An assett protection trust is a separate legal entity that holds property or assets of some kind for the benefit of a specific person or group of people known as the beneficiary or beneficiaries. The person appointed to oversee or manage the trust is called the trustee.
To avoid the problems of gifting assets to individuals
Gifts of the family home to individuals can cause problems. For example:
1. The person receiving the gift (the “donee”) can dispose of the property against the wishes of the person making it (the “donor”).
2. The donor at some point in the future may want to move home. If they have transferred their home they will need the consent of the donor to move.
3. The donor may lose their home if the donee becomes bankrupt or gets divorced.
4. The donee may become liable for capital gains tax in the future.
5. The donor’s entitlement to means tested state benefits may be affected.
6. A dispute may arise between the donor and the donee about maintaining the property.
To avoid these pitfalls the donor can consider gifting their property into a trust.
To protect the interests of vulnerable people
Disabled persons trusts are available for those suffering from a physical or mental disability. Provision can be made for a vulnerable person in lifetime or through a will. A trust set up for a disabled person may attract favourable tax treatment compared with other trusts. A disabled person can be one of several potential beneficiaries in a lifetime discretionary trust. Each type of trust has its own tax regime and therefore consideration must be taken before deciding which type of trust is best for the vulnerable person.
To avoid care fees
Transfer of an asset into a trust does not guarantee avoidance of care fees. Local authorities can, when deciding a claim for assistance, look for evidence of deliberate or intentional deprivation of capital. A transfer of capital will be regarded as deliberate if a person transfers an asset out of his or her possession in order to put him or herself in an improved position to obtain assistance. Deprivation must be deliberate and its effect must reduce resources available to pay care home fees which are clearly and to the knowledge of the person making the gift likely to fall due in the near future. It need not be the only motive; it must be a significant one. Whilst the purpose of setting up the trust may not be to avoid care fees, its implementation may have this effect. In the context of planning for any future financial risks, it is always better to have a position to negotiate from. If assets are in a person’s name they are always open to attack and claims of third parties against that person. Distancing oneself from the legal ownership enables a negotiating stance to be taken and may make it more likely than not that residential and nursing care fees are avoided.
To avoid inheritance tax
Inheritance Tax (IHT) is a cumulative tax that applies to transfers made on death and during lifetime. It is payable on transfers made in excess of the nil rate band. The nil rate band is a value of assets on which IHT is not paid or said to be paid at “nil rate”. At present the nil rate band is £325,000 per person. Tax rate on death is 40% and on lifetime transfers 20%. A trust may be useful where you wish to make a lifetime gift to avoid tax but do not want to make a gift to an individual.
Asset protection through the provision of trust is complex. It is important to have the right information and guidance to make an informed decision. We have an experienced team of professional advisers who can help you decide how best to protect your assets so they can be enjoyed in later life and passed to the next generation.
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