Asset Protection Trusts
One option adopted by concerned parents has been to transfer assets directly to the next generation (“the children”). We put forward various arguments against that:-
Control and Land and Buildings Transaction Taxes
The children would own the assets from the date of the transfer. The parents would no longer have any say in whether a sale might take place. The children would have a second property interest, and if they moved house, they would be liable to the additional 3% Additional Rate of LBTT.
If one of the children died before the parents, the share of the asset transferred to that child would then pass to the beneficiaries of his or her estate. The beneficiaries could include son or daughter-in-law, or someone outwith the family who might want to cash in the asset.
If one of the children became insolvent, his or her trustee in bankruptcy might sell his or her share in order to pay creditors.
Although this is an unlikely scenario, as the asset would not be matrimonial property, if one of the children divorced after the transfer, it is possible that his or her asset could be taken into account in arriving at a financial settlement.
Capital Gains Tax
The children might face a Capital Gains Tax liability when the asset is ultimately sold.
Rather than being exposed to these dangers, there are two options which carry less risk for parents.
Parents would create a trust which would provide that they and the survivor of them are entitled to a life interest in the gifted assets, which means they are entitled to the use of the trust assets during their joint lifetimes and on the death of the survivor these assets would then pass to the children. Trustees are appointed to administer the trust assets and the parents may wish to be included as trustees, which is permissible, though it would be more usual to have the intended children as trustees along with a professional person.
The parents would then transfer the ownership of the assets from their names to the trustees’ names.
If the parents’ Principal Private Residence in the trust, and they require to go into care, then the house would be sold and the money from the sale of the house would continue as an asset of the trust. The parents would be entitled to receive the increased income which that money would generate.
Looking at the dangers highlighted above, the Trustees nominated have control, the children are not attributed as having a second property for LBTT purposes, and predeceasing, insolvent or divorcing children have no claim on the trust. If a house is included, it continues to qualify for a personal private residence exemption and no capital gains tax liability would arise.
If in the future the parents have to go into residential care, the capital value of the trust assets might be taken into account for the purpose of calculating any benefit which to which the parents might be entitled. This would depend upon the Regulations then in force. Much would depend on what is interpreted as the motive for creating the trust, and the time gap between the transfer to the trust and the requirement for care arising. The income from the trust assets would undoubtedly be taken into account.
Most couples hold title to their house in joint names. Under this option, the one half share of the house belonging to the first to die does not pass under his or her Will to the survivor, but to a trust for the benefit of the survivor, and then on the survivor’s death to the intended children.
This has all the advantages of option 1 when compared to an absolute transfer to the children, but there are advantages and disadvantages when compared with Option 1.
The advantages are the parents do not set up a trust now, in most cases the trust is set up by a Codicil to Will, and the change to the parents’ Wills cannot be challenged by anyone. The disadvantage is it protects only the half share of the house belonging to the first to die. The survivor’s share would be taken into account.
Key Contact – Allan Nicolson