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
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
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
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
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
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
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
So how does the local authority decide whether there was a
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
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
- 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
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
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.