Asset Protection Trusts & Wills

dav964

Hello,

Does anyone have any direct experience of using an asset or family protection trust to protect the family home from Inheritance Tax? This is something that is drawn up by a solicitor whereby on a first death the deceased's share of the house is put into trust but the spouse can continue living in the house until their death when the whole of the house moves into the trust and passes on outside of IHT. I think.

There are umpteen adverts on the internet for firms selling these trusts, but I haven't read one actual personal review yet of whether they're successful or not and what the downsides might be.

I've been through the probate process for both of my parents, and knowing how that works I have all sorts of questions about these sort of trusts. I see that they have also been used to shelter a house from being counted when care home grants are approved, and that is not only flawed but looks likely to be the next area of mis-selling compensation.

Any comments welcomed!

SeniorSam

Read the Opinion on IOU Trust clause and ask again if confused.

You can protect the first Nil Rate band allownce in Trust if you wish and setting up these trusts is common place. If the Will has not done this, then the Will can be changed by a Deed of Variation within 2 years of death, to make it so. Again another easy step to take.

Just ask anything that is not clear and I or others will do what they can to help.

Sam

I'm a retired IFA who specilised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, so my comments are just meant to be helpful.

dav964

@SeniorSam,

Thanks for the swift response. Having checked the other thread and looked around a bit more am I on the right track with the following observations?

• These trusts may have been of use in the past to help with IHT planning, but with the transferrable nil-rate IHT allowance that usefulness has been removed.
• They may have a use in the event of the survivor re-marrying (but that's of no interest to me).
• They are useless in sheltering assets from care home grant assessment.
• There is a additional cost to setup (and manage?)

So for IHT planning, these are essentially a waste of time?

getmore4less

I think they do work to protect from care home if done properly.
(only the assets of the first death.

Another use still exists to protect assets where transferable nil rate is not an option.

SeniorSam

Hi dav964,

You are correct that the transferable nil rate band has allowed for the NRB trusts to be avoided if you wish. My own contention and what I have done, is to have this Trust effect on the first death to shelter the first allowance completly, but with the probability that if there is an increase in the allowance, this may be lost, as 100% of the first allowance would have been used for the Trust.

If the spouse has all assets allocated to them following first death, then all those assets are growing in that persons estate and possibly increasing the value, rather than increasing in the Trust. Depending on the value, all of that would be accessible towards care costs if applicable, but nothing in Trust can be touched.

These Trusts can form part of a Will, but if the first death has already occured, then a Deed of Variation would be needed and the cost of that needs to be met.

Do ask if anything needs to be clarified.

Sam

Crabapple

There are Trusts being touted that are said to avoid both care fees and IHT. I don't see how they can work for that.

The first death scenario is fine, that's been done for years and protects half the house. I fail to see why you would want the second half to pass into Trust on the second death, or how that could avoid IHT unless it were some sort of offshore Trust (which HMRC have been looking at very carefully).

There's a reason for running a Trust after a first death for the benefit of the surviving spouse. There's not one afterwards when you have an asset that can be transferred/sold.

I've seen documents promoting the lifetime Trusts where they plug how wonderful it is that you won't have to apply for Probate and deal with all that, failing to mention that you will need to wind up a Trust which is potentially more complicated, and harder to do for the lay person. I'm sure the companies concerned offer to do this for a very reasonable fee though

SeniorSam

Crabtree, I have not advocated the scheme that you are referring to. I also believe that those schemes are a problem and will probably be stopped. AS far as I am concerned, only the nil rate band allowance of the fiurst to die can be sheltered in Trust if desired, although the 2007 act would allow for the allowance to just pass to the survivor. I still maintain that ring-fencing that amount against any claim is a better way to go, but that's just me.

Sam

Crabapple

I didn't think that you were advocating anything unusual Sam, you've been talking about the quite legitimate first death possibilities.

I just went off at a bit of a tangent because of some of the schemes I have seen being plugged, and that the OP mentioned the rest of the house going into trust on the second death.

SeniorSam

I believe that some people do get a little confused when they hear that the property can be protected, when it is only the allowance that can be left until the second death or safeguarded in a Trust arrangement.

The problem will be that those 'unusual schemes' will be jumped on at the time of the second death, when it will be too late to change anything.

A little like the schemes where the home was given to the children and a full market rent was not paid and the death occured within 7 years of gifting the property. A lot of families fell foul of that one.

Sam

dav964

Perhaps I could understand this better with an example. Using nice round numbers and some assumptions: -

Say my wife and I jointly own a house that is worth 1m at todays values. We also each have 100K invested in our own names. We have standard "mirror" wills leaving everything to the spouse. Also assume the NIL rate band for IHT doesn't change.

Scenario 1: No trust.
I die. My wife now owns a house valued at 1m and 200K in savings. She dies a bit later when the house is worth 1.2m and savings are unchanged at 200K. IHT is calculated on 1.2m + 200K - 325K - 325K.

Scenario 2: House put into trust.
I die. My wife now owns half of the house valued at 500K plus 200K in savings. The trust owns the other half of the house. She dies a bit later when the house is worth 1.2m and savings are unchanged at 200K. What is the value on which IHT is calculated?

Thanks in advance...

Crabapple

I don't think it's as simple as you would like.

Scenario 1 - correct

Scenario 2 - your wife can only put a share of the house to the value of the NRB into the Trust. Any more that goes in will be subject to IHT then.

When she later dies the Estate pays IHT on lets say the £1.2m less £325k in Trust (which would now have increased by a percentage) less £325k her allowance.

Depending on the type of Trust though it might have to pay IHT when it winds up, or CGT on the increased value of the house.

So potential tax saving - maybe but would need a lot more specifics working through.

You'd need to get some specialist advice if you wanted to do this.