Asset protection and probate trusts
27 November 2018
29 July 2019
The recently announced increases in the probate fees have, not unexpectedly, resulted in the increase in the number of articles proclaiming the benefits of the so-called probate trusts. Around the same time we have had more details of the fallout from the Universal Asset Preservation Trust scandal. It is therefore timely to consider the pros and cons of using trusts for reasons other than making gifts or tax planning in general, namely to protect assets and avoid probate.
Protecting assets from creditors and from the local authority
Many people these days are concerned that their assets will be used up in paying for their care in their old age, so that there will be nothing left for their children to inherit. Some firms have actively promoted the so-called “Asset Protection trusts”, sometimes called “Family” or “Universal” Asset Protection trusts.
These trusts promote the idea that transferring all your assets to a trust during your lifetime is a great way to protect them from inheritance tax, care home fees, creditors etc, not to mention ex-spouses. And all this can, allegedly, be done without losing control over the assets and being able to continue to deal with them as you wish.
Whilst it is perfectly possible to protect one’s assets if they are transferred to a trust early enough, there have been many concerns over the years that some of the claims made by those marketing the schemes mentioned above are misleading, or else, if trusts are created where “the settlor can change their mind at any time” and “retain full control of what goes in and what comes out of the trust, no questions asked” (to quote from some of the marketing literature), whether these are proper trusts or indeed shams. Furthermore, some promoters have clearly overstepped the mark of legality. In 2015 eight people received prison sentences at Nottingham Crown Court for mis-selling the so-called asset protection trusts to elderly clients.
The most recent scandal involved Universal Wealth Preservation and its associated companies, Universal Trustees LLP, Universal Asset Protection Ltd and Universal Tax Solutions ('Universal').
These companies, amongst other activities, promoted the setting up and management of trusts of the kind mentioned above.
Despite complaints dating back to 2011 the companies continued to operate until recently (Universal Asset Protection Limited entered into a compulsory liquidation in May 2018) and indeed STEP only ended the membership of the brains behind Universal, Steven Long, last October. The complaints have been the subject of an edition of the BBC Radio 4 "Money Box" programme and, more recently, the BBC’s Panorama. Reportedly there have been more than 140 cases of possible fraudulent activity by Universal Wealth Management causing losses to their clients. The police are investigating.
Many of the victims, when interviewed, admitted that the main reason why they "bought" the trust was to protect their assets from care home fees. Clearly, there must have been a lot of mis-selling even if not outright fraud. It is surely well known amongst advisers that a transfer of one’s home to a trust in order to avoid care home fees is likely to be considered to be a deliberate deprivation of assets and, as such, ineffective for the very purpose it was set up. That people willingly pay thousands of pounds and are happy to transfer their home to a third party just shows the power of persuasion of these promoters.
Of course, in the case of Universal there were other problems including the management (usually the lack of it) of trusts, delays in estate administration, delays in receiving payments from trusts, concerns over the security of assets which have been transferred into these trusts (and the recoverability of those assets) and the security of original Wills and trust documents (and difficulty in obtaining those documents from Universal).
Now many of the victims, even if they have not lost their home or other assets, will face problems with recovering their assets and the financial costs of unscrambling the arrangements. The first thing would be to change the trustees of any such affected trust and this may involve an application to the Court.
If any adviser comes across such a victim of the Universal, they should advise them to seek help from a reputable professional and, if they have not done so already, report their concerns to Action Fraud quoting 'Operation Ardent'.
Just to reiterate the point about trusts and care home fees, it is important to remember that while, in theory, asset protection trusts can be used to protect one’s assets, the local authority may decide that a particular individual “deliberately deprived themselves of assets for the purposes of avoiding paying for care” and, in such a case, they would assess the contribution as if the settlor still had the assets. And if assets have been transferred (whether to a trust or outright) with the intent of avoiding using them to pay for care within six months of entering a home, or while a person is in a home, the local authority has powers to recover from the person to whom the assets were given (ie., the 'third party') any money owed to them in respect of the original owner's place in a home. If the asset in question is a house, the local authority can put a charge over it.
Probate trusts and new probate fees
What is a probate trust?
Before 22 March 2006 the type of trust called a “probate trust” had a uniform meaning. Typically, it would be a trust settled by an individual granting a life interest to himself, followed by flexible trust or discretionary trust provisions after his death. If the settlor was entitled to a life interest under the trust he had created, the transfer of assets to the trust would have been neutral for IHT purposes as the property would simply continue to be included in the estate of the settlor by virtue of his interest in possession and no transfer of value had taken place.
Following the changes to the taxation of UK trusts introduced in 2006, creation of such a trust during lifetime would now be a chargeable lifetime transfer (CLT) as well as a gift with reservation of benefit (GWR), as the tax-favoured treatment for most lifetime interest in possession (IIP) trusts ended on 21 March 2006 (if a pre-2006 trust was created under which another person had an IIP, the transfer to such a trust would have been a PET). This is the general rule. The only exemption from this rule is in respect of settlors who are disabled or “prospectively disabled”.
Leaving aside trusts for the disabled, it is well known that if assets are held in a trust there will be no need for probate when the settlor dies as the legal title to the assets vests in the trustees. Indeed, one of the key benefits of having a life assurance policy subject to a trust is that the death benefit can be paid to the trustees without delay (as long as there is at least one surviving trustee) because there is no need to wait for probate. The new term "probate trust" that has developed since 2006 denotes a trust which is made with the main purpose of avoiding probate, regardless of the type of trust, except that the settlor remains a beneficiary under the trust.
Types of probate trust currently in use and their tax implications
Providers of draft trust forms have tried to be creative and so we have fully discretionary probate trusts, flexible IIP probate trusts and bare probate trusts.
The common feature is that all of these are not effective to mitigate inheritance tax. It is well known that if the settlor retains a benefit under a trust this will be a GWR and so the value of the trust assets will remain in the estate of the settlor. But what of the initial gift?
If the trust in question is a fully discretionary trust or a flexible IIP trust, the initial transfer will be a CLT and the trust will be subject to the periodic and exit charges (the "relevant property regime"). Clearly, in most cases making gifts that would result in an immediate tax liability would not be recommended (i.e. if the CLT caused the settlor's nil rate band (NRB) to be exceeded). However, if the value of the gift was comfortably within the NRB so that any potential IHT charge can be avoided, then such a trust may well make sense as a probate avoiding vehicle as long as the settlor is happy to give up (or at least share) control over the assets with the (additional) trustees.
When it comes to "bare probate trusts", the position is somewhat confused by the often conflicting advice from the providers, with some claiming that the creation of such a trust has no IHT implications whilst others claiming that the initial "gift" will be a PET.
Looking at the definition of a PET, for gifts made on or after 22 March 2006 only gifts by one individual to another or to a disabled trust will qualify as a PET. A gift can be made to an individual and so be a PET
- to the extent that the value transferred is attributable to property which, by virtue of the transfer, becomes comprised in the estate of that other individual,
- or so far as that value is not attributable to property which becomes comprised in the estate of another person, to the extent that by virtue of the transfer the estate of that other individual is increased.
Under a bare probate trust, the only beneficiary is the donor so neither of the above conditions can be satisfied and therefore no PET will be involved. In such a case no transfer of value takes place at all. In effect this "trust" is more akin to a nomineeship, as the trustees' job is merely to act on behalf of the donor.
To ensure that the trust is a bare trust there must not be any conditions or provisions as to what should happen on the death of the donor. All the providers of these trusts are in agreement that it will be the beneficiaries under the Will or intestacy who will become entitled on the death of the donor. But if this is the case, then does this trust actually avoid probate? And will it avoid the new increased probate fees?
New probate rules
Most readers will remember the attempt in 2017 by the Government to increase probate fees, abandoned after consultation which roundly criticised that attempt. It was therefore both surprising and disappointing that the Government has again re-introduced the increase in fees using a Statutory Instrument. In England and Wales from 27 November 2018 the fees are based on the size of the estate and while estates below £50,000 will now be exempt, the fees for the rest will vary from £250 to £6,000. One in five families can expect to have to pay £2,500 in fees for estates estimated at just over £500,000.
It should be noted that the fees in the rest of the UK remain unchanged, i.e. the bereaved in Northern Ireland will continue to pay £237. In Scotland things are a little more costly with a fee of £256 if the estate is between £50,001 and £250,000 and for those exceeding £250,000 – £512.
The Government justifies the increases (which are supposed to bring in an extra £145 million of revenue) by the need to upgrade the English Courts and Tribunals system. I should add that there is a great deal of indignation amongst practitioners at this extra "tax" on the bereaved and we are urged to write to our MPs asking for the reversal of this new law (which Parliament has the power to do).
As indicated at the beginning of the article, we have already seen extra publicity given to "probate trusts" with particular emphasis on bare probate trusts.
The question is: will a "bare probate trust" of the kind described above actually avoid probate fees, indeed the probate itself?
One provider tells us that "as the client is not the legal owner of the trust property, the estate should not pay any probate fees on the assets within the trust – these fees are charged on the assets owned by the client at the time of death". But is this really the case? Who does really own the assets? And what is the probate fee based on?
The probate fee is based on the net real and personal estate passing under the grant. The question is therefore: do the assets held in a bare trust pass under the grant or not? There seems to be an agreement between the providers that it will be the beneficiaries under the Will (or intestacy) who will receive the trust fund, although in some cases this is to be made via the executors whilst, according to some other providers, the trustees of the bare probate trust will be able to make the payment directly to the Will beneficiaries.
It needs to be clarified that the trustees of the bare probate trust cannot do anything other than act at the direction of the donor, or after his death the executors. Therefore, they will not be able to make any direct payment to anybody other than the executors. It will be up to the executors to pass the asset to the beneficiaries (assuming the money is not needed to, say, pay any debts of the deceased). It therefore seems extremely unlikely that the value of the assets in the this type of trust will "bypass" the estate for the purpose of the probate fees nor indeed, effectively, the probate itself. Cleary, if the asset, say a bond, is held by a trustee, that trustee will be able to surrender the bond without a grant of probate. But it seems the only thing such a trustee will be able to do is to pay the money over to the executors of the deceased donor to be dealt with as part of the deceased’s estate. Of course, it may still be useful to provide funds to pay any inheritance tax.
Trusts continue to provide an extremely useful tool in financial and estate planning. However, potential settlors need to be fully aware of what they are getting themselves into and it is the duty of advisers to explain fully the consequences of any trust they are recommending.
As for probate/probate fee avoidance, it is clear that "proper" settlements will avoid both. In particular, life interest trusts, even where the value of the underlying assets is in the estate of the deceased (such as an immediate post-death interest trust), the value is not included in the probate value and no probate is needed for the trust to continue (as long as there is at least one surviving trustee). Naturally such trusts do come with their own tax consequences.
There are also other ways to reduce an estate for probate purposes, including deathbed gifts or transferring assets into joint ownership, although the latter is also not without risks.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.