Asset Protection Trusts: Understanding and Navigating the Risks
When we think about estate planning, asset protection is a key focus for many of us. As a result, lots of firms have taken to advertising Asset Protection Trusts (APTs) as a critical tool for safeguarding one's wealth from potential creditors, and other financial threats. These legal instruments are designed to hold and protect an individual's assets, ensuring they are passed on to beneficiaries according to the settlor’s (the person settling assets into a trust) wishes. However, the use of these trusts comes with nuanced complexities and potential risks that must be navigated with caution.
What Are Asset Protection Trusts?
Asset protection trusts are a form of legal structure where assets are transferred into a trust to shield them from passing to other people through divorce of your loved ones, bankruptcy and other financial issues, providing a level of security and privacy not available through direct ownership. They can be established during an individual's lifetime (inter vivos trusts) or upon their death through a will (testamentary trusts).
Intervivos Trusts (Lifetime Trusts) vs. Testamentary Trusts (Will-based Trusts)
The primary difference between inter vivos trusts and testamentary trusts lies in their timing and control. Intervivos trusts, also known as living or lifetime trusts, are created and operate during the lifetime of the settlor. These trusts offer immediate asset protection and can be revocable or irrevocable, allowing for flexibility in management and control over the assets.
On the other hand, testamentary trusts, also known as Will-based trusts are established through a Will and come into effect upon the testator’s death. Testamentary trusts do not provide asset protection during the testator’s lifetime but can be a useful tool for managing and distributing assets upon death, particularly for minor beneficiaries or those needing financial guidance. They can also be commonly used to protect a share of a property for the benefit of specified beneficiaries.
Common Reasons for Using Asset Protection Trusts
Asset protection trusts are commonly used for several reasons:
- To shield assets from the creditors of your loved ones: APTs can offer protection against potential legal cases, bankruptcy, and other financial risks.
- Estate planning and inheritance management: Trusts can help bypass the probate process, allowing for a smoother and more private transfer of assets to beneficiaries.
- Tax planning: Certain types of trusts can offer tax advantages, though this requires careful planning to comply with tax laws and regulations.
Unwrapping a Lifetime Trust
Unwrapping or dissolving a lifetime trust involves transferring the assets out of the trust and back to the settlor or directly to the beneficiaries. This process can be complex and may require the assistance of legal and financial professionals to ensure that all assets are properly accounted for and that all legal and tax implications are considered. Especially as it’s a reserved legal activity to create the trust deed in the first place.
A Cautionary Note
The importance of due diligence cannot be overstated when establishing an asset protection trust. A poignant example of what can go wrong is the situation involving The Nottingham Building Society and the subsequent failure of the Will Writing Company and the Philips Trust Corporation (PTC). Between 2011 and 2017, The Nottingham referred elderly customers to these companies for estate planning services, including the establishment of trusts. Unfortunately, the collapse of these companies led to long, costly battles for homeowners to regain their properties, highlighting the potential risks associated with poorly managed or ill-conceived trust arrangements.
The Financial Conduct Authority (FCA) concluded that the introduction of customers to these trust schemes did not fall within its regulatory remit, underscoring the lack of protection for consumers in certain aspects of estate planning. This situation serves as a stark reminder of the necessity for individuals to conduct thorough research and seek reputable advice when considering the use of asset protection trusts.
SLS Wills and More advises against the use of such trusts. The risks, as evidenced by the experiences of those affected by the failures of the Will Writing Company and PTC, highlight the importance of understanding and carefully managing the potential downsides of asset protection strategies.
SLS Wills and More founder - Sara Sheppard has over thirty years of industry experience and has supported thousands of clients both in private practice and since launching SLS Wills and More back in 2017. Our role is to ensure that our client’s wishes are carried out in the safest possible way whilst adhering to the relevant and current regulations.