Family protection trusts

Family protection trusts

This page was last updated on 1 November 2020

Family Protection Trusts

A family protection trust is a method you can use to ring-fence your assets from taxation, care fees, and other risks to your estate. 

This increases the amount you can pass on to your loved ones and family members.

Topics that you will find covered on this page

What is a Family Savings Trust?

This is a wide term that describes any trust that protects your family’s wealth from risks and erosion.

Generally, this refers to a settlor interested lifetime discretionary trust. You may also see this called an asset protection trust, inheritance tax protection trust, or home protection trust.

What is the purpose of a  family protection trust?

You can put your assets and property into a trust, which means that trustees will hold the property on behalf of the beneficiaries.

The money you have put in the trust will then sit outside your estate, so it is protected from many of the risks that might affect your estate.

Here is a short video about the benefits of using a trust to protect family assets.

What form of trust are family protection trusts?

Trusts wills and lifetime trusts can be either discretionary or fixed interest. Fixed interest is where the first beneficiary has the absolute right to the trust, for example, to live in the house and get income from the trust.

For a discretionary trust, the trustees can make a decision about how a range of beneficiaries will benefit from the trust. 

Usually, for a discretionary trust, the settlor will write a letter of wishes to the trustees, for example, stating the circumstances where a child will benefit from the trust.

Are family protection trusts a good idea?

Family protection trusts have pros and cons, and whether making one would be a good idea depends on the nature of your estate.

Hence, it may be useful to get legal or financial advice to discuss the advantages and disadvantages in relation to your estate. Often prospective clients can ask solicitors questions for free at an initial consultation.

family protection trusts

What could cause loss to my estate?

There are a number of ways the amount of money and property you can pass on to your family and loved ones can be reduced, including:

  • Tax, especially inheritance tax (IHT)
  • Care fees from the local authority means-testing
  • Claims on your estate by a child or other family member left out of the will
  • Sideways disinheritance, where on your death, your spouse enters another marriage and then passes on all your property to their new partner and their children, excluding your children.
  • Probate costs
  • If you give your property or capital as a gift to your children, the funds may be used if they get a divorce or face bankruptcy.

What can I do to protect against these risks?

Evidently, if you reduce these risk factors, you can pass on more to your family. Options include:

  • Transfer your assets to a child during your lifetime. This may have tax and care fee benefits. However, there may be unexpected Capital Gains Tax (CGT) and it may put you in a vulnerable position. In some circumstances, local authorities could consider this a deliberate deprivation of assets.
  • Immediate Care Cost Insurance Plan. This scheme protects clients against care home fees, but at a high cost and ignores the issues of tax and probate.
  • Family protection trusts/asset protection trusts.

"A family protection trust will be particularly good for couples who want to make sure their partner can keep living in the family home, but on the basis that their estate will eventually be passed on to their children."

Who should think about making a family protection trust for their estate?

Anyone over 18 can set up family protection trusts.

A family protection trust will be particularly good for couples who want to make sure their partner can keep living in the family home, but on the basis that their estate will eventually be passed on to their children.

What is the best trust for asset protection?

There is no one trust form that is clearly the best, as the things you would consider advantages depend on the size and complexity of your estate and what you need the trust to do. However, one key decision is with you want a wills trust or a lifetime trust.

Why would I use will trusts?

A Wills trust will only work after your death. This gives you more control over your inheritance, can protect your funds against care fees of the surviving spouse, and may distribute your inheritance tax (IHT) bill over time, instead of all being payable at one point on your death.

Why would I use a lifetime trust?

Lifetime trusts, unlike trust wills, come into force immediately. You can keep using the assets, but you have more control over what happens to them, and they are protected from loss from care fees, etc.

Who do I make trustees?

Often a trustee will be a family member or close friend. Alternatively, you can use professional trustees, like your solicitors, who will know what you want to get out of the process, so can vote in your best interests.

Can I use a family protection trust to protect against care home fees?

The local authority will assess your estate to see if you have to cover your own care costs.

The rules are that if you have funds of over the £23,350 limit, you have to contribute to care costs.

A family trust will help many people by meaning that your assets fall outside your estate, so they are not included in this assessment.

What are the issues with using a family protection trust to avoid residential care fees?

By law, you cannot use a trust with the sole purpose of avoiding paying for residential care. This is likely to be an issue if your health was already deteriorating when you transferred the funds. Deliberate deprivation of assets could lead to the council assessing the trust as part of your estate anyway.

What advantages are there to making a family protection trust?

There are a number of pros of this type of trust:

  • Control over what happens to your assets, and more secure knowledge in who will get what
  • For families, you have the ability to make a provision where your spouse can keep living in the residence as long as they need, but ownership will eventually pass onto your child
  • Possible inheritance tax purposes and benefits in reducing care fees
  • Less likely that a family member can make a claim on your estate
  • Less risk of losing your house etc than the alternative of making a gift to a child
  • A flexible solution, especially compared to intestacy rules for married couples
  • May avoid the need for the probate process, so the administration of the estate is easier

What are the disadvantages of a family protection trust?

It is important to be aware of the potential cons of this option:

  • Price for the work of a solicitor and any fee for conveyancing and administration of your estate
  • Questions about deprivation of assets
  • Possible tax disadvantages, especially CGT
  • Concern over solicitors and financial services staff  selling to their clients where trusts will not, in fact, benefit them
  • You need to make sure you trust your trustee as they have a lot of power
  • Unlikely to avoid probate fees
  • Complex trust administration

What happens to a lifetime trust after my death?

There are two options, and the benefit of a trust is that it gives you control. First, the contents of the trust could pass on to your beneficiaries, such as a child. Second, you could pass on the trust itself to your beneficiaries, so they can keep on getting the benefits of the trust.

How much does a family protection trust cost?

A family protection trust will cost anywhere between several hundred for a simple estate, to thousands for a more complex trust arrangement. Clients may face additional costs that are not included in the initial bill, including:

  • Registering the trust with HMRC
  • Conveyancing fees for the transfer of assets into and out of the trust
  • Setting up a bank account for the trust funds
  • Appointments  and review with a solicitor
  • Trust management

How does the tax work for a family protection trust?

For a lifetime trust, it is important to consider the tax implications so you do not face the problem of an unexpected tax bill.

Inheritance Tax

There may be an immediate charge of 20% for a trust with a value of more than the nil-rate band, which is £325,000. Further, there may be a bill of 6% on the trust’s ten-year anniversary, and a charge of 6% pro-rata when you close the trust or transfer assets out.

Capital Gains Tax

If the trustee were to sell any of the trust property, or the trust is liquidated, then CGT may be payable. This is worked out in the same way as it is for an individual, but the annual allowance is less, with a few exceptions.

Income Tax

If an income is generated from funds or assets in the trust, for example by renting out a second home, then there may be income tax liability.

How do I make a trust?

A solicitor can give you help and advice on what the right trust is for you, and can make sure their clients use the correct legal details. The Law Societies have a database of many solicitors who have expertise in this area of the law:

England and Wales: https://www.lawsociety.org.uk/

Northern Ireland: https://www.lawsoc-ni.org/information-for-banks-lenders

Scotland: https://www.lawscot.org.uk/

Would you like some help setting up a Trust or to have a free consultation on which Trust option is likely to be best for your circumstances?

You can contact us in one of 3 ways:

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Article author

Katy Davies

I am a keen reader and writer and have been helping to write and produce the legal content for the site since the launch.   I studied for a law degree at Manchester University and I use that theoretical experience, as well as my practical experience as a solicitor, to help produce legal content which I hope you find helpful.

Outside of work, I love the snow and am a keen snowboarder.  Most winters you will see me trying to get away for long weekends to the slopes in Switzerland or France.

Email – katy@helpandadvice.co.uk

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Learn about different types of Trusts that could also help you

Property Protection Trusts

This is a trust you put in your will so that the surviving spouse can continue living in your property, but the deceased’s share of the property is kept separate.

Interest in Possession Trusts

This is a trust where the trustee must give all the trust income to a beneficiary as the income is generated, except for trust expenses.

Inheritance Tax Planning Trusts

By putting your money and property into a trust, you can maximize your tax-free allowance and reduce the amount of inheritance tax you pay.

Life Interest Trusts

A life interest trust is a trust written into a will. This means that the trustees hold the assets in the trust on behalf of the beneficiaries. Read more about them.

Asset Protection Trusts

The benefits can include reducing the care fees payable to the local authority and have tax advantages. 

Home Protection Trusts

Protecting assets in a trust is a good option for wealth management and getting control over who inherits from your estate.

Inheritance Protection Trusts

The term ‘inheritance protection trust’ could describe many different types of beneficiary trusts. However, it usually refers to a trust for healthy, capable beneficiaries in a will.

Family Protection Trusts

A family protection trust is a method you can use to ring-fence your assets from taxation, care fees, and other risks to your estate. 

Estate Planning & Trusts

Estate planning involves considering what to do with a person’s money and assets after they are deceased.

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