What are Asset Protection Trusts and why do I need to be wary of these?

Posted on By Lydia Brita
Image of legal advisor speaking to man and woman.

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

Can I use a trust to avoid care fees?

Posted on By Louise Polcaro
care fees trusts

The cost of care can be extremely daunting and you may be concerned about the impact this could have on your finances and your family’s inheritance.

It’s important to understand that there are many legitimate reasons to set up a trust. For example, a life interest trust in a will is a very common and well-recognised arrangement. This allows a surviving spouse or partner to remain living in the family home during their lifetime, while ensuring the property eventually passes to the children. These types of trusts are widely used.

This article focuses on a very different type of arrangement, sometimes marketed as a way to ‘protect your assets from care fees’. These are often called ‘asset protection trusts’ or ‘care fees trusts’ and can carry serious risks.

Trusts marketed as a way to avoid care fees

Some providers will promise that by setting up a trust (often charging fees of many thousands of pounds) you can exclude assets from means-testing for care fees. While these schemes may sound convincing, you should be very wary of them.

What is ‘deprivation of assets’?

If your local authority suspects that you have transferred your home or savings into a trust specifically to avoid paying for care, they may decide that this amounts to deprivation of assets.

If deprivation is found, the local authority can:

  • Treat you as though you still own the asset;
  • Recover the value of the asset from the person who received it;
  • Initiate proceedings under the Insolvency Act 1986 to declare you bankrupt;
  • Apply for a judgment debt against you in a County Court.

In some cases, you could also face large legal and/or court costs, and potentially even criminal charges.

Note: This issue does not apply to will trusts (such as life interest trusts) which only take effect after death. It arises where assets are moved into trust during your lifetime primarily to avoid care costs.

‘But the salesman says if I set it up while I’m healthy, I’ll be safe…’

This is a common sales pitch. While it may be harder for a local authority to prove intent if you set up a trust when you were fit and healthy, there is always a risk they could challenge it.

If they decide against you, you could find yourself in a worse position: your care costs will still be assessed as if you owned the assets, but you will no longer have access to them to pay your fees. The local authority may also refuse to provide financial assistance.

Other things to watch out for

Be cautious if a provider insists on also acting as trustee. When you set up a trust, you give up ownership of the assets, so the choice of trustee is critical.

  • You do not have to appoint a professional trustee.
  • Many people appoint a trusted family member or friend.
  • For trusts that take effect in your lifetime, you can appoint yourself and your spouse/partner as trustees, but you must act in the best interests of the beneficiaries.

Whatever you do, make sure you are completely comfortable with your choice of trustee. Read our article ‘What should I look for when choosing a trustee?’

Final thoughts

Trusts can be an extremely valuable part of estate planning. Life interest will trusts, discretionary trusts for vulnerable beneficiaries, or trusts to safeguard children’s inheritance are all entirely legitimate and widely used.

What you should be very cautious about are arrangements sold specifically as a way to ‘hide’ assets from care fees assessments. These ‘asset protection’ or ‘care fees’ trusts may be challenged as deprivation of assets and leave you financially worse off.

In addition, there may be tax or other consequences of putting your assets into trust.

As you can see, this is a complicated area of law and each person’s individual circumstances will vastly differ. If you are considering setting up a trust, you should speak to a qualified advisor to discuss your specific situation and find a solution that works for you.