Wealth Preservation Trusts?

My wife and I went to a free seminar recently, run by a company selling "Wealth Preservation Trusts"

The idea seems to be that if you each put your assets - such as half of your house and other investments (up to a limit of £325k (the IHT nil rate band) - into a trust, they will be protected against being swallowed up in Care Home fees if you need to go into care, will avoid the need for probate when you die (provided you don't have too many assets outside the trust), and will ensure that assets stay within your blood line and don't get swallowed up if your heirs go bankrupt or get divorced after inheriting from you.

Obviously there is a one-off fee for setting up the trusts, writing new wills, setting up powers of attorney, etc. and also ongoing fees for managing the trusts. It is claimed that the amount saved in the long term will be way above the level of fees paid. [They're not claiming that this will avoid IHT if you have assets in excess of the nil rate band - but they appear to offer other (as yet unspecified) products to address this particular issue].

It all *sounds* plausible, but there *has* to be a major snag somewhere! What is it?

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Yeah, it very likely wont work

tim

Would you care to expand on that?

If you are rich enough to potentially benefit from such a scheme, then you are also rich enough to pay for professional, independent advice. These things can be suitable for some people, but not everyone, and even if it is suitable for you then you need to choose your supplier carefully.

The best source of professional advice will be a solicitor who specialises in estates and trusts, since this is as much (if not more) a legal issue as a financial issue.

Mark

Sounds like a discretionary trust - some call them family trusts - which any half-way decent adviser dealing with personal finance would know about (though as others have said there are specialists in drafting them). On a point of detail though, such a trust can be taken into account on the divorce of a beneficiary.

Given there are very many such trusts (and many still being created) you wouldn't expect showstoppers. But there are pros and cons and given they appear to be selling a product they may not have mentioned all the cons.

If you use the search engine of your choice to look for the pros and cons of discretionary trusts you should find more.

One problem that might arise is with IHT and probate.

If it fails to work you cannot complain.

Additionally, the administrators of this scheme are only responsible to you. I suspect that your executors and beneficiaries have no contract with the scheme managers and would find it difficult getting recompense. [Assuming that the managers are still in business].

I would want to understand their business model.

Deliberate attempts to avoid care home fees are likely to be ignored. If you use this sort of tactic when such fees are becoming inevitable, the council will treat it as an attempt to evade your responsibilities and include the value of the trust in your assets.

Lifetime transfers into discretionary trusts are immediately chargeable to inheritance tax. I think the rate may be less that the full rate after seven years, but they still count towards your taxable estate on death. Tax on income may be up to 45%, if it exceeds £1000 a year.

If the house is included, you'll actually have an interest in possession

trust, which has some differences. I seem to remember that transfers into such trusts are ignored for some purposes, or treated as occurring on death, which probably brings one to the biggest problem: the law is complex, you are going to need to keep good records and make sure that you are paying the right tax (or you will end up paying large fees to the trust manager to do that) and there is going to be a lot more hassle

for your executors.

Actually, looking through

it looks like what is probably being sold here is an interest in possession trust and it looks like it is ineffective for inheritance tax planning, but might provide protection from care home costs if the council agree that that was not why it was created.

I would guess the worst case scenario would be that the council counted it as assets, but you were unable to access those assets.

One suspects it is better to have someone different do the wills and LPA

(I don't see why you would need an ordinary power of attorney), and let the trust manager just manage the trust. I don't think there is any legal requirement to have a professional manager.

Yes, they do point that out, and make it clear that this only works if you set up the trust at a time when you're reasonably fit and not in obvious need of care.

They claim that transfers up to the nil band limit don't incur immediate IHT. Is this not correct?

Yes, they don't claim that the basic scheme would save IHT - that needs something further!

They claim that they have all the necessary skills and resources under one roof - which may or may not be a good thing. They seem to have multiple companies - for managing trusts, writing will, running seminars, etc. - about 10 in all, all owned by one man who appears to be the sole director of all of them. I can't see any evidence that these business are regulated by any specific body, which is a bit worrying.

I think immediately chargeable means that they count towards a total of such transfers, and if you exceed that, you will start having to pay tax in your lifetime. PETs can drop out of IHT, so you don't have to pay tax on them in your lifetime.

I would suggest that, if they didn't tell you HMRC's names for the arrangement, they are trying to prevent you from doing your own research, and should be avoided.

Sorry about replying to my own reply but....

In today's Mail -

I would estimate there is less work involved than a standard house sale,

so £2,000 is way over the top! It will also basically be a fill the boxes exercise, so would mainly be done by a junior clerk.

I suspect that you have a comfortable lifestyle, and I'm surprised that you seem relaxed about the possibility of all that changing when you go into the kind of care home that the state would be likely to pay for. In your position (from what I can judge on the basis of little information) I'd prefer to keep my assets accessible so that I can make sure I have a comfortable old age.

YMMV, but it's worth thinking about. Don't just assume that you'll be happy with state-funded care if there are other options available to you.

The people running the scheme claim - but I can't vouch for its accuracy

- that if you qualify for state aid on account of having no tangible assets ('cos they're in the trust), you can choose your own care home and the state will pay what it would have paid for the type of home you refer to, leaving you to top up the fees from the trust.

Clearly, that would need to be verified!

That is broadly what I undertstand to be the current position on care fees. But of course things can change.

I note also that they envisage what HMRC call a "settlor-interested trust" which has tax implications (income, CGT and IHT). All set out on the HMRC site and elsewhere. Eg you as settlor will be liable to income tax on income the trustees receive whether or not you benefit from it. And that too can all change. Eg I've long wondered if discretionary trusts might be a target for a cash-strapped Chancellor in times of auterity. After all, I suspect the vast majority of people everyone with money tucked away in a "family trust" as rich toffs who can well afford to see their trusts' periodic charge increased from 6% every 10 years to, say, 5% every 3 years ;)

That might not be as logical as the current regime but then so few tax changes are logical in these days when "fairness" rules.

Another thing that could change is that, if the sort of trust in question does succeed in being discounted as a source of capital for care home fees, but still usable to pay them, I can imagine that the rules will change to close that loophole before the care home is actually needed. Either it will be made such that it is included in capital, or the ability to top up the fees from it will get removed.

Though I should perhaps have stressed that many politicians - of all 3 main parties - come from backgrounds where family trusts would be the norm. (In part of course because so many of our MPs come from political dynasties.) So on sober (hic!) reflection perhaps changes to the detriment of such trusts are in practice rather improbable.

The people running the scheme claim - but I can't vouch for its accuracy

- that if you qualify for state aid on account of having no tangible assets ('cos they're in the trust), you can choose your own care home and the state will pay what it would have paid for the type of home you refer to, leaving you to top up the fees from the trust.

Clearly, that would need to be verified!