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Asset protection trusts and care fees

The last time we looked at asset protection trusts was about four years ago. Since then we have had some interesting developments both in the area of care fees and the promotion of certain types of trust.

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 ones assets if they are transferred to a trust early enough, many practitioners are concerned 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 and, unfortunately, asset protection trusts have had rather bad press recently, following the conviction and jailing of eight people last year for mis-selling such arrangements.

Notably, in May 2015 eight people  received prison sentences at Nottingham Crown Court for mis-selling the so-called asset protection trusts to elderly clients.

The defendant firm in this case employed salesmen to cold-call and then visit elderly clients to persuade them to use these trusts, despite their lack of legal expertise. Trading under the names Inheritance Protection Services, Inheritance and Probate Solutions, and Goldstar Law, they demanded advance payments of £2,000 for setting up the trusts. Some clients were told that they had to buy the trust on that day or they would be charged for future visits. During the two years that the businesses were operating, they took more than £250,000 in client fees. They also sold will-writing and power of attorney services. Most of the products sold were never delivered.

Three individuals received four-year prison sentences. They all admitted offences of fraudulent trading and unlawfully carrying out the reserved legal activity of preparing trust documents - more on this point later in this article. 

The others were given suspended sentences, including the firm's ' 'Head of Legal' who in fact had no legal qualifications whatsoever.

Whilst this may have been an extreme case, it, and the publicity surrounding it, has not helped professional advisers who are involved in the legitimate promotion of trusts 

As far as local authorities and care fees are concerned, in theory asset protection trusts can be used to indeed protect the assets although, of course, 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 - see below for more on this subject. And, of course, 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.


Recent developments in local authority policies

There is anecdotal evidence that local authorities are paying closer attention to lifetime gifts of property where a subsequent application for assistance with care is made. Here we review the rules on the so-called "asset deprivation".

A recent case involved a widow who went into residential care. Three years earlier her husband died and as their home was owned jointly as tenants in common it was possible for the husband's half to be transferred into a trust for their children under his will. The family decided at that time  to transfer the mother's half of the property into a trust as well "to make things easier" knowing that it may or may not be assessed for mother's care needs.

Upon assessment they received a letter from the Council's legal department stating that as the mother was receiving home care at the time of the transfer to the trust she had a reasonable expectation that she would need care and support in the future and that, as a result, they would class the gift to the trust as deprivation.

It is well known that when carrying out the financial assessment for care home funding the council will ask a question similar to: "Do you or have you ever owned a property?" If the answer is "Yes" and you have given it away they would then make enquiries as to the reasons why you gifted the asset.

The key point is that if the gift is treated as deliberate deprivation, the local authority will treat it as "notional capital" which will affect the eligibility for local authority funding. 

So how does the local authority decide whether there was a deliberate deprivation? 

There may be more than one reason for disposing of a capital asset, only one of which is to avoid a charge for care. Avoiding the charge need not be the main motive, but it must be a significant one.

When deciding if deprivation was 'deliberate' the local authority might look at the following: 

  • Motive/intention: when disposing of assets, was the main reason to avoid care charges?
  • Timing: there is no set time limit, although local authorities are unlikely to investigate too far back. Most importantly, they will look at the time between the person realising that they needed care and the disposing of assets.
  • Amount: was the gift a significant amount that would make a difference to your relative's capital limit? The asset would have to be worth a significant amount for the local authority to pursue this course of action. Giving away a £300,000 property, for example, would significantly affect the individual's total capital whereas smaller 'gifts' - such as giving a £300 ring to a granddaughter - are unlikely to prompt further investigation.

It all boils down to intention. When the person made the gift, could they have reasonably known that they might need care? For example, if the individual was already ill when they signed their property over to a relative,that would look suspiciously like 'deliberate deprivation'.

Guidance on applying the principles of notional capital are included in the Care and Support Statutory Guidance 2014 (which supplements the Care and Support (Charging and Assessment of Resources) Regulations 2014 and which has superseded the Charging for Residential Accommodation Guide (CRAG)). The guidance incorporates the notion of reasonableness. For example, paragraph 12 of Annex E states that 'it would be unreasonable to decide that a person had disposed of an asset in order to reduce the level of charges for their care and support needs if at the time the disposal took place they were fit and healthy and could not have foreseen the need for care and support.'

Although the transfer of the property into the trust in the circumstances described above was made for a number of reasons (and a desire to hold the entire property in a trust rather than having the ownership split between the trust and the mother may well have made perfect practical sense), since the lady in question was already in receipt of some social security benefits at the time of the transfer to the trust it was probably unsurprising that the Council decided there had been a deliberate deprivation. Cleary the timing is all important. 


So what are the restrictions on providing trusts? 

It goes without saying that only those who are suitably qualified should attempt drafting a trust or a will. However, as the criminal case described above illustrates, this is clearly not always the case, despite legislation making certain activities (so-called "reserved legal activities") unlawful if carried out without proper authority and for reward.  

In England and Wales the Legal Services Act 2007 (the Act) provides that it is an offence for a person to carry on a reserved legal activity unless they are entitled to do so. Reserved legal activities are defined in Paragraph 5(1)(c) of Schedule 2 of the Act as 'preparing any instrument relating to real or personal estate for the purposes of the law ofEnglandandWales…' . This would include trust documents as well as ancillary documentation, such as deeds of appointment and assignment. Wills and other testamentary instruments, agreements not intended to be executed as a deed, transfers of stock containing no trust and letters or powers of attorney are specifically excluded from being reserved legal activities by Para 5(3) of Schedule 2 of the Act. So, for example, a firm of accountants or IFAs preparing a trust document for a fee will be committing a criminal offence, although this would not be the case if the work is done by an employee of the firm who is actually a practicing solicitor.

It should be noted that the Act applies to England and Wales only although, in Scotland, there is similar legislation in section 32 of the Solicitors (Scotland) Act 1980, which restricts the drafting of documentation relating to property in Scotland to those qualified under Scots law.

Of course, in the financial services industry many draft trust documents are offered by life assurance companies and investment companies. This has been proven to be a very helpful and highly valued service from the point of view of both advisers and their clients. Such documents are normally settled by a qualified professional and are offered for no fee and are therefore not in breach of the law.

There is also a general exemption when the individual preparing the trust deed is not remunerated.  Namely, paragraph 3(10) Schedule 3 to the Act, provides that:

'The person is exempt if the person is an individual who carries on the activity otherwise than for, or in expectation of, any fee, gain or reward.'  Naturally, not charging a fee for a trust deed itself would be unlikely to fall within this exemption  where the deed would be part of a larger transaction for which an overall fee was charged, e.g. for investment advice.



Trusts continue to provide an extremely useful tool in financial planning, both during lifetime and on death. Such planning often involves very large sums of money and once arrangements are set up it is usually difficult (if at all possible) to undo them. It is therefore not surprising that additional measures are provided in legislation to protect consumers. Those advising on trusts need to make sure they are competent to do so.