Posted: Wednesday, 23 June 2021 @ 12:08
This is the second part of two articles
about Lifetime Trusts, their ongoing management, and potential problems
to watch out for. The main purpose of this article is to:
make members aware of their future obligations and the problems
that can arise from not managing
those obligations and,
Secondly, and probably more importantly, to let you know that help is available.
In the first article I dealt with three impending trust issues, which are summarised
again below: -
From the 1st March 2022 (only 18 months
away) most Lifetime Trusts that hold assets in excess of £100/ IOU’s or property
will have to registered with HMRC. Are you ready for this?
Lifetime Trusts are subject to IHT charges
on entry and exit, as
well as, being assessed every ten years. If Trust assets exceed the Nil Rate Band an IHT charge is charged based on 6% on assets valued over the Nil Rate Band. With property values increasing and the NRB
still at £325,000 it’s very easy for Lifetime
Trusts to inflate over the NRB and create an IHT liability. What are you doing to review clients
with lifetime discretionary trusts to avoid these issues
Inheritance Tax (IHT) & The RNRB
In 2017 the government introduced
an additional IHT allowance that increased the amount
you could leave tax free when you die to a
potential £500k per person or
£1M for a married couple. This new allowance is called the Residence Nil Rate Band (RNRB)
and from April 2020 it is set at £175k. But, as with most HMRC concessions, there is catch – the new
RNRB is conditional. How many clients do you
have where the RNRB allowance
will fail because the family home is either in lifetime discretionary trust
or is directed into a discretionary trust
by the Will?
But there are other trust administration issues to consider
as well, particularly: –
1. Trusts not being fully utilised.
2. Mis-selling of Lifetime
3. Changing trustees.
4. Regular reviews.
Trusts not being fully utilised.
When we are considering creating
a Lifetime Trust there are, in my opinion, 3 main reasons for doing so: -
avoiding the costs and delays of probate. Any assets transferred into a Lifetime
Discretionary Trust are held by the Trustees
and do not need to go through
the probate process.
The problem with this of course is that most will writers
protect the property but
leave anything else outside the Trust, only doing half a job. This of course often means that probate may still be needed and the benefit of having the Lifetime
Trust is not maximised. It also leaves the Trust exposed to potential claims that it is a sham by third party
creditors. Remember that this probate benefit only applies if the legal title is able to be transferred and does
not apply if only a restriction on the title is used.
Secondly, protecting wealth from sideways disinheritance. Similarly, if a client owns substantial other assets why would we not try to protect those other assets from ending up in the survivor’s name, and being exposed to risk, by using a Will Trust on first death or using the Lifetime Trust to protect more than just the property.
Of course we all know that a Will Trust can only protect the first to die’s share of a property and that the survivor’s share is still exposed to sideways disinheritance and allows a local authority to dictate how care fees are paid if the survivor goes into care. Severing the tenancy and using a Life Interest Trust in a Will has always been good advice and effective estate planning and can never be deliberate deprivation as the person has died without going into care.
Thirdly, protecting beneficiaries from beneficiary issues. These are what someone referred to recently as the 7 deadly sins;
sideways disinheritance, marriage and divorce, financial
problems, IHT, unreliability, IPFD claims and loss of benefits.
Clearly if considerable assets are left outside of the Trust and the Will does not include
residuary Discretionary Trusts,
we’ve only done half a job.
Mis-selling of Lifetime Trusts - Care Fees
We’ve all seen lots of will writing
companies blatantly selling
Lifetime Trusts based
on the prospect of avoiding
care fees and using the clients’ fear of care to “sell”.
Some of those companies have gone but
whilst our profession remains unregulated
and where there is money to
be made, we will find unscrupulous individuals who mis-sell
Lifetime Trusts. I’m afraid it is a scandal waiting
to happen in 5, 10, or more years when people
start going into care and their property is not protected. Clients and their families
will not be happy and will look for someone
Surely its better to explain that a
Lifetime Trust will give you options in the future and put you in control IF you need to go into care. After all,
if your Mum needed to go into care where would she and you want her to be? A good care home that you need to pay for, or the worst local authority
Placing a person’s property into a
Lifetime Trust should not be “sold” as making
sure they don’t have to pay for care, because that is not strictly true.
What a Lifetime Trust does provide is CONTROL over how care is paid for. The beneficiaries have choices, they can
renovate and rent it out, they can sell it and
invest, they can move in and pay for the care using their own funds. Telling
people, particularly in the
current economic climate, that if they pay for a Trust for their house that the Government will pay for
their care is neither the truth nor good advice.
Many Lifetime Trusts have been formed
using Professional Trustee for inappropriate reasons,
and some of them are not as responsive as is often needed due to changes
in circumstances, particularly as many were appointed on the
basis of no fees being charged for the life of the Trust. While appointing professionals CAN be a good idea in some
circumstances, for many families it is leading to a great deal of stress. You should review
your trusts with your
and change the trustees to family members where it is more appropriate, the process is quite simple
and can greatly simplify matters
in many cases.
Lifetime trusts should never be looked at
as “Form and Forget” planning. Tax legislation
changes, property values change and people’s wishes change. You should be checking in regularly
with these clients to ensure they understand
the current situation,
review any changes needed, review their tax situation, and generally ensure
their planning is up to date.
So, in summary,
there are potential issues to
be aware of but it’s
not all doom and gloom. Of course, all the above
potential problems can be avoided by you and
your firm being proactive and making sure the Trust provider you’re
working with can supply the service
you and your clients deserve, not just in terms of drafting but also in terms of ongoing
This article is written by Council member Paul Dodsworth, TEP and Managing Director of Estate Planning Solutions, with input from Alan McAloon, TEP and Managing Director of Acer Prime Law, who provides reserved legal activities for a number of independent Willwriting firms.