There have been a number of trust scams recently, culminating in the Universal Asset Preservation Trust debacle that did not live up to its name.
One of lessons that came out of this is you cannot hide your money in a trust, just to avoid your future financial obligations.
About Probate Trusts in Terms of Set-Up Tax
Prior to changes to UK taxation laws on 22 March 2006 those in the know agreed on the definition of a ‘probate trust’. These were trusts settled by an individual granting a sole lifetime interest to them self.
These became flexible trusts or discretionary trust provisions after they passed away. This arrangement prevented the government taxing the original transaction because the assets effectively remained in the same person’s estate.
However, authorities declared these transactions taxable post 21 March 2006, except where disabled or “prospectively disabled” people were involved. This has pretty much been the case since then.
How Such Trusts Avoid the Need for Grants of Probate
It’s a generally accepted fact there’s no need for probate after death because the trustees already hold legal title to the assets. This means benefits, such a life insurance pay-outs can be transferred speedily to beneficiaries.
Hence there is a good case that some probate trusts exist to avoid the probate process, and the government fees attached.
Is This Arrangement Likely to Survive the Higher Probate Rates?
There seems to be consensus the government will press ahead with implementing the new probate law once Brexit is decided. This could see the probate tax on wealthy estates rise from £215 to £6,000.
It’s therefore quite possible this larger fee will inspire the government to invoke the principle that trusts are not there to bypass current or future financial obligations.
Thus, Barbara Govender of Chartered Insurance Institute begs the question whether such ‘bare probate trusts’ will succeed, or whether they will turn out to be a barefaced attempt to avoid paying tax.
The government insists this is a ‘sliding-scale fee’ and not a tax. We should however not be surprised if they yield to opposition protests if this suits them better in the pocket.
Two Opinions on Which Way the Decision Will Swing
One informed opinion holds a deceased estate should not pay probate “as the client is not the legal owner of the trust property … these fees are charged on the assets owned by the client at the time of death”.
We’ll probably need a Court decision to decide who really owns the assets, and therefore on what the probate fee should be based? A second informed opinion is the beneficiaries under the will should accept some financial responsibility because they are the legal owners of the assets in the trust.
Settlers of probate trusts therefore need to take informed advice until they have a clear answer to this. Her Majesty’s tax collectors will be poised to act once they know the difference between clean trusts, and those established to avoid paying what is due to Caesar.