Ways of protecting family wealth on divorce
Back to basics. A trust is created by giving control of assets to third parties (“Trustees”) for the benefit of others (“Beneficiaries”). The motive may be to provide benefits across successive generations of the family or as a means of protecting beneficiaries from themselves or from the inappropriate attentions of others.
A parent, concerned at a child’s spendthrift ways or the company they keep, might consider it irresponsible and risky to give or leave that child substantial wealth outright. So they might make the gift or legacy in the form of a trust, whereby the child is only entitled to the income produced and not the capital (a “Life Interest Trust”) or entitled to nothing at all unless the trustees decide to distribute income or capital from the Trust Fund to the child ( a “Discretionary Trust”).
If the (adult) child goes bankrupt, then the capital within the Trust Fund is safe from the legitimate demands of the child’s trustee in bankruptcy. If it’s a life interest trust, then the income to which the child is entitled as of right should nevertheless be paid to their trustee in bankruptcy until the child is discharged from the bankruptcy. If it is a discretionary trust, then any payments to the child the trustees choose to make similarly need to be declared by the child and handed to the trustee in bankruptcy insofar as they exceed what’s reasonably needed for maintenance.
The short answer is “no” with the double whammy of such transfer into trust likely landing you with some, potentially very nasty, tax consequences.
English law has long since taken issue with attempts to offload assets to keep them out of the pot properly available to creditors on bankruptcy. The current law is contained in the Insolvency Act 1986.
Any gifts (either outright or into a trust) will be set aside by the Court (and the property given brought back into the bankrupt “estate”) if they are:
For gifts (outright or into trust) falling outside the specified 5year/2 year periods, the key will be the “purpose” of the gift.
If, when wealthy, I make a gift to my children to mitigate inheritance tax on my death, that gift, made for a clear and rational purpose, might not be questioned when, some years later, my previously successful business fails and I’m made bankrupt.
Problem gifts are those where no sensible and believable reason can be established other than an attempt to put assets beyond the reach of creditors. While “inheritance tax planning” may be the principal reason for making substantial lifetime gifts, that argument won’t wash if:
Incurring tax in an unlikely unsuccessful attempt to put assets beyond the reach of potential creditors does not make sense.
My oft-repeated advice “Don’t give away the family home!” makes yet another appearance here. Where the family home is an individual’s principal asset, there could be fear that it may need to be sold to meet a future liability – to contribute to nursing home fees for example.
The (adverse) Capital Gains Tax and inheritance tax (likely no advantage) implications of “putting the children’s name on the deeds”, as well as the inherent risks of your children selling your home from under you (either intentionally or by reason of death or divorce) mean there can rarely exist a motive other than an attempt to avoid, say, the liability to contribute to nursing home fees. Being persuaded to create some sort of “Asset Protection Trust” on the purported pretext of “avoiding the probate process” seems unlikely to wash.
The upshot is that the full value of the family home will likely continue to be treated as “notional capital” in working out the contribution to nursing home fees even after other resources have dwindled to nothing. Making an elderly person bankrupt and having the gift of the home set aside to be sold so that care fees can be recouped is not uncommon.
The possibility of our divorcing is something that worries our parents as much as, if not more so, than it worries us. The suggestion of a pre-nuptial agreement often stems from the wealthy parent of a party to the marriage rather than the loved-up couple themselves. Parents may harbour a strong desire to pass their wealth to their children, but would be loath to see it disappear to a son-or-daughter-in law on divorce. For the treatment on divorce of both outright gifts made and family trusts created by a parent/relative of one party to a marriage, I defer to the excellent blog written by my colleague in our Family Law team, Abby Buckland - Ways of protecting family wealth on divorce.
If you have any questions about the issues covered in this blog, including trusts, asset protection and estate planning, please contact a member of our private client team.
Jim Sawer is a partner in our private client team. He has a broad private client practice and has advised families in the UK and overseas, including those with commercial and landed interests, for over 30 years. Clients appreciate his ability to identify the true crux of a matter promptly and his results-orientated approach to resolving private client issues in the family context.
Deputies are typically appointed because individuals cannot make decisions for themselves due to illness, like Alzheimers or dementia, old age or perhaps as a result of a catastrophic personal injury or medical negligence.
There are several reasons why someone may need the assistance of a financial deputy, stemming from incapacity due to an accident or a consequence of old age. There is however a darker side to this type of work that Court of Protection lawyers are seeing more and more of. This relates to those who have suffered some form of financial abuse and/or undue influence.
After a spinal injury the long-term impact on your life and that of your families can be significant. You may need a care package, a new home or adaptations to their existing accommodation, therapies and specialised equipment.
The pandemic has changed the world – there is no doubt we are all “online” far more now than before. Social media now extends into every aspect of our lives, from those notorious repetitive baby pictures to those ‘should never have been posted university photos‘. We collect and share moments of our lives in the digital world.
In the latest edition of the Financial Times Money Q&A, Jemma Garside, senior associate in our private client team answers a question: "Should I set up a joint lasting power of attorney for my mother?"
Subject to any restrictions or conditions in the Lasting Power of Attorney (“LPA”), a property and affairs attorney can make gifts on the donor’s behalf to the donor’s friends, family members or acquaintances on customary occasions.
Going through a divorce process is stressful. There are lots of things to think about and one of these is likely to be what you should do to protect your hard-earned money.
A donor must have the mental capacity to make a Lasting Power of Attorney (“LPA”) for property and affairs and health and care. The completed LPA is then sent to the Office of the Public Guardian (the “OPG”) for registration. Each page of the registered LPA will be stamped with ‘VALIDATED-OPG’.
As a business owner/shareholder, what would happen to your business if you were unable to make decisions – would someone be able to authorise payments or enter into contracts and keep the business running?
Lasting Powers of Attorney (LPAs) are vitally important documents. Our previous blogs have touched upon what LPAs are and top tips for anyone planning on putting an LPA in place. Most individuals should at least put in place a financial LPA to cover their home and personal finances. It is however a good idea in some cases to have a second financial LPA.
The last 12 months have put an awful lot of pressure on the family unit and sadly this has led to a spike in separation and divorce amongst married couples. With the end of the tax year fast approaching (last day Monday 5th April – Easter Monday) it is timely to consider the tax consequences of separations.
Whilst managing the property and affairs of another person a Deputy appointed by the Court of Protection may come across issues that require them to pay for legal advice and assistance on their behalf. Examples could include purchasing a property, challenging a care plan or obtaining advice about a dispute.
Partner and head of our Private Client team, James Ward, writes about the importance of entrepreneur's putting in place a succession plan to safe guard their reputation.
LPAs are important, and are steadily growing in popularity as individuals realise how necessary they are to support friends and family in the event that they lose mental capacity. Our previous blog gave an overview of how LPAs work and the requirements for making them. This time, we focus on our ten top tips for LPAs.
A Power of Attorney is a very important estate planning tool, especially when an individual loses capacity. Whilst the term ‘Power of Attorney’ seems to be thrown around a lot, it is often misunderstood or not used correctly. In fact there are several different kinds of powers of attorney that can be used for different purposes.
As we find ourselves in another national lockdown, the New Year presents an opportunity for individuals to review their assets and conduct some succession planning.
Phoebe Alexander and JIm Sawer blog about lasting powers of attorney and engaging Discretionary Investment.
Big news was announced by the Government at the end of last month: legislation will be introduced to allow remote electronic witnessing of wills – including for some that have already been made – in a significant amendment to the long-standing requirements. However, it will only be temporary.
Chancellor Rishi Sunak has asked the Office of Tax Simplification to review Capital Gains Tax (“CGT”). CGT is charged on the profit/increase in value on sale or gift of assets. The rates are 18%-28% on disposals of residential property and 10%-20% on other assets. There’s an annual exemption of £12,300 per taxpayer. Disposal of your main residence is tax free and “Entrepreneurs Relief” may see the first £1million of the gain on the sale of a business charged to CGT at the lower rate of 10%.
On the death of a person known to have made a Will, it’s pretty rare that the Will can’t be found...
Skip to content Home About Us Insights Services Contact Accessibility