Understanding the Family Protection Trust
We are seeing significant numbers of something known as the “Family Protection Trust” that are coming to light after the death of a parent. For reasons that I explain below this is causing problems for executors.
The usual situation is that one, and sometimes both spouses have transferred their share of the matrimonial home into a discretionary trust or trusts with the other spouse and children as possible beneficiaries. So far so good, and a tax saving scheme that was used extensively before it was possible for the second spouse’s estate to make use of the first spouse’s Inheritance Tax Nil Rate Band.
Challenges with Local Authority Assessments
However, many schemes often involving one particular firm (now closed down) and sold by a number of specialist financial advisers amongst others, were also sold as protection against assessment of the property for care fees by the Local Authority (LA) – it is far from certain that they would succeed, with LAs arguing that they fall foul of the deliberate deprivation of assets provisions. Essentially the LAs say that the property was given away specifically to avoid assessment!
Potential Pitfalls
There are a number of issues that arise:
With the trusts created through the firm referred to above in particular, they always arranged for 2 of their partners to be appointed as trustees along with the person creating the trust – those two partners were also registered on the property title preventing any dealing with the property. The firm went out of business in 2021 and although files were handed to a Scottish firm they have, in the vast majority of cases, taken no action on the files. Property cannot be sold without appointing new trustees and registering that change in ownership. This can cause significant delays in transactions. We have been in touch with a number of the ex partners who do not wish to actively participate in the trusts but will happily retire for a family member or other trustee to be appointed.
Deliberately created trusts have been subject to compulsory registration since October 2020, the penalty for failing to register is £5000 and none of the trusts we have seen have been registered.
Discretionary Trusts (depending on their value) are subject to Inheritance Tax charges and reporting requirements every ten years. It is almost certain that this has not been done where required.
Contact HK Law for Expert Guidance
The Trustees, including your parent or spouse, will be responsible for any failures so we would urge you to check, or check with your parents, whether they have created such a trust so that appropriate action can be taken to avoid future problems and to ensure the Trusts are compliant with requirements.
At HK Law, our Trust & Tax team is equipped to help you navigate these uncertainties and safeguard your estate’s future.
Contact us today to review your estate planning arrangements and ensure you have the peace of mind that comes from knowing your trust is set up correctly and properly managed.
Contact David Lester on 01305 251007 or d.lester@hklaw.uk. HK Law has offices in Blandford, Bournemouth, Crewkerne, Dorchester, Parkstone, Poole, Swanage, and Wareham.
