Do you have a Family Asset Protection Trust?

The Private Client team at Fraser Dawbarns has recently been approached for advice by several people who were encouraged to use a Family Asset Protection Trust as part of their estate planning strategy, usually between 2013 - 2015.

These appear to have been sold to individuals seeking to shield their wealth - particularly property - from care fees, taxation or to avoid the need to go through the process of applying for probate when one or other spouse dies.

While trusts can offer legitimate planning benefits in certain circumstances, they are frequently misunderstood and, in some cases, ‘mis-sold’. When an individual puts their property into such a trust, the pitfalls can be significant and long-lasting. Below are some of the considerations.

Loss of control over the property

One of the most immediate consequences of placing property into a trust is the loss of direct ownership. Legally, the property no longer belongs to the individual but to the trustees. While the person who created the trust (the ‘settlor’) may still benefit from it depending on the structure, they no longer have outright control. This is particularly concerning where professional trustees have been appointed and then firm who employed the trustees has ceased to exist.

This can create practical issues if the property needs to be sold or managed, particularly on the death of the settlor. Disputes can also arise if trustees disagree. Many people have entered into these arrangements assuming they retain full control, which is often not the case.

Ineffectiveness against care fees

A common reason for establishing these trusts is to avoid local authority care fees. However, this is one of the most problematic areas. Authorities can challenge transfers of property under ‘deliberate deprivation of assets’ rules. If it is determined that the trust was created primarily to avoid care costs then the individual may still be assessed as if they own the property and the trust may fail to achieve its intended purpose entirely.

Tax complications and liabilities

Trusts introduce a layer of tax complexity that many individuals underestimate. Potential tax issues include:

• Inheritance Tax (IHT): Transferring property into a trust may trigger an immediate IHT charge if it exceeds certain thresholds, and there may be 10-year anniversary tax charges or exit charges to pay when property leaves the trust. The benefit of the ‘Residence Nil Rate Band’ (an IHT allowance available to the executors of a deceased individual) may also be lost if property is not held by the deceased individual outright.
• Capital Gains Tax (CGT): The transfer of an asset into trust and the transfer of an asset out of the trust can result in Capital Gains Tax charges, especially for second homes, investment land or investment properties. These can be particularly high if the value of the property in question has grown significantly.

Rather than simplifying estate planning, poor advice surrounding trusts can create additional liabilities.

Many individuals appear to have transferred their property into trust to ‘avoid the need for probate’. Whilst in a limited number of cases obtaining a Grant of Probate can present challenges, for most simple estates, obtaining probate is not an insurmountable hurdle, with many clients obtaining this within four to six months of an individual dying. The costs of unravelling a trust can also, in some cases, be higher than the costs of obtaining a Grant of Probate.

Risk of mis-selling

Family Asset Protection Trusts have sometimes been marketed aggressively, with promises of “guaranteed protection” from taxes or care costs. These claims were often overstated or misleading. Warning signs include: high-pressure sales tactics, one-size-fits-all solutions, and a lack of detailed explanation of risks. Not all providers are regulated to the same standard as solicitors or financial advisers, increasing the risk of unsuitable advice.

What to do next?

Clients who have established trusts into which they have passed their property should ensure they take current advice on the usefulness of these trusts, particularly if the trusts were established around or over 10 years ago When an individual settles property into a trust, they are making a significant legal decision that carries several risks. A trust should be tailored to the individual’s circumstances, not adopted as a generic strategy.

In many cases, simpler and more transparent planning options may achieve similar goals with fewer complications.

Please contact us if you have been encouraged to use a Family Asset Protection Trust and would now like to review whether it is really fit for purposes in your particular circumstances.

How to contact us:

To contact a member of our team, you can fill in our online enquiry form, email info@fraserdawbarns.com, or call your nearest office below. If you’d like to speak to a member of our team at one of our offices across Norfolk and Cambridgeshire, visit our offices page.

Wisbech: 01945 461456

March: 01354 602880

King’s Lynn: 01553 666600

Ely: 01353 383483

Downham Market: 01366 383171

This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek advice specific to your own circumstances. Fraser Dawbarns LLP is always happy to provide such advice.