Funding care in later life and preparing for inheritance tax liabilities are concerns facing many of our clients, who want to see their assets protected and passed down to their family. So do the Asset Protection Trusts being touted by some as a way of protecting the value of a person’s assets against inheritance tax and care home costs offer a solution to their problems?
In fact, such trusts come with some rather significant risks which are not being shouted about quite so loudly; if they are entered into without detailed legal advice, the very people trying to avoid costs could find themselves paying more.
In terms of inheritance tax, transferring the family home to such a trust may fall foul of the ‘gifts with a reservation of benefit’ rule if the person giving away the property continues to live there. This could result in the full value of the property forming part of that person’s taxable estate at death, actually attracting more tax at that stage. Since trusts attract a separate level of tax, the property’s value would also continue to be taxed under the trust’s own tax regime. This could also apply to investments from which the individual takes an income.
Since local authorities routinely means-test those who apply for financial help with care home fees, transferring ownership of assets to a trust might be thought to be an efficient way of avoiding their value being included in that assessment.
But gifting assets into an Asset Protection Trust may be seen as a deliberate deprivation of assets and the local authority could decide not to offer any financial assistance for the provision of care if the value of the property, or other assets, are held to still be within that person’s estate.
So Asset Protection Trusts do not offer an easy solution to these concerns, but there are ways in which care home fees and inheritance tax can be mitigated. Taking expert legal advice is the way forward, so that personal circumstances and preferences can be taken into account and an informed decision made.