A Trust is a binding obligation placed by an individual (known as the settlor) upon the trustees to hold property (which can be either money, investments, land or buildings) on behalf of beneficiaries.
Trusts are often used to make provision for family members where it is not appropriate to give the money to them outright, often due to family circumstances. For example:-
- Where your children are too young or irresponsible to handle a large sum of money.
- Where you have remarried and wish to continue to provide for your spouse but want to ensure that your wealth ultimately passes to your children from your previous relationship.
- Where your beneficiary is in financial difficulty and likely to become bankrupt.
- Where you want to make provision for someone to live in your home for as long as they need to, but want to ensure that it passes to your children in the long run.
- Where you wish to provide for an individual who has either physical or mental disabilities.
There are several different types of trust. Some are fixed and are designed to fit a specific purpose, for example a life interest trust, which is designed to make provision for an individual over their lifetime (or for a specific period) and after they have died the assets in the trust pass to other named individuals. Other types of trust might require flexibility to adapt to the various beneficiaries changing needs (these are usually discretionary trusts). If you have a beneficiary who has a disability, there are potential tax advantages in creating a disabled persons trust.
It is important to recognise that different types of trusts are subject to different tax regimes so it is very important to consider what type of trust is the most appropriate for your personal circumstances. Elizabeth Foggin is a member of STEP (the Society of Trust and Estate Practitioners) and can provide you with suitable advice and guidance in this specialist area.
Asset Protection Trusts
We do receive many enquiries from people wanting to give away their homes during their lifetime in order to avoid paying for care. They often mention talks or articles they’ve read about placing their properties into trust such as a ‘asset protection trust’. Whilst you are perfectly entitled to do what you want with your own asset, many of these schemes fall foul of legislation called ‘deliberate deprivation’ and simply do not achieve the purpose of what you set out to create.
There are also many other risks associated with giving away your main asset (and the roof over your head). Whilst this is possible it is not without significant risk. These risks include:-
- The person you give it away to dies and it passes to someone under their estate. (Maybe someone you don’t know, or like).
- The person you give it to gets divorced and it forms part of their assets when dividing up their matrimonial assets.
- The person you give it to gets into debt and the trustee in bankruptcy sells it to recover their debts.
- Circumstances change and you fall out with the person you have given it to. Or perhaps not them but their new partner – who knows what the future holds?
- The local authority regards your gift of property as deliberate deprivation. This means the local authority will still regard you has owning the asset and so they will recover your care fees directly from the person you have given it to.
- What about if you wanted a higher or better standard of care than you can afford with the income and assets you are left with? The local authority will only provide care at their basic rate, which means that you will have a significantly reduced choice of care home.
- What if your circumstances change and you discover you need the asset to pay for something that you need? What if you needed an operation that would improve your quality of life but the waiting list is too long?
- What if you decide that you want to spend more of your own money during your lifetime? What if you wanted a new kitchen, or an extension, or to downsize and go on a world cruise and enjoy living for as long possible?
- What if you needed an equity release because your pension is not enough to live on? If you have given away your asset you would not be able to do this.
- You will lose both control and the flexibility over what to do with your (former) asset.
- If you still live in the property, it will still form part of your estate of the purposes of Inheritance Tax. If your estate is taxable, IHT will still be payable on the value of the property.
- Giving away an asset to potentially prevent a disgruntled family member from claiming an entitlement under Inheritance (Provision for Family and Dependants) Act 1975 can be set aside by the Court.
Consider very carefully, will giving your home away really achieve what you are seeking to achieve?
The good news is that there are some things you can do to protect and preserve your own estate for your loved ones. Call Liz on 01704 870404 for an appointment to explore what would be appropriate for your circumstances.