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Safeguard your assets

Why You Should Beware Of So-Called 'Asset Protection Trusts'9th Oct 2020

by Anthony Weber on 9th Oct 2020

Contact Anthony Weber

Don’t Become A Mis-selling Victim

No-one wants to sell their home to pay for care in their old age. You worked hard to buy that house. You’d much rather it went to your children instead.

But what if someone told you that you could ringfence your property in an ‘asset protection trust’ to safeguard it from sale? And the local authority would pay for your care instead.

Sounds too good to be true? It is in one sense: there’s no such thing as an ‘asset protection trust’. At least not in the sense of ‘save your house and get council care funding’.

Sadly, that hasn’t stopped stop tens of thousands of people from spending up to £10,000 each on ‘asset protection trusts’ in a futile bid to have their financial cake and eat it.

They’ve shelled out thousands of pounds for documents that won’t work. Cash-strapped local authorities will almost certainly ignore these trusts when assessing applications for continuing healthcare funding.

So What Went Wrong? And What Is A Lifetime Trust? How Do They Work?

So-called ‘asset protection trusts’ are in reality lifetime trusts that have probably been mis-sold. 

Lifetime trusts – also known as interest in possession trusts – are good when they are used (and sold) correctly for their intended purpose. They are a recognised legal entity.

When used appropriately and sensibly, lifetime trusts are a useful way of tax-efficiently transferring some or all of the ownership of an asset to another person before you die.

Here’s how they help couples and their children:

  • the lifetime trust can be set up in advance but is ‘created’ when the first spouse dies
  • the trust pays an income to the surviving spouse (the life tenant) for as long as they live
  • when the surviving spouse/life tenant eventually dies, the trust is transferred to their beneficiaries – usually their children – with no Inheritance Tax liability.

Lifetime trusts were never intended to be a means of hiding people’s homes from the local authorities in order to qualify for free long-term care at the expense of the long-suffering taxpayer.

But sadly that’s precisely what has been mis-sold in many cases.

Some slick-suited financial types saw a gap in the market, seized their chance…and the rest is depressingly familiar. Britain is no stranger to mis-selling scandals.

We recommend that you take a very long hard look at the person trying to sell you an ‘asset protection trust’.

Is the person a proper wills and probate lawyer who specialises in trusts and talks about using a lifetime trust correctly for its intended purposes?

Or are they just a silver-tongued salesman hiding behind an old school tie and some faux heritage branding?

‘Deliberate Deprivation’

The term ‘asset protection trust’ was coined (and ‘coin’ seems to be the most appropriate verb in this instance), to make you believe you could safeguard the money tied up in your home from the cost of having to fund your long-term care.

Salespeople pushing these trusts will often ask for higher fees. They’ll lead you to believe you’re getting a special service. But in reality they could be providing you with incorrect information.
Here’s the brutal reality: selling or giving your home away to avoid paying care fees is known as ‘deliberate deprivation’. And it can be reversed under the NHS and Community Care Act 1990.

Local authorities take a dim view of deliberate deprivation attempts. They are unlikely to be sympathetic or taken in. 

Furthermore, large transactions are subject to the ‘seven-year rule’. That’s how long you need to survive after you’ve made your gift in order for it to qualify as a tax-free Potentially Exempt Transfer (PET).

And assuming you plan on continue living in the property, you would have to pay rent to the new owners to avoid being categorised as a reservation of benefit, which is exempt from the seven-year rule and therefore subject to IHT.

So How Can I Safeguard My Property?

You need to take a holistic view of your needs. It will involve a lot of thought and careful planning. Our experienced wills and probate team can help advise you on the best solutions to suit your family and financial circumstances.

Property trust wills are one way to mitigate the impact of long-term care fees. Find out more about them on our Care Home Funding page.

But trusts are complex. And while they are generally a good way of minimising tax liability, they are not a magic wand: they will not make your tax obligations disappear completely.

Various types of trust are treated differently for tax purposes so it pays to get specialist advice. We recommend that you consider all your options before creating a trust for your property.

One option for joint property owners is to consider severing the joint tenancy – essentially creating shares or separate ownership – to make best use of the nil rate band.

Get Expert Legal Advice

Considering setting up a trust? Worried about a trust you’ve already set up? Want to discuss your options? Contact our Wills and Probate team for more information.

This document is not intended to constitute and should not be used as a substitute for legal advice on any specific matter. No liability for the accuracy of the content of this document, or the consequences of relying on it, is assumed by the author. If you seek further information, please contact Managing Partner Neil Andrews at Coles Miller Solicitors LLP.