Asset Protection

What does Asset Protection do in reality?

Just as there are many and varied needs for asset protection, so there are also many different planning options available. Your choice will require careful consideration to ensure you are effectively mitigating risk while at the same time remaining compliant with current tax and other regulatory rules.

Without planning, your assets are likely to be at risk of exposure to a number of financial threats. This could be as a result of care fees, creditors, bankruptcy, divorce or the tax man. So while the value of your assets will always be subject to economic fluctuations and commercial influences, you can in most cases take protective steps to shelter your assets from these financial threats.

Asset Protection is essentially about planning now to protect for later.

What does Asset Protection do to minimise financial risk?

Any asset protection strategy should take account of a range of potential risks, from the inevitable and foreseeable through to the unexpected.

Some of the most common threats include:

• Inheritance tax

• Capital gains tax

• Bankruptcy

• Divorce

• Care Fees

With these in mind, start with a clear vision of your financial and personal objectives. These are the key drivers. Until you are clear about what you want to happen, any planning is likely to be limited in its effectiveness.

There may be many areas to consider here:

• What does your asset portfolio look like – the value and type of assets, who owns them and where they are held?

• How easily do you need access to wealth and capital now?

• What is your current tax position?

• What do you want to happen to funds now and also after your death? Who do you want to benefit and how?

• Is it feasible to gift some of your wealth away now?

Trusts

For protection purposes, trusts can offer certainty and shelter from financial attack. They can also provide flexible, effective management of Trust assets – for example, providing controlled income/capital payments to disabled or vulnerable beneficiaries.

Trusts are almost always used as a means of making a gift of cash or assets – including shares in the family business – with certain conditions applied that are important to the asset owner. For example, giving someone dividends on shares while retaining ownership of the underlying shares.

You can be a Trustee of the trust that you have created, and so are able to control the transfer of your assets during your lifetime with protection from threats such as divorce and bankruptcy.

Placing an asset in trust can be effective for Inheritance Tax mitigation if you then survive for a period of seven years and assuming that you do not derive any benefit from the trust asset(s).

One must also consider the capital gains tax (CGT) implications of any asset transferred into trust. Even where there is no consideration paid by the trust for the asset, this will still be an event for CGT purposes. Where the asset stands at a gain then in some circumstances the gain can be deferred (or ‘held over’), thus there is no immediate liability.

Wills

A will is arguably the most basic – and obvious – of planning tools. Making a will is the most effective method of protecting your assets upon death.

If you die intestate, you are exposing your estate and beneficiaries to all manner of risks. Your assets will be subject to the intestacy rules, meaning they will be transferred by a mechanical set of rules that are potentially not in line with your actual wishes. This may result in a contentious probate scenario following your death. Not a good result.

Gifts and transfers

Consider making the most of IHT exempt gifts and transfers – a lifetime gift, for example, could be placed into a suitable Trust. This would be both tax-efficient for IHT purposes whilst allowing the Settlor an element of control over the gift and any release of capital and/or income payments.