Sham or Strategy? How Courts Decide Whether an Asset Protection Trust Really Works

At first glance, placing your assets into a trust to preserve them for your children and avoid selling them to fund care fees can seem attractive. These so‑called ‘asset protection trusts’ or ‘family protection trusts’ are often promoted as a means of reducing inheritance tax and shielding assets from care‑fee assessments.

We previously explored the pitfalls of these trusts, which aren’t always clearly explained.

One significant risk is that, when assessing someone’s liability for care fees, a local authority may claim that the aim in establishing the trust amounts to a deprivation of assets and disregard the trust entirely and treat the value of the assets as part of the person’s means. In that situation, the trust would fail to achieve what the settlor intended, the costs of setting it up would be wasted, and recovering control of the assets could be legally complicated.

If a local authority seeks to ignore the existence of a trust and include the trust assets within the means test, it is possible to make an application to the court for a declaration that the trust is valid.

So what does a court consider? Some of the main factors are set out below.

1. Intention

The court would consider the settlor’s (the person who made the trust) intention when setting the trust up.

If the avoidance of care charges was a significant motivation in establishing the trust, the trust is more likely to be ignored. Documents like solicitors’ attendance notes from the time the trust was established would be disclosable in any court proceedings. If those notes make it clear that a settlor was trying to deprive themselves of their assets to avoid paying care fees (although a settlor would be well advised that a trust would be invalid in this situation), it is good news for local authorities.

Other indicators that suggest that the motivation to create the trust may have been to avoid payment of care fees include:

• the settlor continues to treat the assets as their own
• trustees act only on the settlor’s instructions
• no meaningful trustee decision‑making takes place
• the settlor retains practical control over income or capital
• the trust is used only when convenient

2. Timings

Whether a trust was established with the intention of depriving the settlor of their assets so as to avoid liability to pay care fees will quite often be made clear by the timing of the establishment.

For example, the Court will consider whether the trust was established shortly after a medical diagnosis which would increase the foreseeability of the settlor requiring care in the future, or whether the settlor had a reasonable expectation that they would be assessed as having to contribute towards the cost of their care.

3. Control

The Court will consider whether the settlor has truly given up control of the trust asset(s).

High levels of control by the settlor often suggest that a trust was established with the intention of avoiding care fees. Factors suggesting a high level of control include:

• where a settlor appoints themselves as trustee
• where a settlor reserves sweeping powers to amend, revoke, or direct investments
• the settlor continues to live in or use trust property without paying market rent

Conclusion

Although a local authority may disregard the trust for the purpose of undertaking the means assessment, it does not mean that the trust itself falls away, and the settlor simply regains legal title to the trust assets. The trust can be valid in law but ineffective for the purpose it was made.

Whilst it may be possible to prove that the trust was invalid as it was a ‘sham’, this would require further work and potential costly and lengthy litigation if the trustees are not willing to agree to hand back the assets to the settlor.

Our contentious probate and trusts team has vast experience in litigation involving asset protection trusts, including professional negligence claims against estate planning companies that have sold these trusts to clients without fully explaining their effect, or without considering their effectiveness. If you have any concerns about a trust which you or a family member has set up, please do not hesitate to contact us.