Family trusts are commonly used for a number of reasons, not least to help protect valued assets, such as the family home or hard-earned investments, for both existing and future generations.
But does a family trust protect assets effectively? What exactly are the pros and cons of a family trust within the context of asset protection?
Below we look at what a family trust means, and the type of protection a family trust can afford in circumstances where an individual is seeking to preserve their worldly wealth for their loved ones.
What is a family trust?
A family trust is a legal mechanism by which the settlor, ie; the person creating the trust, can transfer personal assets into a trust fund, to be managed and administered by appointed trustees for the benefit of the settlor’s descendants and relatives at some future point in time.
The family trust can be a living trust, taking effect during the course of the settlor’s own lifetime. The benefit here is that the settlor can also act as a trustee. As such, living trusts can be an excellent way to transfer wealth to family members while maintaining control over the assets.
The family trust can also be a testamentary trust, effective only upon the settlor’s death, albeit with the trustees to act in accordance with the terms of the trust deed, and thereby the settlor’s wishes.
In either case, with a living trust or a testamentary trust, where set up correctly using various different trust mechanisms, the trust can be used to help manage and protect the family assets.
Why set up a family trust?
One of the most common reasons for someone placing their assets into a family trust during the course of their own lifetime, typically the family home, is to avoid the cost of care home fees.
With fees averaging between £500 for residential care, to £1000 per week for nursing care, this trend reflects a growing concern amongst the elderly that there will be little or nothing left to pass onto future generations.
In the UK, care costs are means-tested by local authorities, whereby individuals with a certain level of assets, including the value of their home, can be required to pay for the full cost of their care.
For those, however, with assets falling below the relevant threshold, the local authority will either contribute towards, or cover the entire cost of, any care fees.
The theory, therefore, is that if you transfer your assets into a trust, you no longer legally own them, thereby avoiding these being brought into account when the local authority is assessing your means.
The benefits of living trusts also extend beyond this single scenario. For family business owners, trusts can play a vital role in the transition of a company or capital assets to the next generation.
There are also a number of different situations where a testamentary trust can be used to protect family assets, including but not limited to the following:
- Where a person remarries but, upon death, wants to prioritise their own children in their will.
- Where the benefit of an asset is to be split so that, for example, a spouse or partner receives income from it during their lifetime, but the settlor’s children are the ultimate beneficiaries.
- Where assets are earmarked for a beneficiary that may not have full legal capacity through either age and/or disability.
- Where a parent wants to earmark and protect assets following their death for the benefit of a child beyond the age of majority.
- Where assets are earmarked for a beneficiary being chased by creditors or a divorcing spouse.
- Where a person’s estate is likely to exceed the threshold for inheritance tax, currently set at £325,000 (or £500,00 including the new residence nil-rate band).
What protection does a family trust afford?
There are clearly advantages to transferring your assets to your children and grandchildren, but the question remains:
Does a family trust protect assets effectively?
At first blush, a family trust can provide an ideal way of protecting your assets, not least in seeking to protect your family home from the cost of care fees. Indeed, it is perfectly possible to protect one’s assets if they are transferred to a trust early enough.
Unfortunately, however, the reality can often be very different. If you are found by the local authority to have intentionally decreased your overall assets in order to reduce the amount you are charged towards the cost of care services provided, this will be classed as a ‘deprivation of assets‘.
Although your local authority must show that you knew you may need care and support in the future when you created a family trust, in the absence of any other reasonable explanation this is commonly inferred.
In such circumstances the local authority has a wide range of powers, not least they can treat you as if you still own the property and bill you on the basis of what’s known as your ‘notional capital’.
The net effect could be that, having legally given away your home, any remaining assets may be used up entirely to pay for care fees because you are deemed to still own your main asset.
Moreover, once your remaining assets have been exhausted, the local authority can take enforcement action against either you, or the person to whom any asset was transferred, in respect of ongoing care fees.
Sadly, the drawbacks of family trusts also don’t end there. Often in a bid to take advantage of the financial benefits, a prospective settlor may forget to take into account the most obvious risks. In particular, once an asset is transferred out of your name, you no longer have control over it and it is not always possible to rely on the new owner acting in accordance with your wishes.
Why take legal advice?
When you have worked hard throughout your life to acquire personal assets, including your home, it is important to plan how best to manage this wealth in later life, and ultimately protect it for your family.
Needless to say, however, this area of law can become a minefield, opening up the possibility of all sorts of practical and legal problems in the future. In many cases, the creation of a family trust is not in fact the best way to preserve your wealth and provide for your family, either during your lifetime or after you die.
By seeking expert legal advice, you can feel confident that you are not only taking legitimate steps to protect your family assets, but that the choices you make are the rights ones for you and your family, both financially speaking and otherwise.
In this way you can ensure that that you maximise the family assets that you leave behind to your loved ones, with minimal fuss.
A legal adviser can provide the following:
- Advice on how trusts can protect your assets
- Advice on the tax implications of setting up a family trust
- Help you to set up a trust tailored to suit your needs
- Drafting a trust deed on your behalf
- Address any disputes arising out of a family trust
- Advice on administering a trust or dealing with problems with trustees.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal advice should be sought.