We are commonly approached by clients facing problems after having been advised to put their property into an ‘asset protection trust’, also known as ‘family protection trusts’.

Companies often recommend this service as a method of avoiding liability to pay care fees or, reducing inheritance tax and avoiding the costs of probate (which these companies will tell you will be very expensive).

Whilst clients may be tempted by the benefits these trusts can offer, there are a number of risks associated with them which clients are not often warned about from the outset. They are also very expensive and are often based on precedents which have been drafted by solicitors but are amended and sold to customers by salespeople, not solicitors.

This article will explore some of the dangers of these trusts.

1. Loss of control

When a person (the Settlor) places their property into a trust, they are effectively signing the legal title to the property over to their chosen Trustees. Whilst a Settlor can also be a Trustee, there are also usually additional Trustees (sometimes other family members, or professional Trustees) appointed. This means that if the Settlor dies, there are other Trustees in place to manage the Trust.

Settlors very often remain living in the property which has been placed into trust, and may wish for the property to be sold so that they can downsize or buy an alternative property. In order to sell the property, the approval of the Trustees must be obtained. This means that Trustees can and will exercise full control over whether the property is sold. Whilst the Trustees are not allowed to let their personal interests conflict with their duty as a Trustee, very often family members will have a personal interest in what happens with a property (a family member may, for example, stand to inherit the property one day).

Where Trustees do not agree, it very often gives rise to legal challenges.

2. Tax

There are tax implications when any asset is put into trust. There may be an immediate entry charge, ten year anniversary charges, and exit charges when an asset is appointed out of the trust. Liability to pay these taxes falls on the Trustees. This is something which clients often explain to us that they were not made aware of when the trust was established.

Asset protection trusts are often advertised as a way to reduce inheritance tax. Whilst that may be the case in some circumstances, the following taxation issues arise, which Settlor’s are often not advised about;

• If the Settlor places an asset into trust which they reserve a benefit over, i.e. they place their property into trust and have a right to live there for the rest of their lives, then that is a reservation of benefit which may attract inheritance tax even after the expiry of 7 years.
• Inheritance tax exemptions such as the residence nil rate band (“RNRB”) (currently £175,000) will be lost if the Settlor’s family home is placed into a trust with their children named as beneficiaries. In order for the RNRB to be applicable, a property must pass directly to their children, not via a trust.
• If a Settlor transfers their principal residence into the trust and later wishes to sell the property to move or downsize, the following taxes may apply;
  a) Even though the property is the Settlor’s principal residence, it will no longer benefit from capital gains tax exemption, as it is a trust asset. GCT will also be payable at the rate applicable for trust assets, which may be more than the Settlor’s personal rate.
  b) Likewise, stamp duty on the new purchase would be payable at an increased rate as a trust asset, not at the rate normally applicable to the purchase of a principal residence.

3. Validity

If a Settlor places assets into a trust to seek to minimise their liability to pay care fees, the local authority will very often investigate the circumstances in which the trust was established as such actions are unlawful.

If it is clear that the intention was to avoid care fees; or if the Settlor is already suffering from some disability or illness which would make it likely that they will require care later in life when the trust is established, the local authority will simply ignore the trust and include the assets in their calculations.

On the other hand, if the trust is not set aside and trust assets are not considered as part of the Settlor’s means, the choice of care homes may be more limited. The Settlor will not have the means to pay fees for a private care home of their choice.

4. Costs

Trusts are often complex to set up and companies very often charge high fees for doing so.

5. Associated concerns

Regularly, companies that offer services to set up these trusts also offer a will writing service as an ‘add on’. These companies are not always regulated by the Solicitors’ Regulation Authority and the will writers do not always have legal qualifications. In some circumstances, this can mean that a will may not be properly drafted, or clients are not fully advised on the effect of their new will.

Remember, the companies seeking to sell you these asset protection trusts are only able to charge customers who take the trusts out, so it is in their interests for their customers to enter into the trusts. On the other hand, specialist solicitors are there to advise clients regarding the appropriate tax planning for their personal circumstances and have no vested interest in whether or not the client ultimately does enter into the trust or not.

What should you do?

If you are considering placing assets in a trust as a means of tax planning, always take advice from a specialist solicitor. Our Private Client team can assist with any trust-related enquiries.

If you are unsure whether a company that is offering you services, is a law firm, or the person undertaking the work for you is a solicitor, you can use the law society’s find a solicitor tool to check: https://solicitors.lawsociety.org.uk/

If you or a family member has set up an asset protection trust and is now facing any difficulty in dealing with the trust, our Contentious Trusts and Estates team can advise you.