The Right Trust at the Right Time

You may have heard about “Family Asset Protection Trusts” and think they sound promising for protecting your home and hard-earned savings from various evils. At least, that is what the people who market them warn you about.

But many of the supposed advantages are illusory:

  • “You can save Inheritance Tax (IHT)” ….. but if you put your home into trust while you continue to live in it, you’ll be taxed on it anyway. In any event, your joint estates may very well be below the threshold for paying IHT (potentially up to £1,000,000).
  • “You can protect your home from care fees” ….. but if you give your home away for the purpose of avoiding care fees, the transaction can be set aside (as Deliberate Deprivation of Assets), and you may be charged anyway.
  • “You can save on probate fees” ….. but the court fee for a Grant of Probate is a flat rate of £273, while it may take up to £5,000 or so in legal and admin fees to set some of these schemes up.
  • “You can pay funeral costs without waiting for probate” ….. but banks will release funds for funeral costs before probate anyway.
  • “You can use the trust to protect your family from divorce, bankruptcy, etc.” ….. but you can set up such trusts in your Will; you don’t need to do so while you are alive and tie up your own property.

Now, don’t get the wrong idea – we’re all in favour of trusts, which can indeed save tax, protect against care fees, guard against creditors and other third party claims, provide flexibility and much more.

However, it needs to be the right trust for the right reason at the right time. You need to see the bigger picture and weigh the upsides against any potential downsides – which is where experienced advice comes in.

One trust you may wish to consider is a Life Interest Trust (LIT) for a surviving spouse.  This trust is set up in the Wills of both married people, or civil partners.

The idea is that instead of leaving everything to your spouse or civil partner outright, you instead leave it in an LIT for them. This means that they can enjoy the property for the rest of their life.  If it is a house, they can live in it, if it is savings and investments, they keep all the income. However, the crucial point is that they don’t own the property.  That means it is protected for other beneficiaries – such as your children – from various possible threats (e.g., that your spouse or civil partner may remarry, that they may need expensive long term care, that they may simply spend it, etc.).

An LIT is treated exactly the same as an outright gift to your spouse or civil partner.  Gifts between spouses or civil partners are exempt from IHT.  Thus, there would be no IHT on your death as the trust property is treated as belonging to your spouse for IHT purposes.  On their death the value of the trust property is included in their estate tax accounts but they should be able to claim all the IHT allowances that would normally be available to a spouse or civil partner. There might even be an IHT advantage if your spouse or civil partner gives up their rights under the trust (should they not need them) and survives another seven years.

The advantage comes from the trust structure. Because the property does not belong to your spouse, it is not available to fund their means tested Local Authority care fees (as you have designated it for your children instead). This is not Deliberate Deprivation of Assets because the assets never belonged to your spouse in the first place, so they never had the opportunity to deprive themselves of them. Rather it is you who have protected them from putting the capital at risk, by setting up an LIT.  Likewise, as the trust property does not actually belong to your spouse or civil partner, it cannot be claimed by any creditor or otherwise spent.

Meanwhile, the spouse gets to enjoy the property, effectively as if they owned it – e.g., living in it. They just can’t sell or spend it.

There will be many occasions when it would be simpler and preferable just to give everything to each other. However, there may well be occasions too, where an LIT could be the best answer – perhaps a second marriage, with two sets of children; perhaps where one spouse is starting to develop dementia and the other spouse fears they may end up in care for many years and work their way through the family finances, leaving little for the children.

If you think your own Wills might benefit from an LIT, please contact one of our specialist trust lawyers on 020 8949 9500 to set up an appointment to review your circumstances and advise you accordingly.