“Can you help with an Asset Protection Trust?”

Can you help with asset protection – a question we receive regularly. By definition all trusts are about asset protection, yet there is no particular type of trust specifically called an “Asset Protection Trust”. Here we look at an arrangement where people seek to protect their house in a trust from things such as nursing home fees and other liabilities.

In almost all cases the sort of trust that people are looking for is a “Life Interest Trust”, this type of trusts allows you to specify who owns the rights to your property in order to protect the interests of your family home and protect your property. In some instances this means occupying the house, or receiving income from the house even if they are no longer living in it. This kind of arrangement would usually mean that the house could be sold and another house purchased, or the proceeds of the property invested to generate an income.

It is true to say that if your house is held in a trust it may be possible to protect it from various creditors, but it isn’t as simple as it is made out to be, nor can it necessarily give 100% guarantee against third party creditors.

How can a Life Interest Trust be created?
There are two ways in which this sort of trust can be created and there are huge differences in the efficacy and the consequences depending on which two methods you use.

1. The first way a Life Interest trust can be created is by making a lifetime trust for the benefit of yourself.

This is frequently touted by underqualified advisers as a miracle X solution which they will tell you is guaranteed to protect your house and reduce your exposure to inheritance tax. Unfortunately, the complications and risks associated with a lifetime trust or property trust of this type are rarely ever communicated. 

The first danger of this trust is it may be regarded as “Deliberate Deprivation of Assets” by your local authority. Which usually arises when people put into a trust or give away property, in the hope of avoiding local authority charges and shortly after try to claim a benefit of sort from the local authority. In such case the local authority can claim that this was a Deliberate Deprivation of Assets and can force the unravelling of the gift or trust.

Secondly, the creation of this trust is an immediate “Chargeable Transfer” for the purposes of inheritance tax. This means there is a potential immediate liability to pay inheritance tax on the creation of the trust. The inheritance tax is payable at 20% insofar as the value of the trust exceeds the nil rate band of £325,000. This trust is also subject to inheritance tax every 10 years at 6% on the excess over the nil rate band.

Finally, this sort of Lifetime trust is commonly called a “Gift with a Reservation of Benefit” where the people creating the trust benefit from it.  Where there is a gift with a reservation of benefit the trust is not an effective gift of property for inheritance tax purposes and the property will therefore remain as part of your estate when you die. This makes a complicated inheritance tax case after your death. From the above you can see that this is an extremely dangerous route and one which we would strongly advise against.

2. Secondly, an asset protection trust can be created by stating in your will that your share in any property (this can include your savings and investments) is held for the benefit of your surviving spouse of partner in trust.

However your surviving spouse or partner has no ownership of your share of the estate but that half is then protected from creditors. Unfortunately, in this sort of arrangement nothing can be done to protect the assets belonging to the surviving partner or spouse, but at least the share of the first to die can be protected. This sort of trust is rather popular and we frequently advise on this, and is generally effective as an asset protection arrangement, avoiding the inheritance tax pitfalls that are associated with trusts created in one’s lifetime.

For further information contact Anthony Tahourdin at 01276 854 947 or a member of the Private Clients’ Team.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.








Graeme Black
Partner, Private Wealth & Inheritance
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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