Lifetime trusts can be useful vehicles for settlors, this may be for inheritance tax planning, protecting beneficiaries from sideways disinheritance or even so that settlors’ wishes are specifically set out during their lifetime. There are situations where lifetime trusts may be unsuitable or inadvisable. It is crucial to understand the implications of placing assets into trust so that potential settlors can be fully advised or in a worst-case scenario when work should be refused.
If the settlor’s sole or main intention for placing assets into trust is to avoid those assets being used to pay for their own care, this may be considered deliberate deprivation by local authorities. In this event, the local authority will also need to consider whether the settlor had a reasonable expectation that they would need care and support at the time of placing assets into trust and whether they had a reasonable expectation of needing to contribute towards the cost of care.
If a local authority deems that a person has committed deliberate deprivation, for the purposes of the financial assessment they can treat the settlor as if they still own the asset in trust.
If an elderly, ill or vulnerable client wishes to place assets into trust during their lifetime, a full review of their circumstances will be needed. It may be inadvisable to place assets into trust as the local authority would consider it deliberate deprivation and in such a case we may refuse to proceed with creating a trust.
Whilst a person’s interest in a mortgaged property can be assigned to trust, subject to the mortgage, it may not always be suitable to arrange this. This would likely make any attempts to re-mortgage the property in the future difficult as mortgage providers are reluctant to lend against a property owned by a trust. If clients own a mortgaged property and may wish to re-mortgage in the future, transferring to a trust is unlikely to be appropriate for them.
Similarly, if the clients are likely to want to release equity in the property in the future, equity release providers are unlikely to lend against the property whilst it is held in trust and would likely require that the trust is wound up and the property transferred back to the settlors before they will release equity in the property.
If a property is worth more than the nil rate band, the whole property could not be placed into trust by a settlor without initially incurring an IHT entry charge. The trust would also be liable for anniversary and exit charges in that event.
It is possible to place only part of the equity of the property into trust, with the settlor retaining the remainder in their personal name, so up to the NRB could be placed into trust now with further equity placed into trust in 7 years’ time. However, this would come with additional costs both now and when further equity is placed into trust.