What is an Asset Protection Trust
An Asset Protection Trust is a form of Life Interest Trust or Discretionary Trust that is created by the Settlor (the person gifting the asset into trust) during their lifetime.
Asset Protection Trusts are commonly used as an effective means of Estate Planning and provide bloodline planning for future generations.
These trusts allow the Settlor to transfer assets into trust immediately during their lifetime instead of the assets being distributed upon death.
An Asset Protection Trust can protect assets for future beneficiaries, providing protection from their own future financial misfortunes, for example, bankruptcy or divorce.
When the assets are held upon trust they no longer form part of the distributable residual estate on the settlor’s death, this means the cost of probate can be reduced along with any potential delays in distribution of the estate.
Tax implications of using an Asset Protection Trust
The current IHT (Inheritance Tax) nil rate band threshold is £325,000 and for assets held below this threshold, there would be no immediate charge to tax.
The threshold works on an accumulative total basis and will include any earlier transfers of assets made by the settlor in the previous seven years.
Once the value of the total transferred assets exceeds the nil rate band threshold there would be a charge to lifetime inheritance tax of 20% on the amount that exceeds the nil rate band.
If the settlor continues to benefit from the assets placed in trust during their lifetime then the trust will not remove the value from the IHT estate on death, however, the trust can be used to pass the use of the assets to future generations without being taxed on each subsequent death.