Family Asset Protection Trusts
Lock away your biggest assets in trust for your family’s future benefit
Enjoy the benefits and protection they provide
There is no better way to look after your family
Trusts are there for everyone’s benefit, not just for the rich. They have been working successfully for many family specific reasons, preserving usually very hard earned money for use by future generations.
A Family Trust is like a safety deposit box for you to keep your assets in, such as your home and savings. Whilst you are fit and well, you can transfer your assets into the Trust established in your own name and primarily for your own benefit whilst you are living, life simply carries on as before. At the date of death the other named beneficiaries of your Trust are then able to seek advice and discuss their options with your professional trustees.
Here are some of the reasons why you should seriously think about it:
- Avoiding the cost of Probate on your estate, this is likely to save you 2-3% of the value of your estate, because Trust assets are not subject to probate costs at the date of death.
- If you want to relieve your family from having to otherwise deal with your estate after death, setting up an FAPT will do just this, whether your family are likely to be too busy, live overseas or simply couldn’t cope with the role of Executor
- Preventing ‘sideways disinheritance’ which can happen if the survivor of a couple remarries, the remarriage will revoke the survivor’s Will. If the survivor dies next, the new spouse will inherit and the children from the first marriage will legally be disinherited. An FAPT will prevent this from happening.
- Children inheriting at the wrong time, it is not uncommon for children to have shaky marriages, unemployment, alcohol drug or gambling problems. Remember 1 in 3 marriages ends in divorce. A child may also be vulnerable or easily led by others. In these circumstances it would be unwise to leave a large share of your estate to a child with such problems. An FAPT can retain an inheritance until the time is right to distribute it.
- If you have a dependent or disabled relative who relies on State benefits for support, and you leave them an inheritance, it will usually replace their benefits until it has all but gone. Leave it in an FAPT and your discretionary trustees can manage it for that person’s benefit throughout life without affecting their State entitlements.
- Dependent relative claims on your estate are more common than you might think these days, people can come out of the woodwork and contest your Will, whereas they cannot contest an FAPT after 6 years.
- Surprisingly often when a parent’s estate is added to the children’s estate, the children are faced with an Inheritance Tax (IHT) liability, especially if a couple inherit from both sides of the family. It is silly if parents do not have an IHT liability but then create one for their children. An FAPT can prevent this from occurring.
- Assets held in trust and managed by your professional trustees, are in effect acting as your Power of Attorney for the bulk of your assets, more over as trustees they will have more freedom of action than an Attorney which is usually far better for you.
- If you are a couple an FAPT will help with care costs because having placed your own assets in your own Trust, this action will prevent them from being used by your partner for their care costs. This will protect one half of your assets.
- If you are single, a widow or widower an FAPT will not help with your care costs but it is still very worthwhile having an FAPT to eliminate the other risks described above.
Top 10 Inheritance Tax Tips
- The Annual Exemption – you can give away £3,000 each year, so a couple can give away twice this amount. If you don’t use this allowance one year, you can use it in the next year.
- Gift Assets to your Children – these are known as ‘potentially exempt transfers’ (PET’s) and provided you survive 7 years then the job is done. Who should make the gift? Will you lose control of the asset that you’ve gifted? Well, you can protect the gift in the hands of the recipient so you don’t need to lose total control of it.
- Gift part of your house to your children – after 7 years it is out of your estate for IHT. The trouble is you have to pay full market rent to your children. They in turn have to pay income tax on the rent received. If they sell it they will be liable for Capital Gains Tax (CGT) on the gain on their share, and if you get it slightly wrong the gift will fail entirely. The better solution is for one spouse to sell their half share of the house to the other spouse in exchange for an IOU, which is then gifted to the children as a 7 year PET. After 7 years, half the ‘value of the house’ is out of the estate for IHT, but the married couple still owns the entire house.
- IOU Scheme – as tip no. 3 above but it can be done with any asset, e.g. a share portfolio, second property and so on. When set up properly, the value of the asset will be taken out of the estate after 7 years.
- Deed of Variation (DoV) – say a relative dies and leaves you an inheritance that creates you an IHT liability. Use the DoV procedure to vary that Will after death and set up a Trust to receive the inheritance for the benefit of you, and your family. There are time limits but this works very well if set up correctly.
- Gift out of regular income – if you have an IHT estate and your income is higher than your expenditure, the problem will only get worse as time goes by. Gifting the excess out of regular income to your children is immediately exempt from IHT. The rules can be tricky to implement but this is a very significant exemption if used correctly.
- Business Property Relief (BPR) Scheme – if you hold investment assets in a BPR scheme for only 2 years they will be 100% exempt from IHT. You need to retain these assets until you die but you can get an income and, since you have not given these assets away, you can cash them in at any time if you need to.
- Settlor Excluded Trust – if you want to gift an asset to your children to avoid your IHT after 7 years, but the asset has gone up in value (like a house) and would trigger a CGT liability if you sell it, you could instead set up a Settlor Excluded Trust and transfer the asset to that trust. As you are the Settlor and a trustee you therefore retain control of the asset, but as you will have no benefit from it, given 7 years it will be out of your estate for IHT and you will get holdover relief for CGT as well.
- Discounted Gift Trust – can seem attractive and you can get an immediate IHT exemption for part of your initial investment. The trouble is the portion that is exempt is based on your age and health so it may not be as great as you had wished for.
- Family Protection Trusts (FPT’s) – avoid the problem in the first place. If inheriting from your parents is going to give you an IHT problem, get them to set up FPT’s because with their assets ‘in trust’ you will have the option of borrowing your inheritance from the trust in exchange for a valid IOU so that you get the full benefit of the inheritance without incurring an IHT liability.
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