Have You Been Mis-Sold a Family Protection Trust? Key Indicators Explained
Why are Family Protection Trusts under scrutiny?
Family Protection Trusts, otherwise known as Asset Protection Trusts, Asset Preservation Trusts or Flexible Trusts are currently under scrutiny due to media sources reporting on the fact that certain law firms and Will writing companies have allegedly mis-sold these Trusts as a guaranteed means of clients protecting assets from being used to pay care costs and also reducing inheritance tax. Trusts do not guarantee either of these things and can in fact lead to legal challenges by local authorities for ‘deprivation of assets’ and in some cases increased inheritance tax liabilities.
What is a Family Protection Trust?
A Family Protection Trust is a form of Trust into which a person transfers certain assets (usually a residential property) during their lifetime. This will mean that the person no longer owns their property and is restricted with regards to what they can do with the property. For example, the person would be unable to sell the property without the consent and participation of the trustees of the Trust.
The mis-selling of Family Protection Trusts – what went wrong?
Family Protection Trusts are being reported on in the media , following the closure of McClure Solicitors in 2021. McClure Solicitors, who were based in Scotland, allegedly sold thousands of Trusts to their clients on the pretence that the Trusts would shield their clients’ assets from care home fees and reduce their exposure to inheritance tax.
It has been reported that clients of McClure Solicitors were not properly advised on the consequences of setting up a Trust and in many cases, McClure Solicitors had named members of their own staff as trustees on their clients’ Trust deeds and property titles. This caused complications for clients of McClure, and their families, particularly when it came to them wishing to sell the property, as they were unable to locate the trustees as the firm had closed. Former clients of McClure Solicitors have had to instruct other law firms and incur significant legal costs to try and resolve matters.
The consequences of transferring your property into a Trust
By transferring your property into Trust, you are giving up legal ownership of your property. A Trust deed is drafted to document how you can continue to benefit from the property i.e. a right to reside for life.
The property will be registered at the Land Registry in the name of your chosen trustees, and they would then need to consent to any matters relating to the property, such as the sale of the property.
Unintended inheritance tax consequences of transferring your property into a Trust
- Once you have transferred the property into the Trust, despite you not owning the property anymore, if you continue to live in the property, rent free, up until the date of your death (or within seven years of the date of your death), the value of the property (as at the date of your death) will be taken into account when calculating the value of your estate for inheritance tax liability.
- At the point, the property is transferred into Trust, if the value of the property exceeds your inheritance tax nil rate band allowance, there could be an immediate lifetime charge for inheritance tax at a rate of 20% (over the nil rate band allowance).
- If when in the Trust, the value of the property exceeds your inheritance tax nil rate band allowance, there could be inheritance tax charges on every 10th anniversary of the Trust and when the property eventually leaves the Trust.
- Your estate would not benefit from the residential nil rate band allowance (up to £175,000 per person or the value of your property, if lower).
Intentional Deprivation of Assets
If following the transfer of your property into Trust, you need to move into a residential or nursing home, the local authority can investigate the circumstances surrounding the transfer of the property and potentially challenge it on the grounds of ‘intentional deprivation of assets.’ If successful, the local authority can pursue and account for the value of the property, when assessing how much you should pay for residential/care fees.
Warning signs that a Trust may have been mis-sold
If you are considering setting up a Trust, we would always recommend that you seek advice from a specialist, regulated advisor, such as a solicitor.
Furthermore, you should always be mindful of the following ‘red flags:
- Being advised that a Trust can completely safeguard your property from care home fees and reduce your inheritance tax liability. As explained above, this is not the case.
- Being encouraged to appoint unknown third parties as trustees. Trustees have the responsibility to oversee and manage the Trust and the Trust assets. If the trustees are unknown to you or you are unable to easily locate them, this may create complications when dealing with the Trust assets.
- Being pressured to make a quick decision about setting up a Trust.
If you are being pressured to making a quick decision, especially without having the opportunity to consult with loved ones or even another independent legal representative, this is a red flag.
Transferring assets, particularly your property into Trust is a big decision, it is therefore important that you receive the advice that you have been given in relation to the Trust in writing, so you can have the opportunity to review at your leisure, and discuss with trusted third parties should you wish to do so.
What to do if you believe you have been miss-sold a Family Protection Trust
- Review your Trust document and property title and ensure it accurately reflects your wishes.
- Do you know the trustees named in the Trust document and on your property title? If not, reach out to the firm who prepared to Trust to check that they are still practicing and if so, seek confirmation that the trustees are still employed by their company.
- Seek independent legal advice from a specialist, regulated solicitor.
Conclusion: seek specialist legal advice if you are concerned
Whilst Trusts can be valuable tools for estate planning, they are complex, so if you are interested in setting up a Trust or you would like to have an existing Trust deed reviewed, it is essential that you seek advice from a qualified, specialist solicitor.
If you would like advice on any aspect of setting up a Trust, our Lifetime Planning Team will be happy to help.
Contact us today to learn how our team can support you through creating or reviewing a Trust.