Trust No-One – Why using Trusts may not be effective estate planning

Planning for the future can be complex, and many people are told that putting their property into a trust is a simple way to avoid tax, care fees, or probate.

However, trusts are not always the quick fix they appear to be. In this article, we explore the key risks and hidden costs of using trusts for estate planning, including how they can affect inheritance tax, probate, and ongoing administration. Before making any decisions, it’s important to understand the full picture and seek professional advice to ensure your estate is protected in the right way.

Transferring Property into a Trust – Key Risks

The first thing to be aware of when it comes to settling your property into a trust is that you surrender legal ownership of it. This may cause particular difficulty where you settle your home into a trust.

By placing legal ownership with trustees, you may find it difficult to obtain affordable home insurance or face complexities and greater costs when selling the property. Other difficulties may occur where the trustees of the trust become uncooperative, hostile or absent. The latter has been most starkly demonstrated in the insolvency of Phillips Trust Corporation and the ensuing fallout, which has been widely reported in the press.

It is not uncommon for clients to seek to settle their property into trusts to avoid the costs of care. In short, for care fees planning purposes, a trust will not legitimately work to reduce the costs of care. This is because the Care Act 2014 establishes the framework for ‘deliberate deprivation’. In short, any action taken by a person to deliberately deprive a local authority of assets, which would otherwise be able to be assessed for the costs of care, will be taken into account irrespective of the legal ownership of those assets.

Using Trusts to Avoid Probate

Some clients make use of trusts to avoid the need to obtain a Grant of Probate on their death. Professional advice should always be sought to ensure that this does not have unintended consequences.

It is often the case that a settlor (the person setting up the trust) settles their home into a trust without receiving anything in return (i.e. a gift) but continues to live in the property without paying a market rent to the trustees of the trust. This is known as a “gift with reservation of benefit”.

Where a Grant of Probate is required for a different asset within the Estate (e.g. a bank account or Premium Bonds), the streamlined process (where reporting to HMRC is not required) cannot be used because of the gift with reservation of benefit. This means that lengthy forms must be completed and submitted to HMRC that would otherwise have never been necessary, considerably delaying the obtaining of a Grant of Probate.

This adds a significant layer of complexity to an otherwise straightforward process and may incur greater costs for your estate.

Trusts and Inheritance Tax Implications

Where individuals choose to settle their home into a trust, they will lose the availability of the “residence nil-rate band” – an Inheritance Tax allowance worth up to £350,000. This may create a large Inheritance Tax bill for your Estate which would have been avoidable. There is a way to reclaim the residence nil-rate band but this must be actioned within two years of death and not without significant time, effort and cost due to the complexity involved.

Administration and HMRC Compliance

The unfortunate reality of trusts is that, whilst they may look attractive on paper, they often require a greater level of administration than first anticipated. For example, a trust which contains an income-generating asset should have an annual tax return submitted to HMRC. This may necessitate the involvement of an accountant – an additional expense for a trust. Furthermore, most trusts must be registered with HMRC’s Trust Registration Service and there can be severe financial penalties for failing to do so.

When a Trust May Be Suitable

In summary, trusts can be an extremely useful tool when applied to the right circumstances. The reality is that there are few circumstances where placing your home into a trust is the right tool for estate planning.

If you are considering a trust, professional advice should always be sought – at Browell Smith & Co. Solicitors, we are happy to discuss all aspects of appropriate estate planning, including mitigating Inheritance Tax and limiting liability for the costs of care. Our experts offer holistic advice and provide a tailored solution for all shapes and sizes of estate, for people from all walks of life.

Contact us today to arrange your free initial consultation by phone 0191 691 3417 or email probate@browells.co.uk.