04 November, 2016
Asset Protection Trusts can be a useful and effective way to safeguard the family assets and look to preserve them for future generations. There has been much media coverage in recent years of this type of trust with articles running in a number of national newspapers and as a result solicitors are seeing a high influx of client's giving instruction in this respect. However, not all the headlines are positive and there are certain issues that client's should consider before deciding to take this step.
As people grow older they frequently wish to gift their home to their children - this can be motivated by a number of factors:-
- Children willing to give parents financial assistance to meet outgoings and costs in return for the security of knowing the property has been transferred to them.
- The property may still be the home of the grown up son or daughter and the parent wishes to give the child peace of mind the property will pass to the child on their death.
- The parent may wish to continue to reside in the property but pass the responsibility of looking after the property to their children and recognise this responsibility with a transfer of ownership.
However, it is important to be aware from the outset that this is not an effective gift for Inheritance Tax purposes as it amounts to a gift with reservation. There are also dangers to be aware of in simply gifting your property outright to your children being;
- Financial misfortune - if the child was declared bankrupt or accrued debts the property could be pursued as their asset by creditors.
- Matrimonial breakdown - the property would be classed as an asset belonging to the child and possibly form part of their divorce proceedings .
- Unexpected death of child - the property would form part of the child's estate and a sale of the property could be forced.
- Breakdown in relationship with child - although at the time of transfer relations are good, this may change in the future and the child could insist the property be sold.
A better solution can often be to settle property into a life interest trust.
Powers under this type of trust are very wide and enable the donor to:-
- Sell the property at any time and use the sale proceeds to buy a replacement property. If there are surplus proceeds these can be invested in the trust and provide an additional income to the donor.
- The donor has the comfort of knowing they can remain in the property for as long as they may need and the children are reassured that under the terms of the trust, on death of the parent, the property or proceeds derived therefrom will ultimately be theirs.
- If the donor was at some point unable to continue to live in their property and required nursing home care, a life interest trust may effectively enable the property to be ring-fenced from any assessment made by the Local Authority to establish how the elderly person will fund their care. However, each person's circumstances are different and need to be considered in this respect. The length of time that an asset has been in trust does have a significant effect and it is very important to be aware that the Local Authority can, in particular circumstances, disregard the trust under the deliberate deprivation of assets rules.
It is highly advisable to seek legal advice from your solicitor who can sit down with you face to face and give advice tailored to your needs in respect of this type of trust. Solicitors are regulated ensuring that fees are fair and in line with industry standard. The Forbes Wills, Probate, Tax and Trusts Department advises on all types of trusts including life interest trusts and whether they are suitable to your situation. For further information please contact Kirsty McNulty, solicitor on 01772 220022.