Why We Will Not Sell You a Lifetime Asset Protection Trust

At some point, if you own a home, someone will offer to sell you a lifetime trust. It might be called an asset protection trust, a family protection trust, a home protection trust, or a property protection trust. The names vary, the pitch does not.

You will be told that by putting your house into this trust now, while you are alive, you can protect it from care fees, save on inheritance tax, and keep it safe for your children. The fee is usually in the thousands, sometimes several thousand pounds, occasionally with an ongoing annual charge on top.

Let us be straight with you. We do not sell these, and we never will. For the vast majority of ordinary families they fail to deliver what they promise, and they can leave you worse off than if you had done nothing at all. This article lays out exactly why, so the next time you hear the pitch you can see straight through it.

The main selling point of a lifetime trust is usually care fees. Put the house in trust now, the argument goes, and the council cannot count it when assessing you for care.

The problem is a set of rules called deliberate deprivation of assets. Carrying out a care assessment, a local authority is entitled to ask whether you gave away or moved assets to bring down what you would owe. Decide that dodging care fees was a significant reason you put the home into trust, and it can treat you as though you still owned the house. The transfer is ignored, and you are assessed on the full value regardless.

There is a common belief that if you set the trust up seven years before needing care, you are safe. That is wrong. There is no time limit on the deliberate deprivation rules for care funding. A council can look back many years, and the fact that a lot of time has passed does not stop them, especially where the whole purpose of the arrangement was obvious.

So the headline benefit, protection from care fees, is the very thing most exposed to challenge. You can pay thousands for a trust and have the council simply see straight through it.

Here is a trap that catches people who own a reasonably valuable home, which these days is a lot of people.

When you put assets into most lifetime trusts, that transfer is treated as a chargeable lifetime transfer for inheritance tax. If the value going into the trust is above your available nil-rate band, currently three hundred and twenty-five thousand pounds, there is an immediate inheritance tax charge of twenty per cent on the excess, payable straight away.

Think about what that means with a real house. Say your home is worth five hundred thousand pounds and you put it into a lifetime trust. The amount above the nil-rate band is one hundred and seventy-five thousand pounds. Twenty per cent of that is thirty-five thousand pounds, potentially due there and then, just for setting the trust up.

Most people are never told about this before they sign. They are sold the trust on care fees and tax savings, and only later, if at all, discover that the act of creating it could trigger a large tax bill. A trust that is supposed to save you money can cost you a fortune on day one.

Even setting aside the entry charge, the tax saving these trusts promise usually does not materialise, because of a rule called gift with reservation of benefit.

The idea behind the pitch is that once your house is in the trust, it is out of your estate, so no inheritance tax is due on it when you die. But there is a condition. To give something away for inheritance tax, you have to actually give it away and stop benefiting from it.

You do not. You carry on living in the house. That is the whole point, you are not planning to move out. Because you keep the benefit of the property, the taxman treats it as a gift with reservation of benefit, which means it stays inside your estate for inheritance tax as though you never gave it away.

So you can end up with the worst of both worlds. You may have triggered a twenty per cent entry charge when the trust was created, and the house is still counted in your estate for inheritance tax when you die because you never really parted with it. The promised inheritance tax saving simply is not there.

One more cost hardly ever gets a mention, and it can be the priciest of the lot.

Sitting on top of the ordinary nil-rate band is a further inheritance tax allowance, the residence nil-rate band. It hands you an extra tax-free slice, up to one hundred and seventy-five thousand pounds per person, but only when you leave your home to your direct descendants, meaning your children or grandchildren.

The catch is that it only applies if your home passes to those descendants on your death through your estate. If you have already put the house into a lifetime trust years earlier, it is no longer passing to your children from your estate in the way the rules require, and you can lose this allowance altogether.

For a couple, the residence nil-rate band can shelter up to three hundred and fifty thousand pounds of value between them. Losing it can add a six-figure sum to the inheritance tax that would otherwise have been avoided. A trust sold to you to save tax can quietly forfeit one of the most valuable tax breaks available to homeowners.

Now the important contrast. Every trap above comes from one thing: putting assets into a trust during your lifetime. A trust written into your Will is completely different, because it does not exist until you die.

Nothing transfers while you are alive. You keep owning your home outright, exactly as you do now. There is no lifetime gift, so there is no deliberate deprivation problem to challenge, because you have not deprived yourself of anything, you still own everything. There is no twenty per cent entry charge, because nothing is being put into a trust during your lifetime. There is no gift with reservation of benefit, because you have not given anything away. And a Will trust can be structured so your home still passes to your children on your death, keeping the residence nil-rate band available.

The trust only springs into existence when you die and your Will takes effect. Up to that moment it is just words in a document you can change any time. That is precisely why it is safe. It does not trip any of the lifetime traps because there is no lifetime transfer.

A trust in your Will can do the genuinely useful jobs, protecting your share of the home for your children, guarding against sideways disinheritance, controlling when younger beneficiaries inherit, without the cost and risk built into the lifetime versions.

We could sell lifetime trusts. There is good money in them, which is exactly why so many firms push them hard. We do not, because for ordinary homeowners they too often combine a large upfront fee with a real risk of a tax bill, a care assessment that ignores the trust, and the loss of valuable allowances.

If someone offers you one, ask them directly about the four traps above. Ask whether the transfer could trigger a twenty per cent entry charge. Ask how the gift with reservation rules affect the promised inheritance tax saving. Ask whether you keep the residence nil-rate band. Ask what happens if a council applies the deliberate deprivation rules with no time limit. A straight answer to those questions tells you a lot about who you are dealing with.

For most families, a well-written Will, with a protective trust inside it where it genuinely helps, does the real work at a fraction of the cost and none of the traps. If you want to understand what actually protects your home and your children, and what does not, our team will give you the straight version on 0800 055 4321.