Do you have a “Family Protection Trust” or “Probate Preservation Trust”?

GEPP

4 July 2024

By Marc Dorsett

Something we are seeing a lot of over the last year or so are people who have set up a “Joseph Bloggs Family Protection Trust” – that is almost always the title, but it can be the “Joseph Bloggs Wealth Preservation Trust” or “Joseph Bloggs Probate Preservation Trust” or variations of these.  Some of these trusts were created by firm’s that no longer exist, but others are by firms that are still operating.

Every case that has come to us was originally sold on the basis that it will save the individual/couple a small fortune in probate fees/inheritance tax/care fee protection.

The reality of trusts

Before we go too much further into this, it is important to note that trusts are not evil. A trust can be an excellent way of keeping assets safe or for tax planning in certain situations. In the right circumstance, and for the right client, a trust can be the way to go. It is also worth mentioning that just because a trust has a title such as that in the first paragraph, it doesn’t necessarily mean that it doesn’t work.

Trusts are not also just for the hyper-rich to avoid paying millions of pounds in inheritance tax. Don’t believe everything you read in the tabloids about trusts.

Anyway, back to topic.

Common issues with these trusts

One of the problems with some of these trusts is that clients were persuaded that the trustees, and executors where there is a will, should include the professional firm creating the documents.  Often, the only trustees named were the professional firms themselves.

Clients then, typically, transferred the family home into the trust. With couples, each had a trust which usually had half of their home in each. The cost for each trust was usually around the £3,000 + VAT mark.

Unfortunately, many clients were unaware what having the trust actually meant and the tax rules that applied  before they signed up. The trusts are mainly created as non-qualifying life interest trusts as they have the settlor, the person setting up the trust, as the main beneficiary.

One of the main problems, from a tax perspective, is that the residence nil rate band (RNRB) can’t be used if property doesn’t pass to a lineal descendent. Most of the people that signed up to these trusts only had the one house, their home, and the loss of RNRB can lead to additional IHT being paid.

The value of half the house is still included in the settlor’s estate for IHT purposes due to the gift with reservation of benefit rules, but without the ability to use the RNRB.

In addition, there is the potential ten-year anniversary charge that many of the trusts will need to consider. With property prices increasing substantially in the last few years, what may not have been taxable when set up may well have an IHT charge to pay and forms to submit to HMRC. As a rough guide, if the value of the assets in the trust at the 10 year anniversary are over £260k forms will be needed, and tax payable if the value exceeds £325k.

This ten-year charge is also catching people out as they may not have been aware of it when creating the trust. There are also potential charges if the trust assets are distributed out to beneficiaries.

Control issues

Potentially worse than the tax situation is that you could find that you don’t own your home. In some circumstances, the person creating the trust has been persuaded to step off and leave the professional firm as the only trustee. This means that they have the legal ownership and control of the assets in the trust, namely the home.

Trusts also now need to be registered with HMRC on the Trust Registration Service and there is a legal requirement to have this done. Often this has not been completed.

Deprivation of assets concerns

There is also the potential deprivation of assets implications for care fee purposes that needs to be considered. Just because the property is in a trust, it does not mean that it cannot be assessed for care fee purposes if the local authority deem that you only put the asset into trust to stop it being assessed. Contrary to some opinion, there is no deadline for a deprivation of assets claim.

So what can you do if you are in this situation?

The first thing is not to panic. An experienced qualified solicitor or qualified tax adviser will be able to help you to understand the position and advise you accordingly. Trustees can sometimes be removed without getting the former firm involved, it depends on the wording of the trust deed and current position. However, changing the legal title at the Land Registry will mean that the former trustees must sign the transfer paperwork.

Changing the trustees is the first step in taking back control of the home and other assets in the trust. Then, you can make an informed decision on whether to keep the trust or wind it up. Every client will have different needs and there is no “one size fits all” answer.

The Private Client team at Gepp Solicitors have experience with these trusts and we have helped our clients to make the right decisions for them.

If you have a Family Protection Trust, or similar named, and want to discuss if changes need to be made please feel free to call us on 01245 228125 or email privateclientenq@gepp.co.uk.