Family trust confusion! What should we do now?

Limeykitty

Ten years ago my partner and I wrote our wills. At the time we had two properties, mine which we lived in, and partner’s, which we were renovating to rent or sell. We aren’t very financially savvy and unfortunately were persuaded by the will-writer that we really needed to set up Family Trusts to protect our assets, one for each property, with both of us having 50% shares in each.

The following year we sold my partner’s property, and the legal work seems to have been done to recognise this and assign the proceeds of the sale back to us, but I understand that the Trust remains in place. A few years ago, we also sold the other property and moved to a new house together but for some reason, the legal work to reflect this was not done, so our current property is not (yet) in the Trusts. There’s around £200K of “additional” equity in this property (if that makes any difference), with a current value around £400K and therefore well below the Nil Rate Band threshold.

The legal company that manages the Trusts is now chasing us to resolve the situation, but we really aren’t sure what to do as we don’t fully understand the implications and are not at all convinced we did the right thing in the first place!  Are we best to get them to do the legal work to reflect the sale and purchase - this will cost around £1500 – or should we arrange to have the Trusts dismantled, at a cost of almost £2000?  What are the advantages / disadvantages of either option?  Is there anything else that we should consider?  And, given that we don’t now own either of the properties that were originally assigned into Trust, what would happen if we did nothing at all, would this be storing up further nightmares?  

TIA!

elsien

What were you trying to achieve when you set up the Trust?  Protect your assets from what? 

Keep_pedalling

I don’t see how you could sell the properties if they were actually put in trust. You would no longer be the owners so they could ably be sold by the trustees. 

If you are lucky this was a !!!!!!-up by the sharks who sold you the trust and the properties were never held in trust.  If this is the case then you have a trust with zero assets and zero tax liability and I would not be paying any more money.

Yorkie1

Keep_pedalling said:

I don’t see how you could sell the properties if they were actually put in trust. You would no longer be the owners so they could ably be sold by the trustees. 

If you are lucky this was a !!!!!!-up by the sharks who sold you the trust and the properties were never held in trust.  If this is the case then you have a trust with zero assets and zero tax liability and I would not be paying any more money.

If the trust exists, albeit with no assets, should it have been registered with HRMC, and would a 10-year anniversary IHT return still need to be done?

poseidon1

Limeykitty said:

Ten years ago my partner and I wrote our wills. At the time we had two properties, mine which we lived in, and partner’s, which we were renovating to rent or sell. We aren’t very financially savvy and unfortunately were persuaded by the will-writer that we really needed to set up Family Trusts to protect our assets, one for each property, with both of us having 50% shares in each.

The following year we sold my partner’s property, and the legal work seems to have been done to recognise this and assign the proceeds of the sale back to us, but I understand that the Trust remains in place. A few years ago, we also sold the other property and moved to a new house together but for some reason, the legal work to reflect this was not done, so our current property is not (yet) in the Trusts. There’s around £200K of “additional” equity in this property (if that makes any difference), with a current value around £400K and therefore well below the Nil Rate Band threshold.

The legal company that manages the Trusts is now chasing us to resolve the situation, but we really aren’t sure what to do as we don’t fully understand the implications and are not at all convinced we did the right thing in the first place!  Are we best to get them to do the legal work to reflect the sale and purchase - this will cost around £1500 – or should we arrange to have the Trusts dismantled, at a cost of almost £2000?  What are the advantages / disadvantages of either option?  Is there anything else that we should consider?  And, given that we don’t now own either of the properties that were originally assigned into Trust, what would happen if we did nothing at all, would this be storing up further nightmares?  

TIA!

Have you been appointed trustees of each Trust or is the the Will writing firm on record as trustee in both cases? If you are both trustees then there is some hope for a competent firm of solicitors to untangle the mess you are in.

I won't even speculate as to why you both were convinced that it would be a good idea to create these trusts, what I can say is:

1) Both trusts would have had IHT reporting exposure when they  were created.
2) If one or other property did not qualify for main residence exemption when 1st  gifted to trust, an immediate CGT liability may have arisen.
3) Both trusts should have been placed on HMRC's trust register, with penalties for non compliance.
4) There may have been trust  CGT exposure on eventually  sale of the first property, again if main residence exemption is not in point.
 5)10 years later if the value of each trust exceeds the current NRB of £325k there is a 6% tax charge on the excess exceeding the NRB.
6) If you and partner are not married ( then and now), theses tax issues are aggravated by there being no availability of the spouse exemption for gifts between you.

I could go on but hopefully you already get the point that these trusts should never have happened, whatever the bogus rationale sold to you at time.

You and your partner need to get out from under these arrangements ASAP, but you definitely do not go back to the firm who got you both in this mess.

You need to consult a STEP qualified lawyer as soon as you can to advise on the most effective way to terminate both trusts, and what if any IHT exposure has been triggered this year on the 10th anniversary of their existence.

Whether there are grounds to sue the will writing firm for acts or omissions that may have exposed you and your partner to unnecessary tax liabilties and non compliance penalties, only the solicitor can advise.

Limeykitty

elsien said:

What were you trying to achieve when you set up the Trust?  Protect your assets from what? 

The guy used disturbance techniques to get us worried about my partner's ex coming after our assets (at the time they weren't getting on brilliantly, she hadn't remarried and there was no formal financial settlement after their divorce) and sideways disinheritance (partner has kids, I don't).  Clearly, we were naive! 

Limeykitty

Yorkie1 said:

Keep_pedalling said:

I don’t see how you could sell the properties if they were actually put in trust. You would no longer be the owners so they could ably be sold by the trustees. 

If you are lucky this was a !!!!!!-up by the sharks who sold you the trust and the properties were never held in trust.  If this is the case then you have a trust with zero assets and zero tax liability and I would not be paying any more money.

If the trust exists, albeit with no assets, should it have been registered with HRMC, and would a 10-year anniversary IHT return still need to be done?

They are telling us that they have to do a 10-year return, so it seems the Trusts are properly registered. Hiwever, they have done a desktop valuation which massively over-values our current property - according to them it's £520k plus, which puts it within the 80% of the threshold, whereas we've just has two local agents value it at £385k - £400k).

Keep_pedalling

Limeykitty said:

Yorkie1 said:

Keep_pedalling said:

I don’t see how you could sell the properties if they were actually put in trust. You would no longer be the owners so they could ably be sold by the trustees. 

If you are lucky this was a !!!!!!-up by the sharks who sold you the trust and the properties were never held in trust.  If this is the case then you have a trust with zero assets and zero tax liability and I would not be paying any more money.

If the trust exists, albeit with no assets, should it have been registered with HRMC, and would a 10-year anniversary IHT return still need to be done?

They are telling us that they have to do a 10-year return, so it seems the Trusts are properly registered. Hiwever, they have done a desktop valuation which massively over-values our current property - according to them it's £520k plus, which puts it within the 80% of the threshold, whereas we've just has two local agents value it at £385k - £400k).

But were the properties actually transferred into the trust with this being recorded with the LR? I don’t see how that could be the case if you could sell them without the involvement of the trustees. 

elsien

Limeykitty said:

elsien said:

What were you trying to achieve when you set up the Trust?  Protect your assets from what? 

The guy used disturbance techniques to get us worried about my partner's ex coming after our assets (at the time they weren't getting on brilliantly, she hadn't remarried and there was no formal financial settlement after their divorce) and sideways disinheritance (partner has kids, I don't).  Clearly, we were naive! 

So has the financial settlement now been sorted?

poseidon1

Limeykitty said:

Yorkie1 said:

Keep_pedalling said:

I don’t see how you the could sell the properties if they were actually put in trust. You would no longer be the owners so they could ably be sold by the trustees. 

If you are lucky this was a !!!!!!-up by the sharks who sold you the trust and the properties were never held in trust.  If this is the case then you have a trust with zero assets and zero tax liability and I would not be paying any more money.

If the trust exists, albeit with no assets, should it have been registered with HRMC, and would a 10-year anniversary IHT return still need to be done?

They are telling us that they have to do a 10-year return, so it seems the Trusts are properly registered. Hiwever, they have done a desktop valuation which massively over-values our current property - according to them it's £520k plus, which puts it within the 80% of the threshold, whereas we've just has two local agents value it at £385k - £400k).

The threshold for determining whether a nil IHT return has to be submitted is 80% of £325,000 ie £260k for single settlor trusts or 80 % of £650k for joint settlor trusts. 

Be that as it may, it seems to me you both may have been aware of the possibility of these trusts triggering IHT in later years when you created them and indeed depending on the advice they gave you intially, they may also have flagged the other relevant tax aspects and compliance issues highlighted in my post. 

Therefore unlike other OPs who have approached this forum, in complete ignorance of the tax issues similar trusts created by their  now deceased parents had  triggered, you may have been more cognizance of the tax and administrative complexities inherent with your trusts, but decided the 'protective mantle' the trusts offered from potential ex marital claims  was a far more important consideration.

If this is the case , ie that you both were far better informed of the tax and compliance implications than has been assumed by the forum respondents here, your course of action going forward will  likely be dictated by whether you consider the trusts continue to meet your primary objectives of protection from marital claims, regardless of the complexities and pitfalls that are now apparent to you.

You should decide based on what you did or did not know 10 years ago, whether it makes sense to continue to be advised by the present firm, but have you made them corporate trustees of your trust arrangements thereby in effect tying yourselves to them?

Marcon

Limeykitty said:

elsien said:

What were you trying to achieve when you set up the Trust?  Protect your assets from what? 

The guy used disturbance techniques to get us worried about my partner's ex coming after our assets (at the time they weren't getting on brilliantly, she hadn't remarried and there was no formal financial settlement after their divorce) and sideways disinheritance (partner has kids, I don't).  Clearly, we were naive! 

You and many others, so don't beat yourself up too much.

I think you are wildly overestimating what a site like this can do in such a messy situation. However competent and well informed the advice  - and the likes of @poseidon1 clearly know their stuff - people answering are hopelessly short on information, never mind sight of all relevant documentation.

The best advice is the advice you've already had: consult a STEP qualified solicitor. https://www.step.org/about-step/public Quite apart from being properly qualified, they are also insured to advise you.