This article looks at a disturbing trend of certain structures being marketed as ways of protecting wealth, but they are not robust.

The following article about a particular type of structure that families might use to shield assets is not as robust as some might think. These structures operate in the UK and are, so the authors say, often sold by those using sharp practices that cannot be relied upon. 

The authors are Matthew Peto (pictured below), partner, and Ella Whelan (picture below), associate, at law firm Stevens & Bolton. The editors are pleased to share this analysis and invite readers to respond. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

Family Protection Trusts (or “Asset Protection Trusts”) are often mis-sold by unregulated providers using persuasive sales tactics and boilerplate documents not tailored to individual circumstances. Individuals considering these trusts as a simple way to safeguard wealth, streamline estate administration and protect assets from risks should beware of a lack of bespoke advice, generic trust deeds and no explanation of tax or care fee consequences. While in very specific circumstances these trusts can serve genuine estate planning purposes, all too often they do not hold up against legal scrutiny in practice and can exacerbate problems.

Local authorities and legitimacy
A frequent mistake is believing that placing assets into trust will exclude them from local authority means testing for care. This rarely works. Local authorities can treat these arrangements as deliberate “deprivation of assets” if they believe the primary intention was to reduce care fee contributions. They will look at the motivation for creating the trust, the timing in relation to any developing care needs and the overall context of the transfer. 

There is no time limit on how far back a local authority can look if avoidance is suspected. Generic trust deeds with no clear legitimate purpose make it easier for a local authority to argue deprivation. Individuals should therefore seek advice early and avoid relying on these trusts as a guaranteed care fee solution.

Beware recurring charges

Although frequently marketed as inheritance tax (“IHT”) efficient, family protection trusts often do not produce the savings advertised. In fact, most lifetime trusts fall within the IHT “relevant property regime,” meaning that they can attract one or more of the following IHT charges: an entry charge of 20 per cent if the property transferred into it exceeds the available nil rate band (currently £325,000 ($435,827)); a 10-year anniversary charge of up to 6 per cent of the trust’s value; exit charges if/when the property is distributed from the trust to its beneficiaries.

The property will also typically remain part of the estate of the person who transferred it into trust. This is known as a “gift with reservation” (for example, placing a home into trust but still living there rent free). The arrangement provides no tax advantages unless the settlor (the person who sets up the trust) either vacates the property entirely or pays full market rent.

Finally, putting a home into trust can also result in the estate losing out on the valuable Residence Nil Rate Band (currently £175,000), which is only available when a qualifying residence passes to descendants (such as children and grandchildren) and the estate's value is below £2.7 million. Trust ownership often breaks this link, resulting in a higher IHT bill than if the property had been personally held and left in a will to children on death.

These recurring charges can outweigh any perceived IHT benefit and are often not properly explained to individuals before the trust is created.

Looking ahead and taking action

These trusts are not a universal solution for IHT planning or care fee protection, and any assertion of this nature should be approached with caution. If you believe you have been mis-sold a trust, you should collect documentation to support your case – such as engagement letters, sales brochures, email correspondence, the trust deed, transfer documents, valuations, and meeting notes – and take advice from a properly regulated solicitor or accountant who is experienced in the field of tax and trusts. 

Aside from seeking to rectify any defective planning which has been implemented, it may be prudent to make a formal complaint to the firm who advised on the trust creation (if it is deemed that the advice was negligently provided). This is not always straightforward and can, of itself, be an expensive process. Options away from a formal court process include a complaint to the Legal Ombudsman or SRA (if solicitors were involved), the Financial Ombudsman Service (if an FCA authorised firm was involved), or to the Trading Standards (if the firm marketing the trust scheme was unregulated).

Finally, by engaging regulated professionals to determine the most appropriate form of estate planning applicable to your circumstances, you will ensure that you are making informed decisions rather than relying on promises that do not hold up in practice.

Matthew Peto

Ella Whelan