It has been brought to our attention by one of our clients that Knightsbridge Estate Planning are making calls and arranging Trusts to try and help clients avoid paying care fees and Inheritance Tax.

Family Asset Protection Trusts (sometimes also known as “Asset Protection Trusts” or “Universal Asset Protection Trusts”) promote the idea that transferring all your assets into a trust during your lifetime is a great way to protect you from Inheritance Tax, care home fees, creditors and ex-spouses. All this can, allegedly, be done without losing control over your assets and being able to continue to deal with them as you wish.

Many people these days are concerned that their assets will be used up in paying for their care in their old age and therefore there would be nothing left for their family and friends to inherit.

Whilst it is perfectly possible to protect one’s assets if they are transferred to a trust early enough, there have been many concerns over the years that some of the claims made by those marketing the schemes mentioned above are misleading. If trusts are created where “the settlor can change their mind at any time” and “retain full control of what goes in and what comes out of the trust, no questions asked” (to quote from some of the marketing literature), are these proper trusts or indeed shams.

Furthermore, some promoters have clearly overstepped the mark of legality. In 2015 eight people received prison sentences at Nottingham Crown Court for mis-selling the so-called “Asset Protection Trusts” to elderly clients.

Below are a few points that highlight how the Trusts can be set up and often become ineffective:

What is a Family Asset Protection Trust?

The settlor (owner of the assets) would make a gift into the Trust. As the Trust is likely to be a Discretionary Trust, the money would be owned and controlled by the Trustees and the Beneficiaries (the people the gift is intended to benefit) would receive the Trust monies when the Trustees feel it is appropriate and at their complete discretion.

After 7 years, the money gifted into the Trust would be held out of the settlor’s estate for Inheritance Tax purposes, potentially saving the settlor’s estate 40% Inheritance Tax on the gifted amount.

A Discretionary Trust is a Chargeable Lifetime Transfer for Inheritance Tax purposes and any funds in excess of £325,000 placed into the Trust could become subject to an immediate Inheritance Tax charge of 20%. Often these schemes encourage you to place a large amount of your assets (sometimes including your home) into the Trust which often then leads to an immediate tax charge.

Can the person making the gift benefit from the Trust funds?

The point of a Trust is to gift the money away and if the person that makes the gift benefits from the Trust money at all (for example by making a withdrawal to pay for care fees or placing the house into Trust and still living there rent free) then this could be classed as a ‘Gift with Reservation’ and the Trust could potentially become invalid and fail.

What this can result in is the nominal value of the Trust being placed back into the estate value of the settlor for Inheritance Tax purposes which would make the Trust, in effect, pointless.

Can the money be easily distributed to the beneficiaries of the Trust fund?

Often the companies selling these types of Trust appoint themselves as Trustees and therefore have the right to be involved in the distribution of the monies to the Beneficiaries. This means they can say ‘yes’ or ‘no’ to the funds being withdrawn from the Trust.

Can the Trust help the settlor avoid paying care fees?

When a person requires any type of residential care, they will be assessed by the Local Authority and part of this will involve a financial assessment.

If the Trust is created in later life, the transfer of assets may be seen by the Local Authority as a deliberate act to reduce the value of the estate and avoid paying care fees, this is called ‘deliberate deprivation of assets.’

In this scenario it is likely that the local authority would assume the nominal value of the Trust is still held in the settlor’s estate and even though the funds are not available, the care fees would still likely be payable by the settlor. This would make the Trust ineffective for the very purpose it was set up.

The majority of companies selling the Trusts are not regulated by the Financial Conduct Authority (FCA) but the Trusts are legal. However, one of the main areas of concern is that the companies selling the Trusts are not Independent Financial Advisers and therefore do not review your whole financial and personal circumstances and this therefore may lead to tax charges and unnecessary fees.

The companies are likely to charge set up fees for the establishment of the Trust and the one’s we have managed to see within the literature of these companies are in excess of £3,000. You may be paying fees and tax to set up a Trust that isn’t needed to meet your personal aims and objectives.

If you have received a call regarding this type of Trust or are interested in later life care or inheritance tax planning, please do not hesitate to contact us on 0114 258 8899 to discuss this area in more detail with our Independent Financial Advisers.

15.07.2019 – Sophie Smith – Independent Financial Adviser at Fogwill & Jones Asset Management Ltd

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