Creating property & asset protection trusts in your will
Creating a property protection trust (sometimes called an asset protection trust) through your will allows someone to benefit from your estate after you have died as if he or she owned the assets, without actually inheriting it. The value of his or her estate is therefore kept minimised.
In law, there is no such thing as a property protection trust. The mechanism is a standard trust where a beneficiary has a life interest. The name is used in marketing, presumably because the idea of “protecting” your assets from the state is appealing enough to want to pay higher fees for the writing of “special” terms into your will by a professional.
A life interest trust is typically used to allow someone to benefit from assets, without owning them. For example, if you have a disabled child who doesn’t have mental capacity to manage his financial affairs, you may opt to place your estate in a trust, managed by other family members for your child’s benefit. Your wealth enables your child to be cared for, with the trustees making the decisions about how best your estate should be used to do so.
The same structure is used to “protect” property from means tested fees. Your husband or wife never inherits the assets, so they never count as part of his or her estate from which fees can be paid, yet he or she can benefit from them as if they were owned. On his or her death, the remaining estate passes to other beneficiaries who do inherit it.
Why it is used
If you have children and you die without having made a will, then your husband or wife automatically inherits the first £250,000 of value in the estate and half of the remainder. The children receive the other half of the remainder.
Many couples make wills that transfer all of the estate to the other, if the other survives, otherwise all to children.
The intention in both cases is for the survivor to be able to live comfortably for the rest of his or her life, before the joint wealth that both parents have accumulated over their lifetimes is passed on to the next generation.
In these situations, the surviving spouse will find himself or herself much wealthier as an individual as a result of the death of his or her husband or wife.
The issue here is not so much that the surviving spouse is more likely to have assets over the threshold at which he or she must pay for elderly care (because that threshold is relatively low), but rather that he or she has more wealth that can be used to pay such fees before falling back below the threshold.
Many people feel that care fees erode what would otherwise be the “children’s” inheritance.
As an example, Alf and Brenda have assets worth £300,000 together, primarily in the value of their home. At this level of wealth, their joint estate does not qualify for inheritance tax. They wish to leave as much of their estate to their son Charles. Alf dies before Brenda, leaving her his share in the home and all his other assets. After 2 years of continuing to live at home, Brenda needs care and moves to a nursing home. Fees are slightly less than the UK average at £30,000 per year. Her new level of wealth means that she may have to pay such fees for just over 9 years (before her wealth drops below the current threshold for paying fees of £23,250). She lives for 7 more years, and Charles inherits £90,000. However, had Alf placed his assets in a property protection trust, Brenda would still have been able to live in the family home, but the value of her estate would have been still £150,000 just after Alf's death. Care costs for 7 years would have reduced the value of her estate to £14,250 (the level at which your local authority pays all care costs). However, Charles would have inherited that £14,250 plus the £150,000 left by Alf in trust. So Charles would be £74,250 richer.
Ethics and legality
The reason to create these types of trusts is to prevent the wealth of the person who dies first from being used to pay for care fees for the spouse. Your children inherit a greater value.
Other mechanisms, such as discretionary trusts, have been used widely in the past for similar purposes – to avoid inheritance tax (although that loophole is now closed).
Whether using these is ethical is very much a personal opinion. Setting up such trusts is certainly legal.
But while it is lawful and possible for your will to create an asset protection trust, it may not always have the effect you intend.
The Net Lawman opinion is that as a result of current financial pressure on the UK care system, local authorities are more likely to scrutinise any scheme or device that leads to a “deprivation of assets” for someone who needs care.
If it is reasonably clear that the motive for creating the trust was to avoid paying care fees and if it at the time the will was written, it was likely that the life interest beneficiary would need care, then a local authority can look through the trust and take into account the assets in means testing.
However, if you write a will before care might need to be considered, it might be difficult for a local authority to claim that the primary reason for leaving assets in a trust was to avoid care fees. There are after all other legitimate reasons to use a trust with a lifetime beneficiary.
There have been cases in court regarding high pressure selling of such schemes to vulnerable adults.
There have also been cases of mis-selling, where a will writer led a client to believe that the property protection trust would certainly protect his estate, in a situation where clearly it would not.
Creating a trust in a will is good work for a solicitor or will writer. The addition of a couple of extra paragraphs of text can be charged at hundreds of pounds in additional fees.
There have also been situations where solicitors have written wills that nominate themselves as trustees. In that position, they can charge further ongoing fees for their work.
The idea behind an asset protection trust is to give benefit of use without ownership.
One alternative to creating a trust is to give your estate to your beneficiaries (such as your children) during your lifetime, with an agreement that they will use them to look after your spouse.
Provided that it is clear that you are not giving the assets away just before you need care (and thus depriving the state for your own care), this could be a viable alternative. However you need to think about:
if the people to whom you give your estate divorce, the assets would be divided equally between them
there may be inheritance tax consequences if you die within a certain time period after the gift is made
the people to whom you give your estate may not act as they promised: they may not give the same amount of care to your spouse as you hope; or an unforeseen event may leave them bankrupt
Making a will
Net Lawman offers a free online will service that allows you to create trusts, should you want to do so.
The service is free because we believe that everyone should be able to make a will regardless of financial situation.
We also provide some of our more straightforward templates absolutely free with no catches or conditions. We offer nine templates (three free) in total that together cover thousands of possible variations of wishes. There will be one to suit your situation.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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