April 2024

Family Protection Trusts – The Advantages and Disadvantages | April 2024

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.

What are family protection trusts?

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.

How does a family protection trust work?

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.

What assets can a Family Protection Trust hold?

Family Protection Trusts are a valuable tool for individuals and families to protect their assets from future events such as divorce, bankruptcy or death.

Such trusts can hold various types of assets, including cash, shares, real estate and other investments.

The settlor establishes the trust by transferring ownership of their assets to the trust. The trustees are then charged with administering and protecting these assets on behalf of the beneficiaries, who are typically family members.

By transferring assets into a Family Protection Trust, they can be safeguarded against potential future dangers.

This implies that even if the grantor were to become ill or pass away unexpectedly, the assets would remain secure within the trust and access to the beneficiary’s family as needed.

Why might my estate not be administered as I want it to?

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:

The cost of probate and estate administration
Where money goes to your children, this can be lost if their marriage ends or they file for bankruptcy.
Care costs. The local authority will assess assets above a threshold for care costs, which may mean assets like your family home will have to be sold.
Sideways disinheritance, where if your assets pass yo your spouse or civil partner, and they remarry, the inheritance can pass to a new family
Claims on the estate by those left out of the will.

A short video on how family protection trusts work

How much does a family protection trust cost to set up?

The costs associated with establishing a Family Protection Trust can be considerable as legal fees and other expenses pile up.

Typically, the costs will start around £500 and go up to a few thousand depending on the complexity.

Before deciding on a service, it is vital to conduct extensive research and make comparisons.

The cost of establishing a trust will depend on the transferred assets’ nature and the structure’s intricacy. Additionally, recurring trustee expenses such as tax filings may be a factor.

To verify that the trust is set up effectively and that all essential responsibilities have been met, it is often advised to seek the counsel of an experienced attorney or financial advisor. This will provide peace of mind to everyone involved in forming and operating the trust and a measure of protection against potential future problems.

Are family protection trusts a good idea?

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.

Family protection trust pros and cons

There are a number of pros and cons you need to consider when looking to set up a family protection trust.

Below you will find some of these advantages and disadvantages/

The advantages of a family protection trust

There are a number of pros of family protection trusts, including:

You can control what happens to your assets after your death, to keep assets within the family. Having a trust will reduce any concern that your children may misuse the money or other loss to your estate.
You may avoid probate fees and the inheritance being challenged. The cost of the probate process and estate administration come out of the estate itself.
Less risk of assets being reduced in circumstances like where a child gets a divorce and bankruptcy.
May reduce tax, though legal advice should be sought on this.
Avoiding a child’s inheritance tax liabilities. Tax after the death of a parent can be a problem for a child of the deceased. Having the assets in the trust has advantages for a child because they have the ability to access the funds but they will not form part of their estate.
The trust can last up to 125 years. This is useful as a child does not have to get access to the funds immediately.

Disadvantages of a family protection trust

However, there are cons to this type of trust. These include:

The price of setting up a trust can be high and clients may have to pay the solicitor a fee every time they move assets in and out of the trust fund.
You might have to file a yearly tax return for the trust
The trust may not work as you intend, so there will be tax and probate costs.
Issues with breaking the rules, such as funds being considered within the deceased’s estate.
Problems with solicitors not explaining details to their clients.

What problems can there be with family protection trusts?

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:

Solicitors not explaining the advantages and disadvantages properly to their clients, and selling trust funds to people who do not need them.
High additional charges for staff to handle the administration of the trust for a client, like conveyancing charges.
Local authorities bring a claim on the basis of deprivation of assets, like when the person’s health was already deteriorating when they transferred money into the trust.
Inheritance tax consequences to your beneficiaries after your death.

"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."

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Can I set up a family protection trust to avoid paying care costs?

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.

Who are the Trustees?

Trustee responsibilities include administration and management of the trust.

They will be required by law to operate in the best interests of the beneficiaries, ensuring that the trust’s assets are appropriately managed and protected from any harm.

Typically, the settlor selects trustees with care to ensure that they have the necessary qualifications, experience, and expertise regarding asset protection.

In rare instances, family members or close acquaintances who possess these criteria may also be eligible to serve as trustees.

It is crucial to remember, however, that trustees must stay unbiased while making decisions involving the trust’s assets due to their handling of sensitive financial information.

Can I still access my assets while I am alive?

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.

What is a Family Savings Trust?

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.

What is the best trust for asset protection?

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.

What happens if you lose mental capacity?

If a Family Protection Trust settlor loses mental capacity, this can have severe implications for the trust’s assets and beneficiaries.

It is impossible to make changes or amend the terms of the trust without a court order. Therefore, if a trustee is concerned about any potential changes, such as in the case of a medical emergency, they should seek legal advice immediately.

What are the tax implications of a family protection trust?

You may still have to pay tax on trusts. We would always strongly recommend that you speak to a specialist as the law could have changed from the time this article was written.

It is essential to instruct solicitors to prevent unexpected tax consequences.

Types of tax you could pay, possibly include the below. However, this is not guaranteed. A specialist will be able to advise you of your situatiom

Income Tax

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.

Inheritance tax (IHT)

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

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.

Is using an asset protection trust a better alternative?

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.

Do I need legal advice to set up a family protection trust?

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.

Meet the author

Jane Parkinson

Jane is one of our primary content writers and specialises in elder care. She has a degree in English language and literature from Manchester University and has been writing and reviewing products for a number of years.

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