What Type Of Trust Do I Need To Protect My Assets?

Trusts can be used to protect your assets, for example if you are entering into a marriage, or wishing to safeguard from legal challenges and creditors (e.g. in the case of bankruptcy). Trusts can also be used to ensure that your money and estate are utilised in the way that you wish on your death, for example to enable a spouse to benefit from assets for the rest of their life before they are passed on to children; to set funds aside for future generations; to pass assets on to family members tax-efficiently.

It is important to note that if you assign your assets to a trust they are no longer deemed to be your personal possessions (i.e. they stop being part of your estate).

What is a trust?

A trust is a legal arrangement where you transfer the ownership of your assets to a third party to be looked after, on behalf of the trust’s members, by a ‘trustee’ or ‘trustees’. The role of a trustee is to manage the trust responsibly, in line with your wishes.

You can set up a trust while you’re still alive (a lifetime trust), or have one written into your Will that takes effect on your death (a Will trust).

What Type Of Trust Do I Need To Protect My Assets?

Trusts are a useful tool for protecting assets, however choosing the best type of trust for your situation may be complicated, when taking into account your needs, the needs of your family and beneficiaries, and your tax planning. For this reason it is always best to get a professional opinion.

There are many different types of trusts. The best type of trust for your individual situation will depend on what assets you are wishing to protect, and the situation that you are in or could possibly be in, in the future.

Types of Trust

An express trust is where you, the settlor, establishes the trust. If you are wishing to protect your assets then you will form an express trust that will be protective or qualifying, revocable or irrevocable.

A protective trust would name you as a beneficiary, where a qualifying trust would not.

A revocable trust would enable you to retain ownership and control of the trust assets, and to alter the trust deed at any time, where an irrevocable trust would not.

Charitable purpose trusts, or public trusts, are for charitable beneficiaries whereas non-charitable purpose trusts are private trusts where the beneficiary isn’t necessarily an individual.

There are several types of express trusts that could be applicable to your situation:

Bare trusts

Bare trusts are often used to hold assets for children. It is a simple trust where all trust assets are managed by the trustees on behalf of a fixed beneficiary until they are aged 18 or over (in England and Wales).

Bare trusts can potentially help you reduce Inheritance Tax (IHT) liabilities, however taxation of trusts is complicated. More on this later.

Life interest trusts / interest in possession trusts

This type of trust is sometimes called a property protection trust, although this is not a legal term.

With a life interest trust, or interest in possession trust, someone is given the right to use an asset, for the rest of their life without ever becoming the owner. The most common use of the life interest trust, or interest in possession trust, is regarding the family home. On your death your property, or share of property can be left to the beneficiaries that you wish to inherit, but your spouse is entitled to continue living in the home. This type of trust may also protect against local authority assessments but requires couples who jointly own the home to be tenants in common of their home, so each owns a share rather than the whole home jointly.

This type of trust can also be used in wills to ensure that a child, or adult, who doesn’t have the mental capacity to manage their financial affairs can be supported through life. By opting to place your estate in trust, the loved one is cared for while the trustees ensure the best financial decisions are made regarding your estate in order to do so.

When the beneficiary of the trust passes away the trust’s assets are then passed on to the person/people you intended to inherit them, known as the remainderman, or the capital beneficiary.

Flexible life interest trust (FLIT)

A flexible life interest trust allows the trustees to convert the life interest trust into a discretionary trust if it is deemed necessary for capital to be spent for example.

Discretionary trusts

A discretionary trust is a more flexible trust, where the trustee can determine the timing, size, and nature of distributions from the trust, in accordance with the trust's terms.

Mixed trusts

A mixed trust would combine elements of different types of trusts.

Important things to note

Inheritance Tax

Trusts can potentially help you reduce Inheritance Tax (IHT) liabilities, however this depends on the type of trust set up and the amounts transferred into the trust. Taxation of trusts is complicated.

For example, assets placed in a bare trust are treated as ‘potentially exempt transfers’, so as long as you survive for seven years after transferring the assets into the trust then there will be no IHT to pay. If you die before then, there is a sliding scale of IHT liability.

Discretionary trusts however face an IHT charge on assets not covered by your nil rate band at the time the trust is set up, followed by charges each 10-year anniversary, and when the trust is closed or assets are removed.

If you plan to set up a trust for Inheritance Tax planning it is best to seek advice from a professional.

Local authority care fees

You cannot set up a trust with the intention of avoiding paying the local authority care fees, this would be a ‘deliberate deprivation of assets‘. If the local authority suspects that this was the case then it may result in unpleasant and expensive legal proceedings.

Gifting to children

Gifting to children may seem more straightforward, however there are risks. For example if your child files for bankruptcy or gets a divorce, assets such as the family home may need to be sold to pay debts. Children may also have to pay IHT on gifts.

If you are considering setting up a Trust or would like more information, then call us on Bingley 01274 723858, Ilkley 01943 601173 or Bradford 01274 735511.