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If you are financially secure and have assets you wish to pass on to your family when you die, planning for inheritance tax (IHT) is key. As it stands, by law you can leave an estate worth £325,000 tax free. Anything above that amount will be liable to a flat 40% IHT rate.
This might mean that your family may have to sell the family home or, in any case, be unable to benefit from a large portion of the wealth you have accumulated over a lifetime.
If you are worried that this could be a likely scenario for your family, an Asset Protection Trust is definitely worth looking into. Why not discuss this flexible estate planning tool with your solicitor to see if it could be right for your situation?
An Asset Protection Trust is designed for those who want to ensure that 100% of their assets is protected and passed on to the family or other intended beneficiaries. It is chiefly used to protect the equity of the family home, but any assets can be placed in trust.
The Trust is set up in your lifetime by yourself (the settlor), with yourself as a trustee and beneficiary. Once inside, the Trust will keep the ownership of the property private and secret.
You are also one of the trustees, meaning that you retain the benefits and flexibility of home ownership, such as the right to live in your home, sell the property and right of residence in any new property.
Most assets can be placed into trust and you can settle up to £325,000 without any lifetime IHT liability. A husband and wife could create two trusts, with a maximum combined worth of £650,000 held in trust. Assets above the nil rate band are currently liable to an immediate lifetime IHT of 20%. Any property that is not the principal private residence placed into a trust might create an immediate Capital Gains Tax charge. Before setting up a Trust, it is important to take specialist legal advice. A competent tax advisor or solicitor should be able to go through all the applicable tax implications with you.
Since you control the Trust (as one of its trustees), you can transfer assets back into your name at any time, subject to applicable conveyancing or bank fees.
As a discretionary trust, there is considerable protection, with assets not regarded as belonging to any of the beneficiaries (including yourself). Provided that the Trust is established in time and in the correct manner, your property held in trust won’t form part of your estate when you pass away, so will not be included in any IHT calculations. Placing your home into an Asset Protection Trust will ensure that is passes to the people you choose after you death, according to the terms of the Trust, or under the terms of your Will.
Setting up an Asset Protection Trust also gives you the tools to exclude a person from you estate, such as an estranged child or relative. They may be able to make a claim on your estate, but not on the assets held in trust. This can avoid lengthy proceedings and costs.
Furthermore, depending on the complexity of your family circumstances, an Asset Protection Trust can give you the option to ring fence an asset, making sure it goes to your nominated beneficiary after your death. Sideways disinheritance can be an issue for some families, and this way you avoid the difficulties inherent in inheritance scenarios of second and subsequent marriages where children are present.
For instance, if you are planning to leave everything to your spouse or partner but you have children from a previous marriage that you would like to benefit too, the Trust can be used to protect their intended inheritance.
When the Trust ends, the assets will be passed to your beneficiaries without the need to follow any complicated procedures, such as having to apply for a Grant of Probate of Grant of Representation, considerably speeding up the administration of your estate.
Article provided by Mike James, working together with UK based personal injury law firm George Ide, who were consulted over the content in this post.