Family Protection Trust: A Comprehensive Guide

A Family Protection Trust is a type of trust that can provide significant benefits to families looking to protect their assets and provide for future generations. In this article, we’ll explore how family trusts work in the UK, whether a family protection trust is a good idea, what type of trust is best for a family, the risks of family trusts, and where the best place is for a family trust.

How do family trusts work in the UK?

A family trust is a legal arrangement that allows a person (known as the settlor) to transfer assets to a trustee, who will then manage those assets for the benefit of the beneficiaries (typically family members). The trustee has a legal obligation to manage the assets in the best interests of the beneficiaries, and to distribute the assets according to the settlor’s wishes.

The purpose of a family trust is to provide protection for family assets, minimise inheritance tax, and ensure that assets are distributed according to the family’s wishes. Family trusts can also provide protection against creditors and divorce, and can be used to support family members with disabilities or other special needs.

In the UK, family trusts are typically created through a trust deed, which sets out the terms of the trust and identifies the beneficiaries and trustees. The trust deed must be executed properly and registered with HM Revenue and Customs (HMRC) to ensure that the trust is valid and that any tax benefits are available.

Is a trust a good idea?

A family protection trust can be an excellent idea for families looking to protect their assets and provide for future generations. Some of the benefits of a family protection trust include:

• Minimising inheritance tax: By transferring assets to a family trust, the settlor can remove those assets from their estate, potentially reducing the amount of inheritance tax that will be due when they pass away.
• Protecting assets from creditors and divorce: Assets held in a family trust are typically protected from creditors and divorce proceedings, providing an extra layer of protection for family assets.
• Ensuring assets are distributed according to the family’s wishes: A family protection trust can ensure that assets are distributed according to the settlor’s wishes, rather than being subject to the rules of intestacy or being distributed in a way that the settlor would not have wanted.

What type of trust is best for a family?

There are several different types of trusts that can be used by families, including discretionary trusts, bare trusts, and interest in possession trusts. The best type of trust for a family will depend on the family’s specific circumstances and goals.

Discretionary trusts are a flexible type of trust that allow the trustees to use their discretion when distributing assets to the beneficiaries. This can be useful in situations where the family’s circumstances are likely to change over time, or where the beneficiaries have different needs.

Bare trusts are a simple type of trust where the beneficiaries have an immediate and absolute right to the assets held in the trust. Bare trusts can be useful for gifting assets to children or other family members, and can be set up relatively easily and at a low cost.

Interest in possession trusts are a type of trust where the beneficiaries have a right to the income generated by the trust assets, but not the assets themselves. This can be useful for providing a regular income stream to family members while protecting the underlying assets.

What are the risks of family trusts?

While family trusts can provide significant benefits to families, there are also some potential risks that should be considered. Some of the risks of family trusts include:

• Cost: Setting up and managing a family trust can be expensive, and may not be cost-effective for smaller estates.
• Loss of control: Once assets are transferred to a family trust, the settlor will no longer have direct control over those assets. This can be a concern for some families who want to retain control over their assets.
• Complexity: Family trusts can be complex legal arrangements, and may require ongoing management and administration. This can be challenging for families who do not have experience in managing trusts.
• Tax implications: While family trusts can provide tax benefits, there are also potential tax implications that should be considered. For example, if assets are transferred to a trust during the settlor’s lifetime, there may be capital gains tax implications.

Where is the best place for an FPT?

The best place for a family trust will depend on the family’s specific circumstances and goals. In the UK, family trusts are typically created under UK law and are subject to UK tax rules. However, some families may choose to create trusts in other jurisdictions, such as offshore trusts, which can provide additional benefits such as increased privacy and protection against political instability.

It’s important to note that creating a trust in another jurisdiction can be complex, and may require the assistance of a specialist legal and tax advisor. It’s also important to ensure that any trust created outside of the UK is compliant with UK tax rules and regulations.

Conclusion

A Family Protection Trust can be an excellent way for families to protect their assets and provide for future generations. By transferring assets to a family trust, families can minimize inheritance tax, protect assets from creditors and divorce, and ensure that assets are distributed according to their wishes. However, it’s important to consider the potential risks and complexities of family trusts, and to seek professional advice before setting up a trust. With careful planning and management, a family trust can provide significant benefits for families looking to secure their financial future.

For more information about a Family Protection Trust contact Bispham Legal Services.