The pitfalls of asset protection trusts

Asset protection trusts – sometimes called family protection trusts or asset preservation trusts – are increasingly being marketed as a way to safeguard assets, reduce inheritance tax and protect property from care fees.

Used appropriately, they can play an important role in estate planning. However, they are not suitable for everyone and should never be entered into without specialist advice.

People often do not fully understand what happens when they place assets into a trust. For example, transferring a property into a trust means that legal ownership passes to the trustees. This can create difficulties if the circumstances of the person living in the property change – they may wish to sell their home to downsize or move closer to family. Disagreements between trustees can complicate the process and, in some cases, lead to costly disputes.

We often find that these issues first come to light when a property is being sold. Families may be surprised to discover that the trust affects what they can do with the property and who must be involved in the decision-making process.

Unexpected tax consequences

Asset protection trusts are sometimes promoted as a way of reducing inheritance tax liabilities. However, this is rarely straightforward.

Depending on the trust and assets involved, there may be immediate tax charges, ongoing charges during the lifetime of the trust, or further charges when assets leave the trust. Trustees are responsible.

In some situations, transferring a family home into a trust can result in the loss of valuable inheritance tax allowances that may otherwise have been available. There can also be capital gains tax implications if the property is sold in the future.

Unfortunately, we frequently meet clients who were never made aware of these potential consequences when the trust was established. In some cases, individuals have been encouraged to enter into these arrangements for inheritance tax planning purposes despite not having an inheritance tax liability in the first place.

Many people are also unaware that trusts must be registered with HM Revenue & Customs through the Trust Registration Service. Failure to comply with registration requirements can result in penalties of up to £5,000. We have seen cases where individuals were not advised of these obligations at all, leaving them exposed to unexpected complications.

Care fee planning

Perhaps one of the most common reasons people are encouraged to establish asset protection trusts is the suggestion that doing so will protect their home from being taken into account when assessing care fees. However, there is no guarantee that this will be effective.

A full review should be undertaken in relation to a person’s circumstances.

Avoiding Probate

Some clients have been advised that the trust they have created will avoid probate. Had a full assessment been undertaken, it may have been realised that this is not the case, and because a trust has been done, this has caused more complications for a probate application.

Choosing the right adviser

Another pitfall is that not everyone offering asset protection trusts is a regulated legal professional – some trusts are sold by companies using standard documents and sales-led approaches rather than providing tailored legal advice.

We are regularly seeing problematic trust drafting.

However, estate planning is not a one-size-fits-all exercise. What works well for one family may be entirely inappropriate for another. While some organisations are only paid when a trust is put in place, a solicitor's role is to advise on whether a trust is appropriate at all.

The cost of getting it wrong

Asset protection trusts can be expensive to establish and, if they prove unsuitable, reviewing or unravelling them can be both stressful and costly. Unfortunately, we regularly advise people who have paid significant sums to set up arrangements that do not meet their needs or expectations.

In some cases, further legal advice is required to review, amend or unwind an unsuitable trust, resulting in additional costs and unnecessary stress for families. Taking expert advice at the outset can help avoid these difficulties and ensure that any planning undertaken is genuinely in your best interests.

Trusts can be valuable planning tools in the right circumstances. However, they are complex arrangements that require careful consideration of family dynamics, tax implications and future needs.

If you are considering an asset protection trust, have concerns about advice you have already received, or need help reviewing an existing arrangement, we can help. Our experienced team will take the time to understand your circumstances and provide straightforward, expert advice that puts your interests first.

If you would like clear, tailored advice about your options, contact our Wills, Probate, Trusts & Estates team.