Who needs asset protection?

It really depends on your situation. Asset protection through trusts allows people to benefit from your assets without legally owning those assets themselves. That gives you a lot more control and protection from risk. Trusts can be really useful in situations where a person isn’t able to manage the assets for themselves, such as children under 18 or somebody with a disability or an addiction. 

They can also often be used where external factors after your death could mean that your beneficiaries could lose out on their inheritance. Examples of this are things like remarriage, long term care fees or creditor claims. Trusts can also sometimes be used as a tax planning tool, depending on the situation. 

The type of trust that you need depends on the type and value of your assets, how you wish to operate the trust and tax considerations. So there are lots of different things to think about. 

Which type of trust do I need? 

There is no single solution when it comes to estate planning and trusts which is why you need to seek expert advice. 

In exploring your situation, the three main areas that we explore are:

  • the type and value of your assets; 
  • tax considerations. Contrary to popular belief, trusts are actually subject to their own tax regime and so placing assets into a trust could cause an unfavourable tax bill
  • Your present and future concerns. How much of your estate will you need while you’re alive? Do you have dependents that you need to provide for? How much of your estate do you want to protect? 


Generally we will explore anything that you might be worried about, whether it’s to protect your assets from remarriage, the cost of long term care fees or your children not being very good with money. 

Once those three areas have been explored in detail, then we can identify exactly which type of trust would be the most appropriate. But it really isn’t an exact science. There might be a few different options, and sometimes it can be a task of weighing up the pros and cons of each to find the right solution for your particular situation.

Do asset protection trusts work? 

Everyone has a different idea of what their trust should achieve and what asset protection should do. Provided the trust is appropriate for its purpose and is set up correctly, then yes, it will work. They can be very efficient. 

But that is why it’s so important to seek advice from qualified professionals, to advise on the right type of trust and ensure that it is drafted correctly to actually achieve its purpose.

Does a trust protect assets from inheritance tax?

Not necessarily. Trusts are subject to their own tax regime, so depending on the type and value of the assets in the trust, there may be ongoing inheritance tax charges. 

Most property held in trust is counted as what’s called ‘relevant property’, which means that there are 10-yearly charges and what’s known as exit fees whenever funds or property are transferred out of the trust. The calculation of those charges is quite complex, but it generally doesn’t exceed six percent of the total value of the trust fund.

Also, depending on what type of trust you’re setting up, if you transfer assets to trust in your lifetime rather than in your will, this is a ‘chargeable lifetime transfer’, which could involve an immediate tax charge of 20% on anything over the tax free allowance. Trusts are also subject to income tax, capital gains tax and all of the other taxes as well. 

That being said, if the value of the assets going into trust is below the tax free allowance there may not be an inheritance tax liability. Even if there is a tax liability, sometimes placing assets into trust does produce a lower tax charge than passing assets outright to a beneficiary. 

It can be a real balancing act – a trust might not necessarily be the most tax efficient option, but it gives you more flexibility and control and in some cases does save inheritance tax. Again, it very much depends on the individual circumstances, the type of trust and the assets going into trust.

What is a bare trust?

A bare trust is one of the simplest forms of trust. When a bare trust is created, you choose specific beneficiaries who have an absolute right to both the income and the capital. These trusts are usually used for children who don’t have a legal capacity to take ownership of assets themselves. 

When you make a gift to your own child through a will, it may be that either a ‘bereaved minor trust’ or an ‘18 to 25 trust’ is created instead of a bare trust. These two trusts only apply where a will sets up a trust for a child of the deceased. The tax treatment of those trusts are slightly different to a bare trust.

What is a discretionary trust?

A discretionary trust is a slightly more flexible arrangement that gives a trustee discretion and control over how best to use those funds to benefit the beneficiaries. So rather than naming specific people to receive specific amounts, you choose a group of beneficiaries who will receive capital and/or income at the discretion of the trustees. 

Unlike the bare trust, there is no absolute entitlement. The trustees have full control over the trust funds and can distribute to whoever is named on the trust deed whenever they feel it’s appropriate.

Discretionary trusts are usually supported by a ‘letter of wishes’ which gives the trustees guidance on how you intend the trust to be managed. 

Discretionary trusts are sometimes set up to put aside assets for the future. So, for example, if you don’t know exactly how much each beneficiary is going to need, this can be really helpful. Or it can be used for beneficiaries who aren’t capable or responsible enough to deal with money themselves. It gives the trustees leeway to manage the fund as they see fit.

What is an interest in possession trust?

An interest in possession trust gives the beneficiary, known as the life tenant, an immediate and automatic right to the income of the trust for a set period or until their death. The beneficiary who receives the income doesn’t have any rights over the capital on their death or at the end of a set period. The capital then passes to a beneficiary who is entitled to the trust capital. They are known as the remainderman or capital beneficiary. 

It gives that person a life interest on the income.When the trust period comes to an end, the capital passes to an alternative beneficiary.

How does a disabled person’s trust work?

A disabled person’s trust is similar to the discretionary trust, but it is specifically intended to benefit a person who is classed as disabled under a defined list.

The main advantage of a disabled trust is it has a more favourable tax treatment. Provided the income and the capital is entirely used for the benefit of the disabled person, subject to small exemption of either £3000 or 3%, whichever is lower, which can be applied to another beneficiary in tax year there is slightly different tax treatment to a standard discretionary trust and the ten-yearly charges and exit fees we mentioned before wouldn’t necessarily apply to this type of trust.

What is a mixed trust?

This is a combination of more than one type of trust, where different parts of the trust are treated according to the tax rules that apply to each part. 

What is a nil rate band trust?

A nil rate band trust is a type of discretionary trust. A lot of couples who prepared wills before 2007 may well have a nil rate band trust in their wills. These trusts place the available nil rate band, which is the tax free allowance, into a trust to preserve that allowance. 

This was commonly used pre 2007 before the introduction of the Spousal Exemption, which means that there is no inheritance tax when an estate is passed between spouses or civil partners. So the nil rate band trust is much less commonly used these days, but there are still circumstances where they are appropriate from a tax planning perspective.

What’s a flexible life interest trust?

A flexible life interest trust initially operates as what’s called an immediate post death interest trust. An immediate post death interest trust is a type of life interest trust, placing assets into the trust on death. A person is nominated as what’s called ‘the life tenant’, a legal term that means the main beneficiary of the trust. 


The life tenant is entitled to receive all the income of the trust during their lifetime, or for a fixed period. At the end of that period or on the death of the life tenant, the trust automatically becomes a discretionary trust, and the capital can be distributed to the beneficiaries at the trustees’ discretion.

This is probably one of the most flexible types of trust, hence the name. It is most commonly used to provide for a surviving spouse during their lifetime, whilst also offering long term protection for the trust assets for future beneficiaries after the surviving spouse’s death. 

Rather than the assets passing outright to the beneficiaries on the second death, it’s held within the trust and can provide long term protection and control for future generations.

Does a trust protect assets in a divorce?

This is an interesting question. Putting assets into a trust during your lifetime doesn’t necessarily protect them from your own divorce. It’s a complex area. It can be argued that if a trust has been created as a means of defeating your spouse’s financial gains, then that can cause problems. 

However, trusts can be established on your death through your will, which means that those assets transferred to trust are protected if your beneficiaries were to divorce in the future. 

Where assets are held in a trust, a beneficiary has an interest in that trust, but it doesn’t mean that it can easily be shared with the spouse in divorce proceedings.

So it doesn’t necessarily protect assets in your own divorce. But if you have concerns about your children, for example, if you’re not sure whether their relationship is stable and they may divorce in the future, by putting assets interest for your will, you can potentially protect those assets from your children’s future divorce. 

How do I protect my assets from long term care? 

This is the million dollar question! We have lots of clients that come to us for a trust that saves them from paying care fees. It’s a difficult one. 

The main point to raise is that putting a house in trust in your lifetime to avoid care fees is really not straightforward. The local authority is likely to investigate whether you’ve put your home in trust for that reason. That could be seen as deprivation of assets. Plus, you could accidentally be generating a tax liability. 

You can, however, protect part of your estate from care fees for your beneficiaries through your will. So, for example, couples can place their assets into trust on their death, meaning that those assets are protected should the surviving partner need long term care.

Obviously, it means that the share of the surviving partner is still vulnerable to care fees. But the share of the first partner to die is ring-fenced as ownership lies with the trust and not the surviving spouse. 

How can I protect my real estate assets? Are property protection trusts legal?

Property protection trusts is essentially a marketing term. A property protection trust is in fact a life interest trust, where you put a share of your assets in trust. The surviving spouse can benefit from it for a period of time or until their deaths, and then upon their death, the trust assets pass to the beneficiaries. 

Setting up this type of trust is certainly legal, but whether it actually has the effect that you intend is a different matter.

There are restrictions and rules, and they are likely to be a lot less effective if the local authority establishes you’ve taken steps to reduce the value of your assets for the sole purpose of avoiding care fees. 

Creating these types of trusts through your will on death is slightly different, because when you’re writing a will, care fees won’t necessarily be an immediate concern. It is therefore difficult for the local authority to claim that the primary reason for leaving the assets into trust was to avoid care fees. 

How much does a property protection trust cost? 

Trusts should only ever be prepared by qualified professionals and the fee structure will depend on your exact requirements, whether it’s set up in your lifetime or whether it’s through your will. 

But generally I would say the service should probably cost between £300 to £1,000 plus VAT, depending on the circumstances. More than that is unusual, so make sure you shop around and get a few different opinions, because unfortunately there are some people out there that charge a lot of money for something that won’t necessarily be fit for purpose.

What are the advantages and disadvantages of a trust? 

Trusts are very much a balancing act. The main advantages are obviously protection, flexibility and control where you gift any part of your estate outright to somebody. They can do as they please with that money. 

Any inheritance gifted to a beneficiary can be vulnerable to external risks like future remarriage, long term care fees or bankruptcy. In that respect, trusts give you control beyond that and provide additional protection for your beneficiaries. 

In terms of disadvantages, there is the extra cost at the outset, but in most cases where trusts are being considered, the initial set-up costs are more than worth it for the ultimate outcome.

Tax can sometimes be a disadvantage. The trust might produce a higher tax liability. But on the balance of risks, it still might prove beneficial. 

It’s really important to seek professional advice to guide you in the right direction. We will help you balance out your priorities and concerns. We provide you with all of the information and the implications to help you make an informed decision.


If there’s anything that this podcast has raised any questions or concerns, then do get in touch. We can talk through your options and go from there.

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