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‘Living Trusts’ – the reasons why most of us should steer clear

‘Living Trusts’ – the reasons why most of us should steer clear

‘Living trusts’ are increasingly being marketed as a way to protect your assets, minimise inheritance tax, even avoid future care home fees.

However, we do not recommend them to our clients and in fact, spend a substantial amount of time unwinding them for those who have set one up then bitterly regretted it.

Known also as ‘lifetime’, ‘property protection’, ‘asset protection’, ‘family’ and ‘universal’ trusts – all marketing as opposed to legal terms – the unregulated Will writing sector frequently pushes them as a magical solution to all your tax planning problems.

Wealth preservation ‘seminars’, to which so many of us are invited once we reach a certain age, can often hard sell ‘living trusts’ in a way that can be hard to resist.

What problems can ‘living trusts’ cause?

‘Living trusts’ might be sold as the best thing since sliced bread but away from the hype and advertising puff, the reality is very different:

  • They don’t save you tax – and can actually lead to a bigger tax bill.
  • They don’t necessarily work as a way to shield your assets if you need a care home assessment.
  • They don’t shelter your assets from creditors.
  • They do prevent you selling your home without additional administration like filling in a tax return and involving the trustees (often your children who may not agree) in the decision to put the property on the market.

What exactly is a ‘living trust’?

‘Living trusts’ are established while you are still alive, unlike a will trust which comes into being on death.

They are often advertised as a way to transfer your home, and possibly your savings and other investments, with a view to saving Inheritance Tax for your family and avoiding care home fees should that become necessary.

Whilst trusts have many legitimate uses, the ‘living trusts’ advocated by unregulated firms can carry very real risks.

Just last year, the Financial Conduct Authority (FCA) warned about the number of unregulated firms mis-selling and mis-managing these trusts on behalf of trustees who don’t understand what they have invested in or what benefits the trusts actually provide.

Why can living trusts create tax complications?

Without the appropriate advice, the tax implications can be significant:

  • A transfer into a trust is a ‘lifetime chargeable transfer’ for Inheritance Tax purposes which could mean that you have to pay tax immediately on setting up the trust, depending on the value of assets transferred.
  • Gifting your home whilst staying put is known as a ‘gift with reservation of benefit’ which can still have IHT consequences. This is because if you make a gift but retain the benefit (in this case, living rent free in the property you’ve given to someone else) it forms part of your estate for IHT tax purposes when you die.

This is why tax advice, to make sure you don’t fall into these traps, is so important.

Why can gifting your home to a living trust cause problems?

The theory is that by putting your house into a trust and naming individuals (usually your children) as the trustees, you no longer own your own home.

As a result, the premise goes, if you have to go into care, your property and assets will not be used as part of the equation in a local authority means tested, care funding assessment.

This, however, is not always how it turns out.

  • Local authorities are increasingly investigating ‘living trusts’ to ensure they haven’t been set up as a way to get out of paying for care, particularly when a substantial application for assistance is being made.
  • There is a risk that if the local authority can prove you put the assets in trust as an act of ‘deliberate deprivation’ to avoid paying care home fees, it can ignore the trust and treat the assets as if you owned them.
  • Local authorities can take advantage of insolvency law to challenge living trusts if you have put all your assets into the trust, leaving you effectively bankrupt and unable to pay your way from your own resources.

This is why it’s important to be able to show that at the time the trust was set up, you were in good health and had no reason to think you would need to go into a care home.

This includes proving that the trust serves a purpose other than shielding assets from creditors or care home fee assessment.

Is a ‘living trust’ right for me?

It’s important not to assume that a ‘living trust’ is right for you simply because a friend or relative has one.

We frequently have clients come to us on a tide of enthusiasm after attending a wealth preservation ‘seminar’ or talking to someone who has attended one.

If you want to look in to whether a trust is the best way for you to protect yourself, independent, professional legal advice is a must.

Trusts, when set up correctly and crucially, early enough while you are financially solvent and in reasonable health, can deliver good outcomes and be an efficient way to control and safeguard your assets.

The FCA recommends using a solicitor regulated by the Society for Trust and Estate Practitioners (STEP), of which most of our Wills and Mental Capacity lawyers and specialist Trusts Team are members. This ensures they work to set standards of conduct, unlike unregulated trustees.

Click here to read this guide we’ve written on exploring your options when you are considering gifting the family home.

Get in touch

Wards Solicitors’ is once again recommended as a South West Leading firm in the Legal 500 list for 2024, praised for its exceptional professional service standards and high levels of technical expertise.

Our Wills and Mental Capacity Team is one of the largest in the region and vastly experienced. We also offer specialist Trust Creation and Management advice.

Most of our team members are fully accredited with the Association of Lifetime Lawyers (formerly Solicitors for the Elderly) and the Society of Trust and Estate Practitioners (STEP). Membership of these organisations ensures the highest standards of professionalism.

We offer a free initial appointment for you to discuss what you need and always provide clear cost details up front before starting any work.

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