This page was last updated on 1 December 2020.
Inheritance Protection Trust
Trusts are useful for safeguarding your assets so you can pass on as much as possible to your family and loved ones in the form of inheritance.
This can be a difficult area to navigate because the terms used by solicitors and financial services are different.
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.
Topics that you will find covered on this page
What are trusts?
A trust is a legal arrangement where you give money or assets to one person to hold on behalf on another person, such as your child. Lifetime trusts, are created during your life, and wills trusts are set up in wills, and come into force on the settlor’s death.
Why are trusts useful for managing your inheritance?
There are two main advantages of trusts.
The first is the level of control, as you can control who gets what money and assets, and when, or delegate this power to people you trust, i.e. trustees. A second benefit is that for some types of trusts, the money and assets in the trust are not considered to be within your estate for inheritance tax purposes. Therefore, you may avoid some tax.
What is a beneficiary protection trust?
A beneficiary protection trust is any kind of trust designed to safeguard the interests of the beneficiaries.
Some solicitors call this family protection, property protection, or asset protection trusts. If you are considering this option, it is worth taking the time to contact the solicitor and ask them to explain the features of their scheme.
Why might you need to protect the assets for the beneficiary?
There are a number of ways that the inheritance you want to be passed to your children may be reduced, including:
- The cost of the probate process, which is taken out of the estate after your death
- Avoiding care fees, as if you or your spouse need to go into a care home, the value of your estate will be assessed to determine how much you have to pay. A trust may fall outside your estate.
- Trusts clearly set out an arrangement and plan. This may avoid the cost of defending a contested will, and the emotional issues this would bring to your family and children
- Where a beneficiary faces bankruptcy, they may need to pay this off with a share of money in the estate
- Divorce, where a former spouse claims entitlement to half of the inheritance
What are family protection trusts?
Family protection trusts are the marketing term generally used to refer to settlor interested lifetime discretionary trusts. This means you put your assets, perhaps including your house into the trust during your lifetime, where they are safeguarded, then you can leave the trust or it’s contents to your children or loved ones in your will.
Are family protection trusts a good idea?
This depends on the nature of your estate and what you are planning to happen to it. As such, it is a good idea to get legal advice based on your personal situation.
What are the benefits of family protection trusts?
There are many benefits to this type of trust, including:
- Control over your estate, so you can determine who the trustees are and who will benefit from the trust and when
- Useful for providing to children from previous marriages or grandchildren
- A trust can provide clarity about what will happen the estate, which can prevent dispute in your family
- Applying for a grant of representation can take time and be a lot of work, so having property pass in trust may avoid the need for probate
- The value of the estate your beneficiaries inherit will be reduced less by care costs and probate fees
- You can protect the inheritance from situations where beneficiaries get a divorce or have to pay creditors
- Trustees have a discretionary power, so if they are worried about how a beneficiary will spend the fund, they are not required to make consistent outright payments. This is useful if you are worried about a child’s marriage, and do not want their former spouse to get the money, your child is facing bankruptcy or the child has dependency issues.
- You can provide for different circumstances with the trust, such as by creating the right for a spouse to remain in the property, then after they die, the child gets the home.
- Possible tax benefits
- Trust arrangements can be flexible, so they work for you, like putting a share of your home into the trust
What are the disadvantages of family protection trusts?
There are also disadvantages to this type of trust:
- Fees in setting up the trusts. Services are likely to charge conveyancing costs when you move money and assets in and out of the trust, and you will have to pay professional trustees
- If done badly, there can be tax consequences, reducing the inheritance for children and your family
- You may not manage to avoid care and probate fees
- Possible difficulty filing annual returns and time in planning what to put into the trust
Who can set up an inheritance protection trust?
Anyone with capacity and over the age of 18 can set up a trust. You can find a solicitor to help on the law society directories.
What can go in a trust?
You can put most assets into the trust, including your home and personal possessions. However, for some assets, you should get legal advice, for example, a property that you rent out and are not living in may attract capital gains tax.
Is there a limit to how much money I can put in an inheritance protection trust?
You can put as much money as you want into a trust.
However, if you put in assets worth over your nil rate band, you will have to pay inheritance tax immediately. You can get independent legal advice to deal with this, for example only putting 80% of your house into the trust.
Who should I make a trustee of my family protection trust?
In most cases you will be a trustee of your own trust, as well as loved ones and family members you appoint. You also are likely to have professional trustees, like a solicitor.
Can I move assets in and out of a trust?
You have control as you will also be a trustee and the professional trustee will vote with you. You can, therefore, move money in and out of the trust however you want and transfer the assets back into your name.
Why would I set up a trust instead of making an outright gift to my children?
When estate planning, many people choose to give money to their children during their lifetime in order to avoid inheritance tax.
While there are advantages to this in terms of simplify and not paying tax if you give away less than your personal allowance, the main disadvantage is that you are giving over control of your wealth to your children, which can be a difficult situation to be in.
Often, people do not choose one option or the other, rather their solicitor will provide an asset management package with a combination of trusts, gifts, and investments.
Can an inheritance protection trust protect my inheritance against the threat of a lawsuit?
The benefit of a trust is that they can avoid the cost and stressful process of probate, which can on occasion lead to a lawsuit.
However, you cannot usually use a trust to write a child or dependant out of your will.
A spouse, former spouse, dependant or child can contest a will if the will does not make ‘reasonable provision’ for them under the Inheritance (family and dependants) Act 1975.
Can I use a trust to reduce care costs?
It is common for people to attempt to set up trusts in order to avoid care costs.
This is because if your house etc is in trust, it does not legally belong to you, therefore it will not be assessed by the council for your care costs.
However this may not work, so before creating a trust you should get independent legal advice. Otherwise, the cost of setting up the trust could be useless.
If I set up a trust, do I still need a will and lasting power of attorney?
Wills ensure your assets, including the trust, are passed onto your family as you want them to be on your death.
Setting up a lasting power of attorney is important so that if during your life you lose capacity, another person can make decisions about your finances that benefit you and reflect your wishes.
How do I create a life interest trust?
First, professional services will help you set up a trust which gives you the right to live in the property while you are alive and get any income. You must ensure your beneficiaries, e.g. your children, are the ultimate beneficiaries after their death.
Would you like some help setting up an Inheritance Protection Trust, or to have a free consultation on which type of Trust is likely to be best for your circumstances?
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