What is a property protection trust?
Creating a property protection trust (sometimes called an asset protection trust, a family protection trust or a property preservation trust) through your will allows someone to benefit from your estate after you have died as if he or she owned the assets, without actually inheriting it. The value of his or her estate is therefore kept minimised.
In law, there is no such thing as a property protection trust. The mechanism is a standard trust where a beneficiary has a life interest. The name is used in marketing, presumably because the idea of 'protecting' your assets from the state is appealing enough to want to pay higher fees for the writing of 'special' terms into your will by a professional.
A life interest trust is typically used to allow someone to benefit from assets, without owning them. For example, if you have a disabled child who doesn’t have mental capacity to manage his or her financial affairs, you may opt to place your estate in a trust, managed by other family members for your child’s benefit. Your wealth enables your child to be cared for, with the trustees making the decisions about how best your estate should be used to do so.
The same structure is used to 'protect' property from means tested fees. Your husband or wife never inherits the assets, so they never count as part of his or her estate from which fees can be paid, yet he or she can benefit from them as if they were owned. On his or her death, the remaining estate passes to other beneficiaries who do inherit it.
Why it is used
If you have children and you die without having made a will, then your husband or wife automatically inherits the first £250,000 of value in the estate and half of the remainder. The children receive the other half of the remainder.
Many couples make wills that transfer all of the estate to the other, if the other survives, otherwise all to children.
The intention in both cases is for the survivor to be able to live comfortably for the rest of his or her life, before the joint wealth that both parents have accumulated over their lifetimes is passed on to the next generation.
In these situations, the surviving spouse will find himself or herself much wealthier as an individual as a result of the death of his or her husband or wife.
The issue here is not so much that the surviving spouse is more likely to have assets over the threshold at which he or she must pay for elderly care (because that threshold is relatively low), but rather that he or she has more wealth that can be used to pay such fees before falling back below the threshold.
Many people feel that care fees erode what would otherwise be the children’s inheritance.
Example
Alf and Brenda have assets worth £300,000 together, primarily in the capital value of their home. At this level of wealth, their joint estate does not qualify for inheritance tax at any rate.
They wish to leave as much as possible of their estate to their son Charles.
Alf dies before Brenda, leaving her his share in the home and all his other assets.
After 2 years of continuing to live at home, Brenda needs care and moves to a nursing home. Fees are slightly less than the UK average at £30,000 per year. Her new level of wealth means that she may have to pay such fees for just over 9 years (before her wealth drops below the current threshold for paying fees of £23,250).
She lives for 7 more years, and Charles inherits £90,000.
However, had Alf placed his assets in a property protection trust, Brenda would still have been able to live in the family home, but the value of her estate would have been still £150,000 just after Alf's death. Care costs for 7 years would have reduced the value of her estate to £14,250 (the level at which your local authority pays all care costs).
However, Charles would have inherited that £14,250 plus the £150,000 left by Alf in trust. So Charles would be £74,250 richer.
How much does a Property Protection Trust cost to set up?
Solicitors and will writers often charge from £500 to £4,000 to set up a protective property trust.
The cost tends to be greater if the trust comes into existence during your lifetime. Lifetime trusts require deeds separate to your Will to be drafted and additional documents generate higher costs.
Advice is a large component of the total cost
A great proportion of the cost may be attributed to providing legal advice. Tailored advice is charged on a per hour basis, so a two hour consultation with your solicitor might cost you £400. A further hour of discussion once the wording has been written to make sure that you understand the implications might cost and additional £200.
Ensuring that your share of the property can be placed in trust
If you hold your property as joint tenants, then 'severing' the joint tenancy so that each of you owns your share of the property as tenants in common will also come at a cost. However, it is relatively simple to do using a tenants in common agreement.
Bear in mind that an online search at the Land Registry (to identify how legal title is held and therefore whether the work needs to be done) costs £3 currently and can be done by anyone. Completing Form SEV and sending it to the Registry takes ten minutes.
A solicitor will want to carry out this work (they would be negligent if they failed to do so and later there was a problem). However, it may account for £200 to £400 of the total cost.
However, you can do this work yourself and show your solicitor a copy of the search as evidence that they do not need to do the work.
Value based charging rather than time cost based charging
It is common with the will writing industry to charge for the additional of a trust not based on how much work the solicitor or will writer does, but on perceived value to you the client.
By including a protective property trust in your will that qualifies for the Residence Nil Rate Band (a tax relief), your beneficiaries might save tens of thousands of pounds. In the example above, Charles saves £70,000 on a reasonably modestly valued joint estate of £300,000.
This advantage will be conveyed to you strongly during your consultation meeting because saving tens of thousands of pounds later makes the relative cost of a few thousand pounds for drafting your will worth it.
The right words to create a lifetime trust take very little time for a will writer to find. Using will precedents (template wording), the establishment of a trust through a will (even reasonably complex ones) might take 30 minutes provided that the requirements are understood.
A flexible life interest trust (known as a FLIT) usually is more expensive. This type of trust allows the trustees to convert the trust into a discretionary trust during the lifetime of the life tenant so that the life tenant can spend the capital of the property if required. For example, the beneficiaries might decide to fund long term care fees by using an equity release scheme on the home that also allows the surviving spouse to continue living in the property.
Using a Net Lawman will template and our document review service or our drafting service (see below for the link), you can create a Will with a property protection trust within it for the same price as an hour of solicitor's time. Our charges are based on time, not on the saving your estate might make.
Ethics and legality
Property protection trusts created through wills
The reason to create these types of trusts through your will is to prevent the wealth of the person who dies first from being used to pay for care fees (whether residential care or medical care) for the spouse. Your children inherit a greater value.
Other mechanisms, such as discretionary trusts, have been used widely in the past for similar purposes – to avoid inheritance tax (although that loophole is now closed).
Trusts created during your lifetime
Some solicitors and will writers may encourage you to set up a property trust during your lifetime so that you can also avoid care fees yourself.
Is it ethical and legal?
Whether using these is ethical is very much a personal opinion.
Setting up such trusts is certainly legal.
While it is lawful and possible to create an asset protection trust both during your lifetime and through your will, it may not always have the effect you intend.
The Net Lawman opinion is that as a result of current financial pressure on the UK care system, local authorities are more likely to scrutinise and challenge any scheme or device that leads to a 'deprivation of assets' for someone who needs care.
Deprivation of assets means that you have taken an action to reduce the value of your assets in order to deprive the local authority of fees to which they would otherwise be entitled.
If it is reasonably clear that the motive for creating the trust was to avoid paying care fees then a local authority can look through the trust and take into account the assets in means testing.
Your motive in creating this type of trust can't always be proved in court. However, what will be taken into consideration is:
If the trust is made during your lifetime to protect you from paying for care, then whether it was reasonable to believe that you would need personal care. The argument is likely to be strengthened if you have continued to live in the famly home after the trust is created.
If the trust arises from your will, whether it was reasonable to believe at the time you wrote your will that the life interest beneficiary would need care.
A local authority is more likely to apply for power to look through a trust created during your lifetime because the purpose is more likely to be for deprivation.
However, if you write a will before care might need to be considered for your husband, wife or partner, it might be difficult for a local authority to claim that the primary reason for leaving assets in a trust was to avoid care fees. There are after all other legitimate reasons to leave gifts in a trust with a lifetime beneficiary.
Other considerations
There have been cases in court regarding high pressure selling of such schemes to vulnerable adults.
There have also been cases of mis-selling, where a will writer led a client to believe that the property protection trust would certainly protect his estate, in a situation where clearly it would not.
There have also been situations where solicitors have written wills that nominate themselves as trustees. In that position, they can charge further ongoing fees for their work.
Why would you use a trust with a life interest?
Leaving assets in trust with a lifetime beneficiary may give you more control of them than leaving them directly.
A common use of such trusts is where you live together unmarried with a partner or where you have remarried.
If you leave the property directly to your partner or spouse, he or she decides what happens to it through his or her will (or possibly through the laws of intestacy if he or she doesn't make a will).
This can become an issue if you have children from earlier relationships who may not be in the will of your spouse or partner (particularly if he or she remarries after your death). You are likely to want to support your surviving partner or spouse while they are alive, but you also want to make sure your children inherit.
The solution is a trust with a lifetime beneficiary.
Alternatives
The idea behind a property protection trust is to give benefit of use without ownership.
One alternative to creating a trust is to give your estate to your beneficiaries (such as your children) during your lifetime, with an agreement that they will use them to look after your spouse.
Provided that it is clear that you are not giving the assets away just before you need care (and thus depriving the state for your own care), this could be a viable alternative. However you need to think about:
if the people to whom you give your estate divorce, the assets would be divided equally between them (divorce has no effect on a will but once the assets are distributed they may be split between a divorcing couple)
there may be inheritance tax consequences if you die within a certain time period after the gift is made
there may be capital gains tax consequences if the property is not your principle home
the people to whom you give your estate may not act as they promised: they may not give the same amount of care to your spouse as you hope; or an unforeseen event may leave them bankrupt
(Video) How trusts can help to protect family assets
Making a will
Net Lawman offers a free online will service that allows you to create trusts, should you want to do so.
The service is free because we believe that everyone should be able to make a will regardless of financial situation.
We also provide some of our more straightforward templates absolutely free with no catches or conditions. We offer nine templates (three free) in total that together cover thousands of possible variations of wishes. There will be one to suit your situation.
FAQs
What are some of the disadvantages of using trusts for estate planning? ›
One major disadvantage is that they can be complicated and expensive to set up. Although the idea of avoiding probate costs is attractive, it's important to realize that trusts come with their own costs, including legal fees and compensation for the trustee, if needed.
What type of trust is best to protect assets? ›An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren't considered personal property. This means they're not included when the IRS values your estate to determine if taxes are owed.
What are the advantages of putting property in a trust? ›- Trusts avoid the probate process. ...
- Trusts may provide tax benefits. ...
- Trusts offer specific parameters for the use of your assets. ...
- Revocable trusts can help during illness or disability – not just death. ...
- Trusts allow for flexibility.
Using a trust entails legal expenses and the cost of transferring property titles to the trust. There also are expenses for ongoing asset management and legal compliance. In the event of both a will and a trust, generally a trust will take precedence over a will.
What are the disadvantages of a protective property trust? ›The disadvantages of a property protection trust
– They can be expensive to set up and maintain a trust, as you need to pay legal fees and other costs. – If a trust is not set up and administered correctly, it could lead to problems with the inheritance tax.
Revocable Living Trust - Do You Need One? Suze Orman explains why everyone needs a living revocable trust to protect their health and finances.
What is the downside of an irrevocable trust? ›The downside to irrevocable trusts is that you can't change them. And you can't act as your own trustee either. Once the trust is set up and the assets are transferred, you no longer have control over them.
What trust Cannot hide assets? ›IRREVOCABLE TRUST
Another method to protect your privacy would be to use an irrevocable living trust. An irrevocable trust is harder to change once established, but it can be used to protect both your identity and your assets from future creditors and lawsuits.
Family asset protection is important because it helps secure your family's future and financial stability. It also gives them peace of mind knowing they can rely on their inheritance, even in times of uncertainty or sudden changes in circumstances.
Why do rich people put their homes in a trust? ›To manage and control spending and investments to protect beneficiaries from their own lack of experience, poor judgment, immaturity or tendency to waste or spend excessively. To reduce income taxes and to shelter assets from estate and transfer taxes.
Do you have to pay taxes on money inherited from a trust? ›
If you receive some income from either a trust or from the estate of a deceased person, you may have further tax to pay on the income or you may be able to claim a tax refund. In some cases you are taxable on trust income even if you do not receive it, but you can follow the guidance below as if you had received it.
What is the average trust fund amount? ›In the U.S., fewer than 2% of people are left with trusts from their parents. The median amount that is passed through trusts is $285,000. The average amount that is held in trusts is $4,062,918.
What is the best trust to have? ›- Revocable Trusts. One of the two main types of trust is a revocable trust. ...
- Irrevocable Trusts. The other main type of trust is a irrevocable trust. ...
- Credit Shelter Trusts. ...
- Irrevocable Life Insurance Trust.
One of the most significant disadvantages of a trust is its complexity. Generally, trusts use very specific language, which can be difficult to understand for those who are not often involved in estate law. Because trusts were once written in Latin, there are many legal terms that still carry over.
Why would I need a trust in my will? ›Trusts in wills are most frequently used to protect property, and they're widely used when providing for children in a will or when taking care of vulnerable loved ones.
Are family protection trusts a good idea? ›Family Protection Trusts are a valuable tool for individuals and families to protect their assets from future events such as divorce, bankruptcy or death. Such trusts can hold various types of assets, including cash, shares, real estate and other investments.
What powers does a trust protector have? ›- determine or negotiate trustee compensation;
- remove and replace the trustee;
- fill trustee vacancies;
- change the governing law or situs of administration; and.
- approve trustee accountings and waive trustee liability.
The answer is to make a Property Protection Trust Will, leaving his/her share of the house to his/her children either absolutely or in a Trust via the Will. The children will then be certain to inherit their parent's legacy on the death of the first or second partner.
Does Dave Ramsey recommend a trust? ›Do I Need a Living Trust? While there's not a one-size-fits-all answer, the vast majority of people can get by without using a living trust. Dave Ramsey says, “A simple will is perfect for 95% of the population.” In other words, unless you have a really big estate, a simple will works just fine.
Who is the best person to manage a trust? ›A trustee takes legal ownership of trust assets, manages the trust, and is responsible for carrying out the purposes of the trust. Beneficiaries, people or entities named to receive trust assets, will depend on the trustee for legal expertise, financial savviness, prudence, objectivity, and empathy.
What is the most popular type of trust? ›
With that said, revocable trusts, irrevocable trusts, and asset protection trusts are among some of the most common types to consider.
Who would want an irrevocable trust? ›The only three times you might want to consider creating an irrevocable trust is when you want to (1) minimize estate taxes, (2) become eligible for government programs, or (3) protect your assets from your creditors.
Why do people use irrevocable trusts? ›An irrevocable trust is a type of trust typically created for asset protection and reduced federal estate taxes. They are designed so the creator of the trust (the grantor), can designate assets of their choosing to transfer over to a recipient (the beneficiary).
Can the IRS break an irrevocable trust? ›This rule generally prohibits the IRS from levying any assets that you placed into an irrevocable trust because you have relinquished control of them. It is critical to your financial health that you consider the tax and legal obligations associated with trusts before committing your assets to a trust.
What is the difference between an asset protection trust and an irrevocable trust? ›An asset protection trust is a highly specialized type of irrevocable trust that can insulate your assets from creditor actions, including lawsuits. This type of trust can help you preserve wealth for future generations while also avoiding probate, though it may not be right for everyone.
What does Put not your trust in money but your money in trust? ›“Put not your trust in money, put your money in trust”, per Oliver Wendell Holmes, Sr. is embraced by estate planning lawyers and shows that trusts are not a passing fad. Everyone needs an estate plan, and when you understand what a trust does, your plan should probably include one, at least conditionally.
What is a home protection trust? ›A Home Protection Trust is designed to allow the owner(s) of a property to keep control of, and continue to reside in a property whilst adding a degree of protection against unforeseen future complications.
Can property left in trust be sold? ›The Trustee to sell the property would need their solicitor to confirm that legally they are allowed to sell the property.
Can I protect my property by placing my house in trust? ›With your property in trust, you typically continue to live in your home and pay the trustees a nominal rent, until your transfer to residential care when that time comes. Placing the property in trust may also be a way of helping your surviving beneficiaries avoid inheritance tax liabilities.
Should I put my finances in a trust? ›There are several benefits of creating a trust. The chief advantage is to avoid probate. Placing your important assets in a trust can offer you the peace of mind of knowing assets will be passed on to the beneficiary you designate, under the conditions you choose and without first undergoing a drawn-out legal process.
How do wealthy use trusts? ›
Trusts are regularly used by wealthy families to minimize taxes and transfer assets to heirs. Trusts are also used to insulate wealth from frivolous and unfounded lawsuits and sometimes from divorcing spouses.
How do trusts avoid taxes? ›For all practical purposes, the trust is invisible to the Internal Revenue Service (IRS). As long as the assets are sold at fair market value, there will be no reportable gain, loss or gift tax assessed on the sale. There will also be no income tax on any payments paid to the grantor from a sale.
How do rich people protect their money? ›For more than 200 years, investing in real estate has been the most popular investment for millionaires to keep their money. During all these years, real estate investments have been the primary way millionaires have had of making and keeping their wealth.
Can I put my house in my children's name to avoid inheritance tax? ›Gifting your home
The good news is that you could gift your home to your children and if you lived for at least seven years after the gift was made, it would be removed from your estate and no inheritance tax would be due.
Money taken from a trust is subject to different taxation than funds from ordinary investment accounts. Trust beneficiaries must pay taxes on income and other distributions that they receive from the trust. Trust beneficiaries don't have to pay taxes on returned principal from the trust's assets.
Can I gift my house to my children? ›One of the most common forms of property ownership transfer is to gift a property to your children. This is a relatively common way to minimise the impact of inheritance tax. It is important to remember that there can be financial and other consequences to gifting property to your children, however.
What is considered rich? ›Based on that figure, an annual income of $500,000 or more would make you rich. The Economic Policy Institute uses a different baseline to determine who constitutes the top 1% and the top 5%. For 2021, you're in the top 1% if you earn $819,324 or more each year. The top 5% of income earners make $335,891 per year.
What is the average inheritance in the United States? ›According to the most recent data available from the Federal Reserve, for individuals who received an inheritance, the median value received from families with a parent with a college degree was $92,700. This is $16,500 higher than the median value received from families that did not have a parent with a degree.
How much is a Social Security trust fund? ›| 2021 report | 2022 report | |
|---|---|---|
| Trust fund reserves | ||
| Amount at beginning of report year (in billions) | $2,908 | $2,852 |
| Amount at beginning of report year (as a percentage of report year outgo) | 253% | 230% |
| Projected year of peak trust fund reserves c | 2021 | 2022 |
Living Trusts vs.
We recommend living trusts to our clients because of the tremendous benefits they offer over wills, the more traditional estate planning tool. The biggest benefit of using a living trust instead of a will is that living trusts avoid probate.
Is a trust better than inheritance? ›
The bottom line is that a trust provides far more potential asset protection than an outright inheritance. Depending upon the needs of your family, an estate planning attorney can create a trust for you that protects assets and preserves them for your beneficiaries.
Where is the best place to set up a trust? ›While definitions of “best” may vary, there is a general consensus that seven states stand out in terms of favorability: Alaska, Delaware, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming.
What is the best type of trust to protect assets? ›An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren't considered personal property. This means they're not included when the IRS values your estate to determine if taxes are owed.
What assets should not be in a trust? ›- Retirement assets. While you can transfer ownership of your retirement accounts into your trust, estate planning experts usually don't recommend it. ...
- Health savings accounts (HSAs) ...
- Assets held in other countries. ...
- Vehicles. ...
- Cash.
If your assets amount to a small amount of money, then an outright inheritance is likely your best bet. It's the more cost-effective and simplest alternative. On the flip side, if your assets amount to a significant amount of money, then a trust may be your best option.
What are the disadvantages of trusts? ›One of the most significant disadvantages of a trust is its complexity. Generally, trusts use very specific language, which can be difficult to understand for those who are not often involved in estate law. Because trusts were once written in Latin, there are many legal terms that still carry over.
What are the disadvantages of a family trust? ›Disadvantages of a Family Trust
You must prepare and submit legal documents, which the court charges a fee to process. The second financial disadvantage of a family trust is the lack of tax benefits, especially when it comes to filing income taxes. When the grantor dies, the trust must file a federal tax return.
The major disadvantages that are associated with trusts are their perceived irrevocability, the loss of control over assets that are put into trust and their costs. In fact trusts can be made revocable, but this generally has negative consequences in respect of tax, estate duty, asset protection and stamp duty.
What are the disadvantages of a land trust? ›However, there are three disadvantages with land trusts: First, they do not offer great Asset Protection. Second, they are costly to prepare and administer. Lastly, financing and managing the trust properties is also more cumbersome.
What are the pros and cons of property trusts? ›The advantages of placing your house in a trust include avoiding probate court, saving on estate taxes and possibly protecting your home from certain creditors. Disadvantages include the cost of creating the trust and the paperwork.
What type of trust is best? ›
- Revocable Trusts. One of the two main types of trust is a revocable trust. ...
- Irrevocable Trusts. The other main type of trust is a irrevocable trust. ...
- Credit Shelter Trusts. ...
- Irrevocable Life Insurance Trust.
Most experts would say that it is not enough to put assets into a family trust and expect that will protect your assets if your relationship fails. It's a far better thing to be brave, talk through with a new partner what would happen in a separation, and sign a contracting-out agreement.
How much does a family protection trust cost? ›It can be expensive and time-consuming, often taking 9-12 months to complete. Most people will use their bank or solicitor, who on average charge 3% of the value of the estate to carry out the work. For any assets you hold in in trust, there is NO probate.
Why is trust a weakness? ›Being too trusting can be a weakness if you allow the toxic actions of a few to negatively impact you or your team. All it takes is shifting your view and actions, so that you don't live in a rainbow coloured world where everybody is lovely and gets along well.
Who you should not trust? ›- People who spread secrets.
- People who talk badly about others.
- People who lack self-awareness.
- People who lack empathy.
- People who can't make up their minds.
- People who don't take no for an answer.
- People who act differently around others.
Trust Issues
You may feel like your partner isn't telling you everything. Or it might seem like there is much you don't know about him (or her), and that he is unwilling to share. If you feel like your partner has a hard time trusting you or telling you the truth (or vice-versa!) it's a serious red flag.
A trust is a legal arrangement where you give cash, property or investments to someone else so they can look after them for the benefit of a third person. For example, you might put some of your savings aside in a trust for your children.
Who owns land held in trust? ›Trustees. The trustees are the legal owners of the assets held in a trust. Their role is to: deal with the assets according to the settlor's wishes, as set out in the trust deed or their will.
Can trust land be sold? ›The simple answer to the question, 'Can a private trust sell its property in India? ' is yes but it comes with certain restrictions. The Delhi High Court has stated that prima facie, no trust property can be held, sold, mortgaged, or exchanged without obtaining prior permission from the court.