A guide to family protection trusts
GA Solicitors in Plymouth is renowned for its expert advice in all areas of private client work, including wills, probate, tax planning and trusts. Our clients often ask for advice on how to best protect their assets and limit any tax liabilities. One of the most common trusts we advise upon is Family Protection Trusts.
What is a Family Protection Trust?
A Family Protection Trust (also commonly referred to as an Asset Protection Trust, Home Protection Trust, or Wealth Preservation Trust) typically involves the transfer of assets into a managed trust. Upon transfer, these assets are no longer owned by an individual (the settlor) and instead become the property of the trust. However, it is possible to retain certain legal rights over those assets by acting as a trustee, providing you with the chance to oversee the safe management of assets.
What are the advantages of a Family Protection Trust?
There are a number of advantages to this type of trust.
- It provides additional protection of certain assets for beneficiaries. For example, if a beneficiary is considered vulnerable, the use of a Family Protection Trust can help to protect them from financial abuse and/or losing income from means-tested benefits.
- The trust assists in sheltering the assets from potential claims by hostile third parties and those who may challenge the validity of a Will.
- Assets in a Family Protection Trust do not require a Grant of Probate to administer those assets upon death.
- Should beneficiaries face potential divorce or bankruptcy in the future, having their inheritance in the form of an interest Family Protection Trust can offer protection.
- By giving up your interest in the assets you place in trust, those assets shall not form part of your estate for inheritance tax purposes (assuming you survive seven years thereafter).
Anti-avoidance Provisions
It is worth referencing that if you intend to use such a trust to reduce your capital and avoid paying care home fees or paying other creditors, there are anti-avoidance provisions in place that could prevent such transfers from being effective.
If these are the only reasons for the use of such a trust, or if it was foreseeable at the time you transferred assets that care might be needed, then the trust could be disregarded by the Local Authority who would otherwise be responsible for funding your care.
Tax implications of a Family Protection Trust
Upon each ten-year anniversary, the assets within the trust should be valued. If the property is valued at a sum greater than £325,000, then inheritance tax at a current maximum rate of 6% will become payable. It is your responsibility to value the assets within the trust and to report and pay any tax.
Even where no tax is payable, a tax return could be due, and failure to complete the tax return could result in penalties and interest on any unpaid tax.
If the Family Protection Trust owns your family home, you will not be entitled to the Residence Nil Rate Band from inheritance tax on your death.
If you remove the property from the trust, it will lose the protection provided by the trust.
Generally speaking, if your house is currently worth more than £325,000 for a single person or £650,000 for a couple, or if the overall value of your estate, including your other cash and investments, breaches this sum, then the existence of the Family Protection Trust will be negative from an inheritance tax perspective. The recommendation for inheritance tax purposes may therefore be to end the trust to avoid these tax charges.
However, by removing property from the trust, you are removing any protection that it offers.
How do I set up a Family Protection Trust?
To set up a Family Protection Trust, you need a specialist solicitor or legal professional who can offer clear and effective legal advice bespoke to your situation and needs.
You will then need to transfer the appropriate assets legally into the name of the trust.
Once the trust is established, you need to identify any and all beneficiaries with clear instructions as to how you want the assets managed and distributed. To ensure your wishes are carried out, you will need to appoint trustees to manage the trust.
Trustees should be trusted family members or friends, or a professional entity such as a solicitor or bank. Ideally, there should be at least two trustees, but no more than three or four.
Your specialist trust solicitor will then formalise the trust deed, ensuring it outlines all of the terms and conditions of the trust. If needed, then they will also register the trust with HMRC.
How can GA Solicitors in Plymouth help?
What is right for you will depend upon your circumstances. Our experienced and knowledgeable team is well placed to consider your succession planning needs, as well as advise you on all matters relating to the protection of your assets, the payment of inheritance tax, the different types of trusts, and the most appropriate steps for you to take to achieve the best outcome for you and your family. We will guide you through the process and explain every step.
Members of our team are accredited by the Society of Trust & Estate Practitioners (STEP) and The Association of Lifetime Lawyers, as well as being highly experienced solicitors or Chartered Legal Executives. We are also the only Band One ranked private client team in Plymouth by Chambers High Net Worth, and are also highly ranked in The Legal 500.
To find out more about Family Protection Trusts or how we can help, speak to our team today for a free initial consultation. Call 01752 203500 or email enquiries@GAsolicitors.com.
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