Family protection trusts: mission accomplished?

As humankind continues to reach new heights in emerging technologies and space exploration (we are still awaiting news of the next Bond!), trusts must also be reviewed taking into account families ever evolving circumstances and needs. 

In this article, senior associate Annika Bell considers whether trusts remain a reliable estate planning tool in today’s regulatory and tax environment. She explores how changes introduced in recent decades have reshaped their effectiveness, highlights common pitfalls, and outlines when trusts can still play a valuable role in safeguarding and transferring wealth.

Much of the planning and use of trusts carried out 20 years ago needs to be brought up to date to ensure they meet individual planning needs and ensure they comply with the tax regime of which many seem unaware.
 
One such popular pre-2006 tax planning tool involved people placing their home into trust, which they could continue to benefit from during their lifetime but the underlying value of the property was protected in the trust. There were different types of trust which were used to protect the value of the property from care fees or for more complex inheritance tax (IHT) planning which could involve multiple trusts and the use of loan notes.

In 2006 the Government brought in changes to the taxation of trusts and so these different trust arrangements are often no longer suitable for IHT purposes. However, pre-2006 it was common for these types of trust to be set up and so many continue to exist today with families who set them up having long forgotten doing so.

Following the changes there has been a move towards considering flexible trust arrangements, which can be useful in some circumstances. However, some providers help clients place their homes in ‘Family Protection Trusts’, which under the current tax regime and based on many client’s circumstances are not suitable. They are usually set up on the basis that they will avoid care fees and probate, however this might not be the case or is often not the main concern of those looking to set them up. It can also then create difficulty when an individual later looks to downsize, remortgage or otherwise deal with the property only to find they are limited in what they can do as their property is held in trust.  

There can also be other implications during the lifetime of a trust which need to be considered, including:

•  The need to add or remove trustees (i.e. due to death or incapacity);
•  The impact on an individual’s IHT position (i.e. the residence nil rate band or gifts with reservation of benefit rules); and
• Ongoing trust administration and tax reporting.

Trusts continue to be useful estate planning tools and there are particular situations where they are more likely to be beneficial, such as:

• Where flexibility is required to cover complex family relationships or long-term generational planning;
• If there is a vulnerable beneficiary; 
• Where there are tax planning opportunities such as assets which may grow in value, where an individual has excess income or has an interest in business assets.

It will depend on a client’s circumstances as to whether a trust is suitable but must be carefully considered in each case and reviewed regularly (every five years or after a life event).

If you wish to review an existing trust or discuss estate planning, please do get in contact with a member of our team.