asset protection trusts

Asset protection trust

Increasing numbers of people are looking for new ways to manage their estate so they have money left to give to their children.

One option is an asset protection trust, however, it is important to be cautious in setting up a trust to avoid being accused of deliberate deprivation.

What is an asset protection trust?

An asset protection estate is a tool for managing your estate to make sure your assets go where you want them to after you die.

An asset protection trust is set up during your lifetime, and assets in the trust are distributed quickly to the beneficiaries once you pass away.

Asset protection trusts are a form of life interest trust but overlap with trust wills as the trust will be named in your will.

How do asset protection trusts work?

A trust means that you split up the legal ownership of an asset up from the enjoyment of that asset.

The trustees get the legal ownership, and the beneficiaries get the benefit.

The idea is that by transferring your assets into this type of trust during your lifetime, they stop being part of your estate, and this form of ownership continues after your death.

What is the purpose of an asset protection trust?

Asset protection trusts are life interest trusts for the person setting them up. While you are alive, you must benefit from the lifetime trust, as per the local authority capital deprivation regulations.

Why would I want to protect my assets with an asset protection trust?

There are multiple ways your estate can be eroded after your death meaning that your assets are not distributed to your loved ones as you would want.

These include:

  • Your spouse remarries so that any assets or property they inherited from you pass onto their new partner and their children, rather than your own children.
  • Your spouse becomes bankrupt, and their assets are used to pay debts.
  • Family members make an application to contest the will
  • Assets pass onto in-laws ahead of your children, especially following a divorce.
  • If your spouse needs to move into a care home, their long term care fees will be assessed from their total assets, including inheritance, meaning this money is not passed onto your children and other beneficiaries.

asset trusts

How much does an asset protection trust cost?

You will need an adviser or legal service to help set up a trust.

The cost of setting up lifetime trusts depends on the complexity and value of the assets you want to transfer into the trust. It also depends on the tax liability of the assets and the solicitors you choose.

As a guide, lawyers will charge between £2500 and £5000 to establish the trust and you may have to pay conveyancing fees to move money in and out of the trust.

It is worth getting in contact with a solicitor’s practice to get more help and information and to get an assessment of whether this arrangement is right for your family.

Who needs an asset protection trust?

Anyone with mental capacity can set up an asset protection trust. This sort of trust is useful for any person who wants to set up a more specific inheritance regime.

What assets can go into an asset protection trust?

The most common thing people put in this trust is their property, or a share of their house if it is jointly owned. Any capital under £14,250 is not considered for means-testing, so any capital above this is worth putting in the trust.

You should be cautious about putting any assets that attract capital gains tax into the trust.

Also, if you transfer assets over your Nil Rate Band in the trust, you will be charged lifetime inheritance tax. on the trust property. It is worth seeking legal advice on the tax implications of family trusts.

What does an asset protection trust mean for long term care home fees?

If the assets are in a trust, they are separate from the rest of the surviving spouse’s assets.

Therefore, when the local authority does their equation to calculate the amount of long term care fees payable, in theory, the assets in the trust will not be included. Therefore, the surviving partner is likely to get more state benefits.

However, you cannot set up a trust with the intention of avoiding paying the local authority care fees, which is called a ‘deliberate deprivation of assets‘.

If from the context, the local authority suspects that it was reasonably foreseeable that long term care would be required before the trust was set up, such as if your health or your partner’s health was already deteriorating, they have wide discretion of what to do with the trust.

Their powers include the ability to access to the trust assets and assessing their value. As such, there is a risk the house may need to be sold.

protection trusts

What advantages are there to an asset protection trust?

There are numerous pros to setting up this type of trust arrangement:

  • Probate is not necessary for the assets in the trust, so the administration of the property can be dealt with more quickly and grant of probate fees can be avoided after your death.
  • Settlors get to control inheritance procedures and who will inherit joint assets that otherwise would have passed directly to your spouse.
  • You can appoint trustees who will impact what happens with the trust, so can ensure it is in line with your purposes. You also decide who is the estates beneficiary.
  • A possible source of income for the individual
  • Side effects include that, individuals can avoid care costs, though deprivation of assets cannot be the sole basis of setting up the trust.
  • You can still do what you want with the assets while you are alive
  • Having a trust may have tax advantages. There will be an inheritance tax exemption if the trust value is below the threshold. This is more cost-effective than if you made an outright gift to your children. You will pay less income tax on the money you make off the investment of trust funds.
  • You can make provision for your spouse to continue to live in the family home after you are deceased while still passing family wealth onto your children.

What disadvantages are there to an asset protection trust?

While asset protection trusts seem like a perfect method of estate planning, it is important to be cautious, with Age UK describing these trusts as a ‘worthless piece of paper’.

There are numerous problems with this type of scheme:

  • Local Authorities have the legal power to reverse any gifts into trusts where there has been deliberate deprivation of assets to avoid care home fees. Often it is difficult to find any other legitimate intention for the creation of the trust, other than to avoid care home fees. Court proceedings can be costly and time consuming.
  • There has been a recent move to limit companies breaking the rules and making misleading claims about the advantages of these lifetime trusts. Navigation of this area can be a minefield as solicitors and experts want to sell this product, sometimes regardless of the possible consequences.
  • It is unlikely you will be able to avoid your executors paying for probate.
  • The sum may end up attracting large amounts of inheritance tax for your children if it is not set up correctly.
  • You have to pay to transfer payments into the trust account and to set up the trust.

What is a family asset protection trust?

This is also called a settlor interested lifetime discretionary trust.

This is a trust fund you can add to throughout your life, and everything in the trust is deemed by law not to be owned by you but is owned by the trust.

When you die, the contents of the trust pass to the beneficiaries. The trust value will not be used to pay probate costs or for residential care.

Is there a maximum amount of money that can go in a family protection trust?

No. However if the value is about the nil rate band, which at the moment is £325,000, there will be an immediate lifetime inheritance tax charge.

This will be 20% on the sum of investments £325,000. Also, you have to consider the income tax consequences of the payments you make from the trust during your lifetime.

Who should I make a trustee?

You can appoint any person, or group of people you trust, to manage your affairs.

This is likely a family member or loved one. It is important that you are also a trustee, so you get some control over the trust. You can also put in place solicitors as trustees, as they will vote with you during your lifetime, provide information on the law and sort out wills.

It is important you appoint two solicitors, so they cannot take individual control, and also that these solicitors are regulated by the solicitors regulation authority.

Who should I make the beneficiaries of the trust?

Any person you wan, often your children.

One drafting option is that if you have a spouse, and you have a joint tenancy of your home, you can ensure they have the right to continue to occupy the property for their lifetime, while leaving your share of the home to your children or any other person.

What if I change my mind about the trust?

You can change your mind at any point, and move assets into and out of the trust. You can change your will too.

There is likely a conveyancing fee for moving assets, but other than this you can do as you please.

What should I do if I have already set up an asset protection trust and am concerned it is illegitimate?

Recent legislation has attempted to deal with providers misleading clients over the benefits of asset protection trusts.

Where there has been unfair commercial practices, victims can get redress under consumer protection from unfair trading regulations.

This includes where a solicitor has been misleading and causes you to make a decision you otherwise would not have made.

You should contact a solicitor for help if you are worried you want to take action if you did not have the correct knowledge and information at the stage when you set up the trust.

What are the alternatives?

There are other alternative types of arrangements you can make both for inheritance tax purposes and to safeguard your assets, all of which have pros and cons.

It is worth getting a legal assessment to get a guide on what is the best course of action for your estate. These include:

  • Using a will trust rather than a lifetime trust. Trusts in a will only come into effect after you die. This is the most common will trust is a property protection trust, where in your will you leave your share of the property to the beneficiaries, but your spouse can continue living in the family home. Hence the trust will still protect against local authority assessments but there are fewer risks of tax consequences. This is more legitimate and requires couples to rewrite the content of their wills so you are both tenants in common of your home, so each owns a share rather than the whole home jointly.
  • Leave your property as a gift to your children. This is more straightforward, however, there are other risks, like if your child files for bankruptcy or gets a divorce, the assets, especially the family home, may need to be sold to pay debts. Also, your children will have to pay IHT on the gift.

Confused or need help with which type of Trust will best protect your house and assets? The Co-Op can explain which option is likely to be best for you.  Contact them direct or book an appointment below.



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