Pitfalls Of A Lifetime Trust

By Ruth Heap | HM Legal

What is a lifetime trust?

A lifetime trust is a vehicle that allows you to transfer your assets into a trust whilst you are alive. You set up the trust straight away and the idea is that it protects your assets potentially from care home fees or other claims on your estate, such as marriage breakdowns. These are sometimes called Asset Protection Trusts or Family Protection Trusts.

Pitfalls of lifetime trusts?


  1. Deliberate deprivation:
  • When a person has reached a point where they require full time care, the local authority will take into account the full value of their financial assets. This will include everything owned by this person, such as property, cash and personal possessions.
  • If a person has given away their assets, such as their savings or their family home, then if the local authority believe that this has been done purely to avoid funding your own care, then they have wide reaching powers to set aside the transaction. Therefore regardless of any gifts you may have made, your total estate including the value of assets given away will be taken into account when determining the extent you pay for care.
  1. Limited access:
  • Another pitfall of lifetime trusts is the limited access they offer. Most people put their biggest asset into the lifetime trust, which is usually the family home. Although the trust still grants you a right to live in your property rent free, you are no longer entitled to the capital from the property. This is because you have given the property away to the trust. This means that you cannot sell the property and spend the proceeds of it as you wish. This can cause problems if you need access to the money in the future for something unexpected, or if you want to mortgage the property to release funds.
  1. Discretionary:
  • Most lifetime trusts are discretionary in nature, meaning that the Trustees have full control over the assets that are held in the trust. They are free to deal with or distribute any or all of the assets in whatever way they may deem to be appropriate. You would have no authority on how the assets are dealt with, meaning even if you disagree with the Trustees’ decision, there is nothing that you can do to change it.
  1. Difficult to undo:
  • Lifetime trusts are complex and difficult to undo. If you change your mind about having a lifetime trust you may find that it is going to cost you a lot of money to get out of it. There may be a better alternative, which protects you in a similar way but is less restrictive.
  1. Tax consequences:
  • There are several additional and ongoing tax obligations when assets are held within a lifetime trust. There may potentially be both an inheritance tax and capital gains tax liability. There will also be a review of the value of the trust every ten years. If the value of the trust exceeds £325,000, then a charge will be payable. If the Trustees wish to distribute assets from the trust, an exit charge will be payable.

What is the solution?

One alternative to lifetime trusts is proper estate planning in your Will. Will trusts still offer protection from potential care home fees and potential disinheritance of family members, which is a big concern for many people. As you have seen above, setting up trusts, whether this is a lifetime trust or a Will trust, can be complex and have far reaching consequences. It is therefore important to ensure you always receive tailored legal advice from a professional such as HM Legal.



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