Most people don’t know what Trusts are, how they work and if there is any advantage in having one. We hope, in this article, to briefly explain how Trusts work and what the benefits are.
Let’s start with the basics. A Discretionary Family Trust (sometimes called an Asset Protection Trust or Property Protection Trust) is a device that’s used to legally separate the ownership and control of assets from the people who are entitled to their use and enjoyment. The assets can be anything of value – property, money, antiques, stocks and shares etc. If we take the example of the family home, if it’s transferred into a Trust, whilst the parents would continue to live there, they would no longer be the owners.
There is some legal jargon when dealing with Trusts and it might be an idea to explain that now.
The people who set up the Trust are called the Settlors. They’re the people who own the assets before they’re transferred into the Trust.
The Trustees are the people who deal with the administration of the Trust. The document creating the Trust will contain a list of powers that the Trustees can exercise. In a Discretionary Family Trust, the Trustees are usually the Settlors, perhaps an additional family member and, usually, a professional adviser.
The Beneficiaries are the people who will benefit from the Trust. These are usually the Settlors themselves and members of their Family.
The Trust Deed outlines why the Trust was set up and who the beneficiaries. It also identifies the Trustees as well as providing a list of their powers. It is essential that the Trustees have power to exercise their discretion for this kind of Trust to work properly.
Once the Settlors transfer the assets into the Trust, they are no longer the legal owners of those assets – but they can continue to enjoy them as they will also be beneficiaries of the Trust.
When assets are transferred into a Trust they no longer belong to the Settlor and do not need to be included when their estate is wound up after their death.
The Settlors can (usually) continue to live in the family home if it has been transferred into the Trust and the Trustees will be responsible for maintaining it.
It MAY help you avoid having to pay for any care costs that are incurred. Despite what you might have heard or read, there is no guarantee that by placing your assets in a Trust you will avoid having to pay for the cost of care in the future.
In dealing with the issue of paying for care costs, the Local Authority has to consider if there has been a “deprivation of assets” with the sole purpose of avoidance of care costs. The decision on care funding is means tested by the local authority and one of the questions it will ask is whether the person requiring care has ever owned any property. If they have, they will ask about when and in what circumstances the property was disposed of. There is no time limit as to how far back the Local Authority can go in its investigation.
If the property has been transferred into the Trust (or given away in the case of a transfer to a family member) within 6 months of the person requiring care, the Local Authority can look to the person who received the asset to pay for the care costs!
If the Local Authority makes a decision that there has been a “deprivation of assets” through a transfer into a Trust, it can apply a “notional” value to the property transferred into the Trust and apply that to the calculations it uses when making a determination on whether it is required to fund the cost of care.
It might be considered a legitimate purpose to create a Trust to manage the transfer of assets to family members (usually children) by parents with the purpose avoiding the costs of Confirmation (Probate in England) and winding up the estate.
If, however, the person is in ill-health when creating the Trust and it seems that they might very well need care in the future, then it is likely that the Local Authority would be entitled to consider there to have been a “deprivation of assets” and apply a notional value on the assets transferred into the Trust.
If you are thinking about creating a Trust, you should consider the following:
• Are you in good health, fit and healthy and don’t foresee the need to move into residential accommodation;
• That the Trust is being set up for a purpose other than the primary aim of avoiding care costs;
• That the transfer of assets into the Trust occurred at least 6 months before the Settlor requiring care;
There is a very useful Report called the “Charging for Residential Accommodation Guide“(CRAG) that Local Authorities pay close attention to when carrying out their assessment of contribution towards care costs. You can access that Report by clicking here.
If you would like to meet to discuss whether a Trust is the right thing for you, please call us on 0800 005 1755 or email us now to arrange an appointment.