What is a Family Protection Trust?
You may have heard about trusts and how they can stop you from paying inheritance tax, protect you from paying care fees and avoid the need for Probate all in one set up, but are they really this magical solution?
What is a Family Protection Trust?
A Family Protection Trust is a legal set up that allows money to be removed from one person's estate (the “settlor”) and held aside for other people (often family members). This is often to pass on wealth to the younger generations in a tax-efficient way.
A Family Protection Trust in itself is not a type of trust but is usually a way to describe a type of trust known as a “discretionary trust”. Sometimes these trusts have another type of trust giving income to someone else before the discretion starts. However, because a Family Protection Trust is not a type of trust itself, the terms of the trust will depend on the wording of the trust document and therefore one Family Protection Trust may differ from another.
Do Family Protection Trusts stop me paying Inheritance Tax?
Not entirely. They can help to save inheritance tax in limited scenarios, but they can also create an inheritance tax bill where there would not have been one if the circumstances are not properly considered.
Do Family Protection Trusts stop me paying care home fees?
If you have created the Family Protection Trust solely to avoid care fees, the answer is no as you will be depriving yourself of assets. If you have other reasons to create a Family Protection Trust, it is best to discuss the circumstances with your solicitor for bespoke advice.
Do Family Protection Trusts stop me needing probate?
Potentially, although they are likely to cost you more money and time than an application for Probate would! A Grant of Probate will still be needed if you have assets remaining in your name that require it (such as over £50,000 held with one bank even if it is across multiple accounts).
Why would I need a Family Protection Trust?
Benefits:
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They can be very effective inheritance tax planning vehicles for very specific people with particular circumstances;
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They can be effective for providing wealth to multiple generations in the longer term;
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They can provide flexibility and continuity for asset distribution and management.
Disadvantages:
Amongst others, there are a few disadvantages...
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For some people, you may end up paying inheritance tax where it wouldn’t otherwise be payable;
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You may attract Capital Gains Tax where it wouldn’t otherwise be payable;
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You can loss control over and the benefit of your assets;
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For full benefit, the trusts cannot be reversed;
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Managing a trust creates a legal duty on the people doing so (“the trustees”) that you may not otherwise have;
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The trust may require its own tax return; and
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Although these trusts do not come with ongoing fees in themselves, there will be incidental ongoing fees for legal advice, legal fees in the removal of money from the trust, accountants fees for tax returns and possibly regulatory costs.
How much money do I need to have to set up a Family Protection Trust?
There is not a set amount of money required to set up a Family Protection Trust, however a Family Protection Trust will not be suitable for lots of people and therefore it is important to speak with a solicitor to ensure that it is the right choice for your specific circumstances.
What do I do if I want to set up a Family Protection Trust?
It is really important to speak to someone who is qualified, as it can be very costly to rectify a mistake in a trust (sometimes it can involve going to Court). The Society of Trust and Estate Practitioners (STEP) is a group of experts who have undergone extra training in this area. Lawson West has 4 solicitors who are part of STEP.
What do I do if I think I have been mis-sold a Family Protection Trust?
There has been lots of news about the mis-selling of Family Protection Trusts, with McClures Solicitors perhaps being one of the most infamous. If you think that you have a Family Protection Trust, it is very important that you seek legal advice as soon as possible.
Ultimately, a Family Protection Trust can be a powerful tool for managing and protecting family wealth as well as an inheritance tax planning option. When done properly, Family Protection Trusts can be beneficial, but it is so important to completely understand why you are putting the trust in place, the consequences of doing so and the ongoing responsibilities that trustees face.
If you would like to talk about setting up a trust, or managing an existing trust, call our experts in the Probate, Wills and Trusts Team on 0116 212 1000.
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