Several people have come to me recently with questions about so-called Asset Protection Trusts (APT). In fact several professionals have also reached out to me recently on Indeed with the intention of me marketing their APTs to my clients and taking a commission. I feel it important to write this post to explain a few things about them.

What is an Asset Protection Trust?

The APT is purported to be a mechanism by which you can protect your assets and save them from being swallowed up by care fees and/or inheritance tax (IHT). The idea is that you take the asset in question and put it into a trust while you are still alive – a lifetime trust (as opposed to a will trust that only activates on your death).

Once you have placed assets into a trust, they no longer belong to you. Legal title of the trust property is held by the trustee while the beneficiary holds beneficial title to the trust property. Once the trust comes to an end, the beneficiary becomes entitled to the property and then receives the legal title to the property –  they become absolute owner of the property. Does this all make sense so far? I hope so.

There are certain trusts that could be viewed as APTs. A good example of this would be the Right to Reside Trust. This is where you provide someone with the right to reside in your property once you have passed away, with the property passing to someone else when the resident has passed away. A working example of this in action would be when you want your surviving partner to continue to live in your home for the rest of their lives, but you ultimately want your children from a previous relationship to inherit the house in the end. This trust can also help to mitigate care fees if used correctly. There is more on that below.

I am not going to say that lifetime trusts do not have their benefits, in particular when it comes to IHT. But it is important to understand that your estate is liable to pay IHT on the trust from the moment that it is created, not just when you pass away. The trust will eat into your Nil Rate Band which you can read about here. If the value of the property that you are putting into trust exceeds your remaining NRB, then you are liable to pay 20% IHT when the trust is created in your lifetime. There are then anniversary charges and exit charges to consider, but depending on how long the trust is to run for, your estate may end up paying less IHT on the asset that it may have done had it not been put into trust and just passed absolutely under the will. This subject is something that is beyond the scope of this article and I won’t discuss it further.

It is important to understand that the Right to Reside Trust I referred to above is a trust that is written into a will, and not a lifetime trust. The dangers that I refer to in the title of this post are solely focussed around lifetime trusts.

Gift With Reservation of Benefit

If you are thinking of placing your home into a trust for your children, or even handing complete ownership of your home over to them, and then continuing to live there, then don’t. It’s not going to work. The HMRC will view this as a gift with reservation of benefit. You have gifted it to someone but you are continuing to enjoy the benefit of it. In the eyes of the HMRC, you still own it. In short, this means that HMRC will treat it as still belonging to you when it comes to calculating IHT on your estate when you pass away. Thus the trust was a waste of time, money and effort.

I have used the family home as an example here, but it doesn’t have to be the family home. It can be any asset at all. If you have a nice Sunseeker yacht and you gave it to your son but you still continue to sail it around Poole Bay every weekend, that Sunseeker still belongs to you in the eyes of HMRC.

Deliberate Deprivation of Assets

It is on the local council to assess how liable you are to pay for your own care fees. They are legally entitled to go through all of your personal finances to see what you own and what your cashflow looks like. If your estate is valued at more than £23,500, then you will have to pay yourself.  This figure is referred to as the Upper Capital Limit (UCL). Bare in mind that the UCL does not include your residence. However, if you end up in long term residential care, your house is no longer your residence. This means that it will be included in the care fee assessment.

There has been talk from the government for some time now about raising the UCL from £23,500 to £100,000 and also introducing a cap on the amount of care fees you would need to contribute at £86,000. However this was meant to be introduced in October 2023. At the time of writing this we are 2 weeks shy of a general election that the current government is undoubtedly going to lose. There is no indication of what the incoming government will do in regards to this matter, and given the hideous economic situation we have been in for many years now, I wouldn’t bet on this being changed any time soon. But I digress.

If you are trying to reduce the value of your estate to mitigate how much you may end up having to pay in care fees, then be careful about giving things away shortly before long term care becomes a necessity for you. Just like giving it away, putting the asset into trust is not going to successfully hide it from the council when they analyse your finances to assess you for care fees. This would be seen as a deliberate deprivation of assets and, as a result, the council will include the value of the asset when calculating your care fee liability. Again, the trust was a waste of time, money, and effort.

With joint assets there are a few things you can do to reduce the value of your estate.  Severing a beneficial joint tenancy on any property you jointly own is one way. You can not deprive yourself of an asset that never belonged to you in the first place and as such severing the tenancy prevents that half of the house being taken into consideration for care fees. Though you will want to add a Right to Reside Trust in your will if you do that.

If you jointly own bank accounts then there is nothing stopping the other owner from taking the money out of that account. You would not have deprived yourself of the assets, the other owner did. Again there would be no deliberate deprivation of assets. But I would recommend you seek advice before doing anything.

Reserved Activity

The other important aspect to consider here is that drafting a lifetime trust – unlike a will trust – is what is referred to as a reserved instrument activity under the Legal Services Act 2007. It is a criminal offence for anyone that does not have practice rights for reserved instrument activities to draft and execute lifetime trusts. People can and have received several years in prison for drafting these trusts without practice rights to do so. The only people that are legally entitled to draft these trusts would either be chartered legal executives with the necessary practice rights, or practicing solicitors. Anyone else is a cowboy who is treading on very thin ice.

I am not saying for a second that every professional that has reached out to me over Linkedin recently has been a cowboy. They may have someone on their books, or partnered with that does have the right to draft and execute these trusts. But those that I have spoken to have been very elusive about how they operate, instead focussing on highlighting the profits that I could make. For saving my own skin, and the skin of my company I won’t be touching these people with a 10 foot barge pole.