Will a trust really help protect my house from my insolvency?

By 5th December 2016 Trusts No Comments

There are many reasons people may wish to place their assets into trust during their lifetime. Some do so to keep their property outside of the Probate process, to speed up sale upon death, to protect vulnerable or reckless beneficiaries, or to reduce the risks of someone challenging their Will. Some people, especially sole traders, wish to use trusts to keep their family home away from creditors.

An asset held in trust is deemed not to be owned by the person who set it up – the “settlor” – but is instead owned by the trustees. This does provide a strong protection over those assets: they are “no longer the settlor’s assets” to be divided up by the creditors.

However, nothing is ever that easy.

The Insolvency Act provides that the court may set aside transfers into trust five years prior to any claim that leads to bankruptcy: within two years of the bankruptcy, any such transaction can be set aside; between two and five years before bankruptcy, they can be set aside if the donor was insolvent at the time or made insolvent by the transfer.

In addition, there is no time limit to the court’s power to set aside a trust where the reason for the settlement was to put assets beyond the reach of someone who is or may at some time make a claim, or to otherwise prejudice such a potential claimant’s interests. This is a real obstacle for those who want to protect their properties precisely for these reasons.

As such it can be dangerous to place assets into trust with these motivations in mind. Similar problems are faced by those who wish to place their property into trust to avoid it being used for care fees.

Trusts can only be used safely if they are settled with proper motivations in mind: otherwise, they may even make matters worse for the settlor and their family.

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