In recent years, asset protection trusts have been often marketed as a means of safeguarding clients’ wealth for future generations, shielding assets from care home fees, or protecting them from creditors. Whilst it is true that these types of trust vehicle can and do serve legitimate purposes when used appropriately, the practice of mis-selling them seems to a professional observer to have become an increasing concern.
Experienced professional input and advice tailored to bespoke circumstances can result in these forms of trusts representing a genuinely effective tool in estate planning and wealth management. The apparent mis-selling will simply result in unexpected results and most likely poor tax consequences.
When mis-selling occurs invariably it is the advice that has been wanting and in the worst cases misleading with often the opposite to the intended consequence or consequences.
When sold through an agent with generally an “uplift” in cost the damage can be even more keenly felt not only as a result of the ineffective cost of the inception of the trust vehicle itself but also in the cost occasioned by the need to de-construct the mess that has been established.
What Are Asset Protection Trusts?
An asset protection trust (often sold as family or flexible family trusts) will at its core represent the establishment of a new legal entity where ownership of assets, such as property or savings, are transferred to trustees who manage them on behalf of beneficiaries.
However, the enticement of promises such as avoiding care home fees has led to the widespread marketing of these trusts under misleading pretences. Some unscrupulous advisers and companies target vulnerable individuals, particularly the elderly, by offering seemingly quick and easy solutions for complex financial and legal issues and indeed often when there is not even a realistic expectation of a problem needing a fix.
Some of the problems:
1. Overstatement of Benefits – in particular claims of protection from care home fees:
One of the most common tactics involves exaggerating the ability of trusts to shield assets from care home fees.
Local authorities may investigate such transfers under “deprivation of assets” rules if they believe the trust was established with the primary intent of avoiding care costs. If sold as a primary benefit, then inevitably a deprivation of assets was the intent!
2. Lack of Transparency/Clarity:
Often, the purchaser is not fully informed about the potential downsides of these trusts, such as high fees, the loss of control over their assets, or the fact that assets within a trust might not be entirely exempt from creditors or inheritance tax and the interplay.
3. Sales Pressure Tactics:
High-pressure sales techniques may be adopted to push individuals into making quick decisions without consulting independent legal or financial advisors.
4. Unregulated Sellers:
The selling of these products may often come from middlemen who are not necessarily regulated financial advisors, companies selling these trusts may operate without proper oversight. This lack of supervision and regulation increases the risk of misleading or poor advice where the motivation may well be the fee generated rather than the appropriateness of a product.
To give an example why sell a cheaper and simpler Will with a life interest trust within it when you could sell a simple Will and a secondary trust product and double or triple (sometimes more) the fee if you are focused on sales targets?
Potential Consequences from the inappropriate sale and purchase of asset protection trusts may include one or a number of the following:
- Financial Loss: High setup and maintenance fees (sometimes unexplained or poorly explained). When combined with unexpected legal and tax implications this can result in substantial (unexpected) financial strain.
- Legal Challenges: Trusts that fail to comply with legal requirements could be deemed invalid, leaving individuals unprotected.
- Emotional Stress: The realisation that assets meant for family members are at risk in unexpected ways can cause significant distress.
How to Protect Yourself
If you’re considering establishing an asset protection trust, I would suggest the following as a checklist:
- Seek independent advice: Consult a qualified solicitor or regulated financial advisor to ensure the trust is suitable for your specific circumstances.
- Do your research: Take time to understand the terms and conditions of the trust, as well as any legal or tax implications and set up cost and procedure.
- Be wary of pressure sales tactics: This sort of decision should not require an immediate decision. Be sceptical of promises that sound too good to be true, particularly claims about avoiding care home fees or taxes.
- Check credentials: Take steps to investigate the seller and whether they are reputable and regulated by an appropriate authority.
Summary
While asset protection trusts can be a legitimate and effective tool in financial planning, they do genuinely have a role to play, the mis-selling of these products is I believe a serious issue that can have lasting consequences.
I have seen 3 very poor examples just this year and as many of these Trusts start to have a substantive effect (as opposed to being over many years approached as though dormant) it seems this is a problem that will continue to cause distress for clients for some time to come.
The best advice I can offer if you or a client has an Asset Protection Trust, or something named similarly, and you/they are not fully sure in what you/they have is that you seek a review of what you/they have established by a qualified professional. If it is not broken, they will not try to fix it but if it needs fixing it is likely to be cheaper acted on sooner rather than later.
Please do not hesitate to contact the Herrington Carmichael LLP team if you need advice and one of our team will review your provision and give you the appropriate advice
