also review the client’s will to identify how the terms thereof would be impacted by adoption of the scheme. As some providers do not accept life interest trusts, if a will gives the surviving joint owner an immediate post-death interest (IPDI), this could be a breach of the terms of the scheme and result in its premature termination. If the legal advisor does not feel confident with advising on wills, they should consider referring the client to someone suitably qualified to do so.

Similar concerns arise where the client has either no will or the terms of their will need updating. As the debt under an equity release scheme will usually be a joint liability, providers may not accept the severance of a joint tenancy where there are co-owners. Although, one may argue that it is for the co-owners to decide if they wish to convert the title to a tenancy in common. If the scheme provider’s terms include a requirement that it must consent to a severance, or any dealings with the legal title, it will hold the most power.

Will instructions

When taking will instructions, it is important not only to identify if the client has entered into an equity release scheme but also to understand the terms attaching to that particular scheme. They can then identify how it may affect the way in which the estate may become distributable. If the client wishes to make a specific gift of their home, they will need to understand that the beneficiary will receive the property subject to the charge, unless the will specifically directs the gift to be free of the charge. This may seem particularly harsh, especially if the cash obtained via the equity release scheme might still be sitting in the residuary estate.

Summary

When considering signing up to an equity release scheme, clients need to look at their wills at an early stage and understand the impact such a scheme might have upon the terms of the will. Although they might continue with the scheme, they will at least be aware of any changes that they might need to make to their will and manage the expectations of their beneficiaries.

If taking will instructions from a client who has already signed up to an equity release scheme, it is important to understand how the scheme might affect the client’s testamentary wishes, so that they can be advised appropriately. If the property is to be the subject of a specific devise, will the client want the provider’s charge to be settled from residue?