Family protection trust explained: the will version, the lifetime version, and what each protects

What a family protection trust is

A family protection trust is a sales name, not a legal one. Firms use it, along with property protection trust, home protection trust and asset protection trust, for two different arrangements. One is a trust written into your will that starts when you die. The other is a trust you set up now, during your lifetime, and give your home to. They are sold with the same promise, which is that the family home will reach your children whatever happens. They carry very different risks.

When a couple asks Aaron about a family protection trust, they usually want the will version. Its proper name is a life interest will trust, and it is the one this guide explains first. The lifetime version has its own section further down, because it is the one to be careful of.

The will version, in plain terms

A married couple, or civil partners, usually own their home together. The first step is to make sure you own it as tenants in common, each with a distinct half share, rather than as joint tenants where the whole house passes automatically to the survivor. If you own as joint tenants, a short document called a severance of joint tenancy changes that.

Each of you then makes a will that leaves your half share of the home into a trust. Nothing happens while you are both alive. When the first of you dies, that person's half share passes into the trust rather than outright to the survivor. The survivor is the life tenant: they have the right to live in the home for the rest of their life, and to any income the trust produces. When the survivor dies, the half share in the trust passes to the people the first of you named, usually your children.

The survivor's own half share is untouched. It is still theirs to leave, spend or sell as they choose. The trust only ever holds the share of the person who died first.

What it protects against

• A second marriage or a new will. If the survivor remarries, their existing will is revoked by the marriage. Without a trust, the whole house can pass to the new spouse and then to that spouse's own family. The half share in the trust cannot, because it never belonged to the survivor.
• The survivor's creditors. Bankruptcy, a court judgment or a business failure can reach the survivor's own assets. In general they cannot reach the capital in the trust's half share. The survivor's own life interest can still pass to a trustee in bankruptcy. A protective trust in the will can guard against that.
• Care fees on the first to die's share. If the survivor needs residential care, the local authority assesses the survivor's own capital. In England a person with more than £23,250 of capital pays their own fees in full. The half share held by the trust is not the survivor's capital, so it is not counted. The survivor's own half is.
• Family disagreement. You decided, in writing, while you were both well, who inherits the first half share. That decision does not depend on anyone's goodwill later.

What it does not do

This is the part sales material tends to leave out. It is the part Aaron will always tell you on the call.

• It does not protect the survivor's own half. If the survivor needs care, their half share of the home and their savings are assessed in the normal way. A will trust halves what is at risk. It does not remove it.
• It does not save inheritance tax on its own. Leaving a share to your spouse through a life interest trust still qualifies for the spouse exemption on the first death, and the trust share is treated as part of the survivor's estate on the second death. The residence nil rate band can still apply when the home ends up with children or grandchildren. The trust is neutral for tax. It is not a tax scheme.
• It cannot help a single person. A life interest trust needs a survivor to hold the life interest. If you are single, widowed or divorced, the tools are different, and usually simpler.
• It is not a substitute for advice on your own facts. Whether the trust is right for you depends on how you own the home and what else you have. It also depends on your children's circumstances and the wording of the will. That is why the fee includes the meeting, not just the document.

The lifetime version: take care

The other thing sold as a family protection trust or an asset protection trust is a lifetime trust. You set it up now and transfer your home into it while you are alive. You carry on living there. The idea is that because you no longer own the house, no one can count it against you later.

Four things to know before you sign anything like that.

• Care fees. If a local authority decides you gave the house away to avoid paying for care, it can assess you as if you still owned it. That is called deliberate deprivation, and there is no time limit on it. The seven year rule people have heard of is an inheritance tax rule and has nothing to do with care fees.
• Inheritance tax. Giving your home to a trust while you carry on living in it rent free is a gift with reservation of benefit. For inheritance tax the house is still treated as yours, so the tax saving that is sometimes promised is usually not there, and a lifetime transfer into trust can itself trigger an immediate charge above the nil rate band.
• Control. Once the house belongs to the trust, you are no longer the owner. Selling, moving, borrowing against it or changing your mind all depend on the trustees and the trust deed.
• Who is selling it. Lifetime asset protection trusts are heavily marketed, often by firms that are not solicitors and are not regulated. Trading Standards and the Law Society have warned about the way they are sold, and a client of an unregulated seller has no route to the Legal Ombudsman when it goes wrong. Fees can run to several thousand pounds, and the trust may then need running every year.

Aaron rarely recommends the lifetime version. For most couples the will version does what they actually want, at a fraction of the cost, without giving anything away during your lifetime. Where a lifetime trust really is the right tool, it is planning drawn for you, not a product.

Who it suits

The will version is worth a conversation if you are a couple and any of these is true:

• One or both of you has children from an earlier relationship.
• Most of your wealth is in the family home.
• You are worried about what happens if the survivor remarries, is pressured, or runs into money trouble.
• You want certainty now about who inherits, rather than trusting how things turn out later.

The life interest will trust page walks through the five moments from signing to the end of the trust. The guide to protecting the family home goes deeper on property protection trusts specifically.

What it costs

Aaron does this work for a fixed fee, agreed in writing before anything starts, never by the hour. The current figures for trust wills for a couple and for the severance of a joint tenancy are on the fees page, with VAT stated. If you have been quoted for a family protection trust elsewhere, that is the like for like comparison. Home visits across East and North Yorkshire are included.