Family Trusts, particularly Asset Protection Trusts (APTs) or Family Protection Trusts (FPTs), are often marketed as a way to shield assets from care home fees, creditors and inheritance tax. However, without expert legal guidance, these products can be mis-sold, leaving clients in financially and legally precarious situations – and often without any protection at all.
The Society of Will Writers has recently issued guidance to its’ members following complaints that certain Trusts were mis-sold by unregulated advisors. Some of the issues related to:
1. Misleading Claims About Care Home Fees Avoidance
One of the biggest concerns with unregulated advice is the promise that putting a main residence into a Trust will automatically protect it from being assessed for care home fees. However, this is not the case:
- Deliberate Deprivation Rules: Local authorities can scrutinise transactions that appear to have been made to avoid care costs. If they believe a Trust was set up primarily for this purpose, they can disregard it and still count the property as part of the estate when assessing care fees.
- No Absolute Guarantee: Despite what some unregulated advisers claim, councils have the power to challenge and overturn Trust arrangements.
- Gifts with Reservation of Benefit: For more information, see our previous article here.
2. Inheritance Tax (IHT) and Tax Complications
Another common selling point is that Trusts will automatically reduce inheritance tax liability. This is not always true.
- Periodic and Exit Charges for IHT: Some types of trusts (like discretionary trusts) are subject to periodic IHT charges every 10 years and an exit charge when assets leave the trust.
- Loss of IHT Exemptions: If a main residence is transferred into a Trust, the owner may lose the Residence Nil Rate Band (RNRB), which can significantly impact the amount of inheritance tax payable. For married couples, this can mean losing £350,000 of IHT allowances. This is a major issue for those who have created Family Protection Trusts.
3. Capital Gains Tax (CGT) Issues
Placing a main residence into a Trust can trigger capital gains tax liabilities. If the settlor continues to live in the property without paying market rent, the principal private residence exemption (PPR) may not apply, leading to unexpected CGT bills when the property is eventually sold.
4. Lack of Regulation and Consumer Protection
Unlike solicitors and regulated financial advisers, many will writers and estate planners selling Trusts are not regulated by the Financial Conduct Authority (FCA) or the Solicitors Regulation Authority (SRA).
- No recourse to the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS) if things go wrong.
- Inconsistent standards: The quality of advice can vary widely, and mis-selling is a real risk.
5. Loss of Control Over the Property
Once a property is placed in Trust, the original owner no longer has full control over it. This can create several issues:
- Selling or moving: If circumstances change and the owner wants to move, Trustees must approve the sale, which can be restrictive.
- Family disputes: If family members or third parties are appointed as Trustees, disagreements can arise, making access to the property or proceeds complicated.
6. Ongoing Costs and Complexity
Many people do not realise that Trusts require ongoing administration, which can be costly:
- Annual Trustee meetings
- Professional fees for management and compliance
- Tax reporting requirements
These costs can often outweigh any supposed benefits, especially when the Trust fails to achieve the originally intended protections.
Summary
While Asset Protection Trusts and Family Protection Trusts can be beneficial in certain circumstances, they are not a one-size-fits-all solution. Misleading, unregulated advice has led many individuals to set up unnecessary, expensive and ineffective Trusts based on false promises.
At Four Oaks Legal Services, we are regulated STEP-qualified professionals, committed to providing impartial and expert advice tailored to each client’s unique situation. We ensure that any estate planning decisions are fully informed, legally sound and structured to achieve the intended protections without unexpected risks or costs.
If you are considering a Trust for asset protection or estate planning, we strongly recommend seeking our regulated, specialist legal advice to avoid potential pitfalls.
Contact us below for more guidance.