What is a Family Protection Trust
Family Protection Trusts are often recommended to individuals and families who want to protect their assets from potential future creditors. They are designed to protect the family home from certain creditors, such as care home costs and inheritance tax liability. However, many clients are unaware of the implications of setting up a Family Protection Trust, and may not have been properly advised of the potential pitfalls of doing so.
A Family Protection Trust is simply a trust that holds assets owned by an individual or a family. However, once assets such as the family home are transferred into a trust, the trust owns the property and the family no longer owns it.
Problems with Family Protection Trusts
One of the most common issues with Family Protection Trusts is the deprivation of assets. If a council believes that a trust has been set up to avoid care home costs, it can challenge the trust in court. If the council is successful, the trust is ineffective and the costs of setting up and running it, plus the court costs, are all wasted.
Another common problem is that some professional trustees insist on being paid to resign their position. This may not be an intractable problem and can be subject to negotiation.
Additionally, where a property is subject to a mortgage, the lender is very unlikely to agree to allow the property to be transferred into a trust while there is still an outstanding mortgage. This could result in the mortgage company seeking to recover the full amount of the outstanding loan if they become aware of the transfer.
What’s more, almost all trusts should have been registered with HMRC by late 2022. A failure to register a trust with HMRC potentially exposes the trustees to a penalty for late registration. Trusts must also pay tax every ten years and may be liable for tax if assets are sold.
Getting Advice on a Mis-Sold Trust
If you believe you have been mis-sold a trust, it is worth getting independent advice on what it means for you and your family, including how the trust works, the options for removing trustees, registering the trust with HMRC, and whether any tax is due. Tax advice should be sought from a qualified, independent accountant, as this falls outside the scope of legal advice.
Family Protection Trusts have often been mis-sold as a way to protect assets, but they can be complex and may not provide the protection families expect. Many individuals and families have previously been advised to put their family home and other assets into a trust, often without a full understanding of the consequences.
For many families, a properly drafted will and wider estate planning provide a simpler and more effective way to protect their assets than a family protection trust. Speak to our wills and estate planning team to discuss the options available to you.
