Asset protection trusts – too good to be true?

We are regularly contacted by people who have heard about a clever plan – called an asset protection trust – that takes their family home out of the inheritance tax (IHT) net, and can protect against care fees.  Often their friends have entered into these schemes and they want to find out if they can do it too.  But do they really work?

What is involved in an asset protection trust?

The family home is put into a trust known as a discretionary trust or a life interest trust.  Usually, the trustee of this trust will be the firm selling the plan. The home owners remain living in their home for the rest of their lives, and the trustee then deals with the property after they have died or, in the case of two owners, after they have both died, passing it to the other beneficiaries who are typically the children and grandchildren of the original owners. The scheme is marketed as saving IHT, probate fees and potentially care fees.

Do asset protection trusts work?

In short, no!

They don’t save IHT – in fact they can sometimes increase the IHT payable!

Because the original owners continue to live in the house, without paying a market rent, they are benefiting from the property.  Anti-avoidance legislation means the property will remain in their estates for IHT so it will still be subject to IHT on death and sometimes IHT could be due on the first spouse’s death (this would not usually be the case where no asset protection trust is involved).

Moreover, the trust could also cause the owners to lose a valuable relief known as the residence nil rate band. This is a tax free allowance, which can save IHT of up to £140,000 per married couple,  but requires the home to be left to lineal descendants rather than being held in a lifetime trust.

Such trusts also fall into the ‘relevant property regime’ for tax purposes meaning that there may be an inheritance tax charge every ten years, as well as inheritance tax on death.

They don’t avoid care home fees!

A local authority can look back at transactions over an unlimited period if they believe that one of the primary reasons for using such a trust is for the person to deliberately deprive themselves of assets to avoid care fees. If the local authority deems this to be the case, they would treat the original owners as still owning the house so the value of the house will still be taken into account in any care home fee assessment. While a trust may assist after the death of the first spouse, a properly structured trust in a will can achieve the same results without falling foul of the rules and without the complexity of an asset protection trust.

A grant of probate may still be required!

If the house is not the couple’s only asset of substance, a grant of probate may well still be required. This would be the case for many bank accounts, investment portfolios, other properties and many other assets.

They are complex and can cause a lot of hassle!

Providers of these schemes usually insist on being the trustee. That can lead to delay and additional costs, as they will need to be involved in any decisions, including selling or remortgaging the house.

There have also been cases where the providers of these schemes have gone into liquidation, vanished or even gone to prison, leaving families stranded and unable to sell properties, and needing to take legal advice and sometimes court action to rectify the situation.

In addition, the reporting of the ten yearly charge mentioned above can be complex and is likely to require professional assistance.

In summary, these schemes are complex and rarely deliver the promised benefits, often giving rise to additional costs and delay, and sometimes result in losing the benefit of existing IHT reliefs. Advice tailored to your personal circumstances can help you to ensure that your wishes are carried out, whilst maximising the IHT reliefs available.  At Thomson Snell & Passmore, we have extensive experience of helping people to protect and pass on their wealth in the way that best suits them.

This article first appeared in Wealden Times.