Setting up trusts for asset protection

Setting up a trust can be an effective way of protecting assets from various factors such as tax liability, divorce settlements, bankruptcy, and other claims. When you put assets into a trust, you no longer own them – they belong to the trust, and named beneficiaries can benefit from them according to the rules of the trust (the trust deed).

A trust is normally irrevocable. Once your assets are transferred to a trust, you cannot usually claim them back. They are owned by the trust and neither you nor anyone who isn’t a named beneficiary, have any access to them. 

The settlor (the person who sets up the trust), can appoint the trustees and these can include professional trustees such as solicitors or financial advisers. The trustees are then responsible for managing the assets in the way that is outlined in the trust deed and have a duty of protecting and preserving trust property. Trustees may also have powers to determine the timing and amount of the beneficiaries’ entitlements. A trust can therefore be used to protect assets from spendthrift beneficiaries or fortune-hunters. Once a settlor places assets within a trust they can no longer benefit from them unless they are named as one of the beneficiaries of the trust which can have adverse tax implications and so generally is not advised.

What is an Asset Protection Trust?

An Asset Protection Trust or APT, also known as a Life Interest Trust, is created by someone during their lifetime to protect their assets from creditors. It enables them to dictate how they want assets to be distributed among the beneficiaries. The trust is set up during a lifetime and protects assets for future generations. An APT or Family Trust is known as a Life Interest Trust because the settlor (the person who creates the trust) can continue to benefit from the assets during their lifetime.

What type of trust is best for asset protection?

The best type of trust for asset protection is a Life Interest Trust, which is sometimes called an Asset Protection Trust (APT). It’s a way of ring-fencing assets such as cash, property, and investments and protecting them from claims on your estate. Once assets are put into an APT they no longer form part of your estate, and therefore, don’t officially belong to you any more although you can nominate yourself as a named beneficiary. 

The following assets are frequently held in Asset Protection Trust:

  • Cash 
  • Property
  • Investments
  • High-value assets 

How does an Asset Protection Trust work? 

The main reason for setting up an Asset Protection Trust is to do just that, protect your assets from creditors. Your assets are protected, if you are a named beneficiary you can usually continue to enjoy the benefits of them during your lifetime by receiving the income from the underlying assets and then, once you die, the underlying assets will be distributed to the remaining beneficiaries, according to your wishes.

Benefits of an Asset Protection Trust 

The benefits of an Asset Protection Trust include: 

  • Avoiding care home fees – in the UK, anyone with savings of more than £23,000 will be liable to pay their care fees. There is a chance that you can protect your assets from the local authority, by placing them in an APT. However, this could be seen as a deliberate deprivation of assets. For this reason, you must seek legal advice if avoiding care home fees is your intention when setting up an APT
  • Protect against claims – an APT can protect your assets from claims like lawsuits or divorce proceedings
  • Protect your home – you can give someone a portion of your home safe in the knowledge that you can live there until you die.
  • Long-lasting protection – a trust can run for up to 125 years giving you the reassurance that you can decide how your assets are divided across generations

The disadvantages of an Asset Protection Trust

The main disadvantage of an APT is the fact that you no longer have control over the assets. There are also costs associated with the setting up and running of an APT.

An APT is irrevocable, meaning that once you transfer assets into it, you cannot usually remove them.

How do I create an asset protection trust?

If you are over the age of 18 and of sound mind, then you can create an asset protection trust. You will need to consult a solicitor or financial adviser so that you are aware of the legalities and any tax liabilities.

You would need to register the trust on HMRC’s Trust Registration Service and choose the trustees who will manage the assets for the benefit of the beneficiaries. You may also need to complete trust tax returns to report any capital gains arising to the trust.

Can I put my home into an Asset Protection Trust?

You can put your home into an Asset Protection Trust and continue to live in it for the rest of your lifetime. In fact, residential property, or a share of one, is one of the most common assets placed in an APT.

However, if you transfer property worth more than your unused nil rate band (currently £325,000) into an APT, you will have to pay lifetime inheritance tax on the balance at a rate of 20%. This will need to be factored in when you’re working out the affordability of placing property or other high-value assets into an APT. 

If you transfer your property into an Asset Protection Trust, there are some risks associated, which include:

  • When a beneficiary dies, their share of the asset would form part of their estate and be subject to inheritance tax
  • If a beneficiary gets divorced, their share of the asset could be included in any divorce settlement calculations
  • If a beneficiary became bankrupt, their share of the asset could be included in claims

Key Takeaways

Asset Protection Trusts can be a useful way of protecting your assets however specialist advice is vital before setting one up. Another consideration is the administration commitments that come with both setting up and running a trust.