What is an Asset Protection Trust?

An Asset Protection Trust – sometimes also called a ‘Family Protection Trust’ or ‘Care Fees Trust’– is a trust where people transfer assets (usually their home) into the trust during their lifetime, to keep them outside means-tested assessments on their estate. This is particularly relevant for both local authority-funded care fees and private care fees.

Do Asset Protection Trusts help to avoid care fees?

The short answer is: no. The core issue with these trusts is the deliberate deprivation of assets. If a Local Authority decides that you have deliberately deprived yourself of an asset to avoid care fees, assets in the trust will still be considered for means testing for care fees. In some cases, you could also face large legal and/or court costs.

Ultimately, you may pay for an expensive trust and still be required to pay full care fees and even incur legal costs.

How can you manage care fees?

A Care Annuity, also known as Care Fee Annuity or Care Home Annuity might be a useful solution. An annuity is a kind of insurance policy where you pay a lump sum to get a lifetime income to pay for care. The lump sum will guarantee an income sufficient to cover your or a loved one’s care fees. Advice would need to be taken from a financial advisor about this as Care Fee Annuities are not something lawyers can arrange.

The other option is for couples to create trusts in your wills. This protects the first person to die’s assets from being redirected by the surviving spouse through a conscious decision (such as changing their will) or otherwise (such as care fees). The trust in a will can still be used to support the survivor by allowing them to live in any property owned by the first person to die, support them with their care, but they have no absolute right to the capital, which is held at the trustees’ discretion.

Can Asset Protection Trusts help to reduce inheritance tax?

Asset Protection Trusts can sometimes increase the amount of inheritance tax paid upon your death. This is because transfers to a trust over a certain amount will trigger an immediate inheritance tax charge.

Trusts are also subject to inheritance tax every ten years, as well as when assets leave the trust. Properly administrating trusts can also incur costs.

Asset Protection Trusts are also liable to capital gains tax and income tax in the same way as people are. We recommend that you get advice about whether the Asset Protection Trusts is liable to either or both of these taxes.

Can Asset Protection Trusts help avoid loved ones waiting for probate?

Asset Protection Trusts can potentially help mitigate the impact of loved ones waiting for probate upon your death. It removes the need for probate to sell your home, as the surviving trustees could sell it after your death.

However, probate may still be needed after your death to be able to deal with your other assets, such as bank accounts, that are not included in the trust. At present, probate is generally granted within six weeks of the application being submitted.

Are there any other risks to be aware of?

Bear in mind that once you transfer your home to a trust, you no longer own it. It is owned by the trustees and their permission is required should you want to sell the house. The proceeds would then belong to the trust and you would need the trustees’ permission and agreement to use the funds to buy a new house. Likewise, it can make it harder to obtain equity release if the house is owned by a trust, and the trustees’ agreement would be required.

Asset Protection Trusts are often mis-sold. People are told the trusts will reduce future care costs but, in reality, the costly arrangements are being put in place when it does not achieve what they want because of the deliberate deprivation rules (see above). The arrangements can put consumers in a vulnerable position, particularly when the companies mis-selling these arrangements appoint themselves as trustees. They, as trustees, then need to agree before anything can be done with the assets in the trust, which is usually your home.

In conclusion

You should always be wary of off-the-shelf estate planning solutions that promise more than they can deliver.

Although Asset Protection Trusts may be marketed as a smart way to avoid care costs, the legal reality is very different. They are expensive arrangements, which Local Authorities are well within their rights to challenge.

If you are considering setting up a trust for any reason, it is essential to speak to a qualified and specialist estate planning professional who can help you plan for the future.

If you have already set up one of these trusts, you can also review it with an estate planning professional to ensure it suits your needs.

Speak to a TEP, estate planning professionals who have the expertise to help you plan for the future.

Amy Lane TEP, Partner, Gunnercooke