Too good to be true?
Some unregulated commercial Will writers market ‘lifetime protection trusts’ as a solution to reduce care home fees and save inheritance tax (‘IHT’). The benefits are often overstated and you should exercise caution when considering these trust arrangements as they may not be suitable in your circumstances. Francesca Sassoli answers some common questions in relation to these trusts.
What is a lifetime protection trust?
Trust arrangements are promoted under a number of different names including ‘wealth preservation trusts’. The trust is set up to receive your family home during your lifetime leaving you with limited control of your main asset.
Giving your home away during your lifetime is rarely a good idea and will make it harder for you to access the capital when you need it.
Will it save me IHT?
Not necessarily. The value of your property will only fall outside your estate for IHT purposes if you give up any benefit from the property and survive 7 years from the date you gave it to the trust. Living in the property without paying a full market rent would count as a benefit.
These trust arrangements have been marketed to individuals whose estates are not subject to IHT. The introduction of the new Residence Nil Rate Band in April 2017 increased the tax free allowances available to individuals. By 2020, married couples who meet all the conditions of the new allowance will be able to pass £1 million of their combined assets, including their home, to their children or grandchildren tax free.
Will it save me care home fees?
Probably not. Depending on your circumstances, it is likely that the arrangement will be caught by the ‘deliberate deprivation’ rules. The rules allow local authorities to clawback assets that a person has sold or given away with the intention of reducing their wealth before being assessed for entitlement to help with care fees. There is no time limit for applying the rule. The local authority simply has to demonstrate that it is more likely than not that the individual knew, at the time of setting up the trust, that they may need care in the future.
Is it simple to run?
Not always. Trustees should keep accounts and record their decisions. They must comply with HMRC reporting requirements. Depending on the value of your property, the trust may be subject to an initial IHT charge when it is set up and an exit charge when property leaves the trust. A review must be carried out on every 10 year anniversary of the trust’s creation and an IHT charge may arise then too.
Does this mean all trusts are a bad idea?
Not at all. There are various different types of trust that can be very useful if implemented correctly and in the right circumstances. Trusts can be used to protect assets and beneficiaries, reduce IHT and provide flexibility for planning in the future.
How can I save IHT and protect my assets from care home fees?
By seeking independent advice from a regulated professional. A well drafted Will that is appropriate to your circumstances can mitigate the impact of IHT and care home fees.
If you would like more information, Francesca can be contacted on 01892 506 354 or firstname.lastname@example.org.