Can I protect my assets during my lifetime?
We are all keen to protect our assets for our loved ones, during our lifetime AND after our death. We want to do the best for our spouse/partner and children. However, there are many questions that need addressing before the right planning can be put in place.
What if my spouse remarries after my death?
Assets they have inherited from you could pass to their new spouse rather than to your children. Many people forget that when they marry, or remarry, their existing Will is usually revoked and they are intestate, meaning most of the estate will pass directly to the new spouse, not your children or other chosen beneficiaries.
What if I leave assets to my children and one of them then divorces?
Potentially 50% of the gift you have made to your child may end up with your ex in-law.
What about Care Home fees?
If a person owns assets valued in excess of £23,250 and they require long term care, they will usually be required to make a 100% contribution towards the cost of their care from income as well as from capital assets.
There are detailed rules that we can explain to you, but the sheer cost of care needs to be carefully considered.
Can an Asset Protection Trust help?
The use of a Trust can often solve many of these common problems. It can avoid the need for the family to get a Grant of Probate for the assets held in the Trust. This reduces cost and delay. A side benefit from employing this kind of planning is that assets held within the Trust can frequently be protected from the impact of long term care fees, unless it can be proved that at the time the Asset Protection Trust (APT) was set up it was reasonably foreseeable that the donor would enter long term care. This would then mean that the Local authority would claim that there had been a deliberate deprivation of capital and an attempt to avoid paying Care fees.
Do I need a Will as well as an Asset Protection Trust help?
A Will is essential planning, but an Asset Protection Trust (“APT” for short) can work alongside the Will to give you a myriad of benefits. It is designed to protect your assets during your lifetime, as well as giving you the peace of mind that your estate can pass on securely and intact to your spouse and the rest of the family (or other named beneficiaries) after your death.
The Trust in effect ring fences your assets. In most cases this means protecting your family home, although sometimes savings can also be safeguarded. Just like a safety deposit box, assets can be added and removed from the trust during your lifetime to a limited degree.
You would usually be named as the main beneficiary and retain control of the assets within the trust while you are alive and have capacity, so you are free to move home or release equity from it.
As well as protecting the assets during your lifetime the trust can continue to work after your death. The trust can continue to hold assets safely within it and pay them out to in accordance with your wishes. Although there are no inheritance tax benefits for your estate, second generations onwards can benefit hugely in this respect. The trust itself can continue to protect your family for up to 125 years and is extremely flexible. This means that the benefits are not just for you but also for your children, grandchildren and even great grandchildren.
Is there any limit on how much I put into the APT?
You can put assets to the value of your Nil Rate Band (presently £325,000) into the APT, but anything additional to that creates an immediate charge to lifetime Inheritance Tax (20% of the value over the current Inheritance Tax nil rate band placed within the Trust).
However, after seven years more assets can be added, with a similar restriction. Once more you must be careful that this does not constitute a deprivation of capital and assets.
What type of assets can be placed within the APT?
Most people put their share of their home into the ATP. Sometimes savings can also be protected in the Trust. We can advise on this.
Practical aspects of the Trust.
Throughout your lifetime you retain full benefit from all the assets within the APT. You can also choose who your Trustees are from time to time, so you stay in control. You can live in your house and enjoy it. If you are not able to live in your own home the house can be sold or rented. Upon your death, assets within the APT can pass directly to the beneficiaries named in your Trust, or remain protected by the Trust, be loaned to your beneficiaries, then repaid to the Trust on their death or divorce. The Trust can then loan the assets out again. This protects the assets and has great IHT benefits.
Potential benefits of the Trust.
FINANCIAL PROTECTION FROM RELATIONSHIP PROBLEMS
Many people are concerned about the effects of remarriage after first death and the risk of “sideways disinheritance”, where assets are allowed to move out of the bloodline and benefit a non-family member. This trust, however, allows you to benefit your spouse, without the risk of losing assets to his or her new spouse or children in the future. By ring fencing your assets within the trust prior to marriage/cohabitation, you can make it much harder for these assets to be taken from you in the event of a relationship breakdown. This will also protect your children and grandchildren from losing their inheritance should their relationships fail in the future.
RING FENCING YOUR ASSETS
The trust provides better protection for everybody than a straightforward gift to your children would. The capital value of the property does not pass to them until after you have died and so if anything happens to any of them (for example divorce, bankruptcy or if they die before you), then your rights in relation to the property are protected and they have nothing that can be claimed against.
PROTECTION FOR YOUR DEPENDANTS WHO ARE RELIANT ON STATE BENEFITS
When assets are inherited by someone that is dependent on state benefits, receiving an inheritance will often result in the loss of this income. The trust protects the assets so your beneficiary will still qualify for state support. This is a particularly useful benefit of the trust where a beneficiary has a condition that will prevent them from supporting themselves in the future.
PROTECTION FROM INHERITANCE TAX
Assets held within an APT do not form part of the taxable estate of your beneficiaries. This means that assets passing to your son or daughter will not be taxed on their death, potentially saving your grandchildren from large amounts of inheritance tax. Your grandchildren will inherit from your trust, not from the estate of their parents.
It is, however, very important to remember that the APT is not a tax planning tool during your lifetime, and assets protected by it will not fall outside your estate for inheritance tax purposes. This is because you are named as the main beneficiary during your lifetime, and you therefore have what is known as a “reservation of benefit” in the assets held in the trust.
There are also restrictions on the value of assets that can be placed in the trust during any seven-year period. The trust itself will be registered with HMRC, and any tax return will be based on the assets held in the trust not your personal income.
On the 10th anniversary of the trust it will be assessed for a periodic charge. If the assets in the trust exceed the inheritance tax threshold on that date, a tax charge will apply. This is something that we can advise on in detail.
PROTECTION FROM CARE FEES
Many people feel that it is unfair to work throughout their lives only to have their home and savings at risk if they have to go into care in later years. A side effect of the APT is that assets properly held within the trust created at the right time can be protected from such care fees. It is essential that the trust be created at a time when it was not reasonably foreseeable that you would need to go into care.
Since the capital value of the property will no longer belong to you, if you go into care you can rightly say that you do not own your home, if you are asked. They may ask if you ever owned your property and when you gave it away. If they can show that you gave it away just to avoid payment of care fees, they can count it as yours anyway. However, they do have to show that this is why you gave the property away. The longer the gap between the gift of the property and you going into care, the harder it is for them to show this, especially if at the time of making the gift it was not reasonably foreseeable that you would go into care.
However, there are very strict rules against anyone deliberately depriving themselves of assets, and this type of trust cannot be used if the primary motivation is to avoid care fees.
In those circumstances the local authority may decide that a particular individual “deliberately deprived themselves of assets for the purposes of avoiding paying for care” and, in such a case, they would assess the contribution as if the settlor still had the assets.
If assets have been transferred (whether to a trust or outright) with the intent of avoiding using them to pay for care the local authority can try to recover theme from the person to whom the assets were given or put a charge over it.
Local Authorities can review medical and other records and so any pre-existing medical condition or even comments made while in discussion with Local Authority, social workers or carers, could become relevant at a later date.
However, if the APT was set up at the right time and in the right circumstances, for example when the person was in good health, living independently and with no prospect or intention of long-term care, then there should be no problem.
PROTECTION FROM BANKRUPTCY
If you are in business and would like to safeguard your personal assets from future business debts, the trust can keep them safe. However, you cannot protect assets that are already at risk. It does not prevent you from being declared bankrupt, but it can protect the assets within the trust itself. This also applies to subsequent generations of your family, preventing loss in the event of your children or grandchildren who suffer financial difficulties.
PROTECTION AGAINST ESTATE CLAIMS
If a claim is made against your state it can take many years to defend and cost thousands of pounds in legal fees. Assets held in and APT would normally not be subject to this type of claim.
NO PROBATE NEEDED.
You do not need Probate for the assets in the APT, which saves your family from potential lenghty delays, as well as the expense of probate fees.
LENDING RATHER THAN GIFTING ASSETS
The trust also allows you to “lend” your assets to your spouse after your death. These assets can then be repaid to the trust either on the death of your spouse, or on some other specified event (such as remarriage). The assets will then pass under the terms of your trust
There are various implications of doing this settlement, as follows:
You will no longer own the capital value of your property and so you would not be able to sell it and spend the money however you would like.
In summary, an APT can:
Protect assets for family members who can’t look after assets themselves
Protect assets from business creditors or divorcing spouses
Prevent an inheritance from affecting someone’s entitlement to state benefits
Provide for young children in an income tax efficient way
Provide for both a current spouse and children from an earlier relationship
Protect family members’ estates from large inheritance tax bills when they die
Reduce your spouse’s tax burden when you die.
We would be delighted to offer you a free initial meeting so that we can discuss what planning may assist you and your family. Please contact Christopher Seddon (cseddon@cheyneygoulding.co.uk) or another member of our team.
This article is for general commentary only and does not constitute legal advice. If you would like to discuss any of the issues discussed in this article, please get in touch.
Cheyney Goulding LLP, solicitors in Guildford, Surrey
