The most effective form of asset protection planning is a Trust that is set up during your lifetime. Whilst you can have a Trust in your Will, nothing will go into it until you die and so it can’t protect you from events that happen while you’re still alive.
But what exactly is asset protection planning anyway?
Asset protection is when you prevent your assets, i.e. money and property, from being handed over directly to someone else when you die.
If you make a simple Will, that’s s exactly what would happen. When you die, your executors apply for a grant of probate. Once received, they then set about the task of handing over gifts to the beneficiaries of your Will. For many people, the beneficiaries of their Wills are their children.
But what happens then? Well, the money and property goes straight into the beneficiaries’ bank accounts, or valuable items are handed over. Since these assets are now the property of the beneficiary, they could be at risk.
For example, one of your beneficiaries might be going through a messy divorce. If they inherit money during this period, it could be considered as fair game in any divorce settlement. Half of their inheritance would be lost.
Or what about a beneficiary who has started a business that’s got into trouble? Or perhaps they’re just struggling financially. If they go bankrupt, all of their inheritance is lost.
Some people can’t help being poor at looking after money because they are vulnerable in some way. For vulnerable people like drug addicts, alcoholics or gamblers, inheriting a sum of money might be a bad thing. Not only might they lose it, it also might do them harm.
Others are vulnerable due to a disability, in which case they might be on state benefits that are means assessed. Inheriting money might mean that they lose those benefits.
All of these are powerful reasons to put asset protection planning in place, but there are others that you might not think of.
Children living abroad
Lots of people choose to live abroad, either for personal reasons or because their jobs demand it. Their stay overseas might be short or long term.
But what if you die while one of your children is living abroad? If they receive money from your Will, it will go directly to them and they may have to pay inheritance tax in the country they live in. Some countries have “dual tax treaties”, meaning that any inheritance tax can be reclaimed, but others do not.
What’s more, inheritance tax laws do sometimes change and it’s impossible to predict what the rules will be at the time of your death in the UK or any other country.
Another possibility is if your offspring have done well in life. That doesn’t necessarily mean “high net worth”, but they might have well-paying jobs, a nice house and possibly a rental property.
Inheriting from you is going to swell their estate. Perhaps the value of their estate was just at the limit where they’d pay inheritance tax when they die. But inheriting from you means their estates could pay a lot. And that means your grandchildren would miss out.
A partner finds someone new
The last scenario is probably the most common problem that’s easily solved by asset protection planning.
If you just make basic Wills, all you are doing is handing over assets to someone else on your death. If that person is your partner, they are perfectly free to make a new Will later on.
What can, and often does, happen is when a widow or widower meets someone new, which is just human nature. But problems can arise if they then change their Will to favour their new partner. Potentially, children from previous relationships could lose out on the inheritance they thought they would receive.
If your spouse and partner remarries, that can be an even bigger problem. A marriage (or civil partnership) cancels the existing Will. That mans that assets pass via the rules of intestacy and so children from a previous relationship might not receive anything at all.
Stopping this happening (it’s sometimes called “sideways inheritance”) can be done with asset protection planning.
How does asset protection planning work?
The best form of asset protection planning uses lifetime Trusts. You set these up while you are still alive and put (“settle”) assets into them.
You choose trustees to manage the Trust, of which you can be one. You need at least two, so the other trustees are typically your spouse and other family members and friends.
You can also write a list of potential beneficiaries. The potential beneficiaries are the people who could potentially benefit from your estate. Ideally, they should follow your written wishes but they don’t have to.
This is the power of this kind of asset protection planning. Who benefits from your assets is decided by the trustees. This means, of course, that your choice of trustees is crucial.
The trustees can then make decisions that take account of your beneficiaries’ circumstances.
A son or daughter going through a divorce? They can keep their inheritance intact until the divorce is finalised. Or how about someone on means-tested benefits. They could be given their inheritance a bit at a time.
Trust planning can be complex so it’s best to talk to us to see if it suits your circumstances. Find out more about asset protection here and request a callback by clicking the button below.