This article explains what you need to know about Family Protection Trusts.
If, as part of your estate planning, you are considering how to ring-fence your assets for the family, one option is setting up a family protection trust. However, it is important to take care to ensure that the protection trust is legitimate.
A family protection trust is technically called a settlor interested lifetime discretionary trust.
It is a legal option where you have full access to the assets in the trust while you are alive, but you get to choose who will inherit from the trust fund.
This type of trust must be set up during your lifetime when you have full capacity.
This is different from a trust will, as trusts wills only come into effect after you die. You will be the trustee, often alongside your partner, a family member or professional trustees.
Once you have died, the trustees can distribute the assets to the beneficiaries according to your wishes. Your beneficiary can be anyone but is often the deceased’s child.
One of the benefits of this type of trust is that you can put any of your assets, including your home and other property into the trust fund.
There is no limit to the size of the trust, though there could be an issue with taxation. However, there is likely to be a fee for the solicitor to process funds in and out of the trust bank account for a client.
There are numerous reasons the amount your beneficiaries inherit might be affected. Avoiding these risks is a key reason why people set up lifetime trusts. These include:
Family protection trusts generally cost several thousands of pounds, though they generally cost more for a couple than for an individual.
Solicitors advertising these services will often advertise family protection trusts as paying for themselves, as they can avoid probate costs, tax liability, and care fees.
However, clients should be cautious as these trusts do not always work and may not do all they are promised to.
There are pros and cons to setting up this type of trust. While the trust will help you manage your estate, they are often missold which can mean they cost most than they are worth.
To find out if it is right for you, you should seek a free initial consultation from a solicitor to you can ask questions specific to your estate. It is worth getting help and advice from different sources to get the full picture.
There are a number of pros of family protection trusts, including:
However, there are cons to this type of trust. These include:
You should be aware of the problems with family protection trusts before paying the solicitor fees. It is important to choose solicitors who are regulated by the solicitor regulation authority.
Problems can include:
You cannot set up a trust with the purpose of avoiding having to pay for your residential care.
This is called deprivation of assets. If the local authority thinks there has been deliberate deprivation to avoid care home fees, they can contest the trust in court, so the trust will not work and the assets will be assessed for residential care home fees.
Therefore, these trusts should not be set up where care fees are foreseeable. However, while avoiding care fees cannot be the reason for the family protection trust, it can be a benefit.
One of the main benefits is that you and your spouse can continue to live in the house and access property in the trust fund.
As you will be a trustee, you will have full control over things relating to the trust funds. There will be a provision that you will have a right of residence in the house while you are alive.
This is a broad marketing term that includes any form of trust that is meant to protect your assets from risks.
They can be very flexible, and contain elements from lots of different types of trust. Often the phrase family saving trust is used to apply to trusts that deal with income from a business the settlor has ownership of.
Different types of trusts are better for different families, depending on the value and complexity of the estate and what you want to happen to your assets. There are specific asset protection trusts you can look at.
Trust wills are useful because will trusts only come into effect after you die. It is worth seeking legal advice to answer questions on what type of trust would benefit your family and to learn about the details of the trust.
You will still have to pay tax on trusts. It is important to instruct solicitors to prevent unexpected tax consequences.
For a settlor interested trust like a family protection trust, the settlor is responsible for paying income tax, and must report this to HMRC. The rate of tax depends on the trust scheme.
While some people think they can set up a trust for inheritance tax purposes, this is often not successful.
IHT must be paid by trustees on funds over the threshold. Tax can also be payable when you transfer money into the trust fund and on the ten year anniversary of the trust.
There is a range of different tax rates that might need to be paid in relation to a trust. The rules on inheritance tax can be very complex, hence why many law firms have staff who specialise in this area.
Capital gains tax may be payable when assets are put into or taken out of a trust. More capital gains tax may be payable in circumstances where there is more than one beneficiary.
Different solicitors use different marketing terms, so the terms are often used interchangeably.
However, as a rule, asset protection trusts are different in that the client must get a benefit from the trust while you are alive, generally in the form of interest.
Many people transfer their family home into this trust. Which option is best for you depends on the estate and what benefit you are trying to receive. Therefore it is worth contacting a solicitor to get advice on which arrangement is better for your family.
You need to use solicitors to set up a trust, as this area of the law is complex and therefore requires specialist knowledge in order to receive benefits from creating a trust.
Many law firms will have specialist wills and probate teams that have staff who can help clients set up a family trust.