Back in January I wrote this blog, which gained significant traction on social media and a number of enquiries to the firm in respect of asset protection trusts. I was very pleased to have been able to prevent some clients from entering into these documents, but sadly I did hear from many people who already had them in place and were now facing difficulties extricating themselves from the arrangement.
These trusts are typically established with a view to avoiding care fees and for the various reasons set out in my blog should be avoided.
As a follow on from that blog though, I thought that it would be helpful to review the various estate planning means available that can legitimately be used to mitigate future exposure to care fees. These are as follows:
The establishment of life interest trust mirror wills (for couples)
The legitimate expenditure of capital
Use of personal injury trusts
Life Interest Trust Mirror Wills
This would be the type of planning most applicable to many of our clients. This is typically used by married couples, but would also work effectively for unmarried couples, including cohabiting family members, who jointly own the property in which they live. I will set the rest of this blog out on the basis that the planning is undertaken by a married couple. Nevertheless, the comments do apply equally to those other categories of cohabitees as well.
In these circumstances you will often want to leave your property outright to your spouse or family member in order, firstly, that they can continue to live in that property after your death and to ensure that they have sufficient capital to meet their own needs in the future. Nevertheless, if the survivor does subsequently go into care, the inheritance they will have received from you will enlarge the size of their estate for the purpose of a care fee assessment.
There is therefore one method in which you can provide for your spouse whilst also preserving the value of your interest in the matrimonial home (and indeed any other assets that you might happen to own in your name). That is to create a life interest trust into which your half of the property, together with such other assets as you might deem appropriate, are channelled following your death. That life interest trust would pay an income to your spouse for the remainder of their life (in the case of property, this means that they could continue living in the matrimonial home free of rent). However, the capital from your half of the home itself would be completely safeguarded from a care fee assessment.
It is also perfectly possible to build in the power to your Will to advance capital from that trust in favour of your spouse, thereby ensuring that their capital needs can be met if this is required in the future.
As with any trust your choice of trustees is incredibly important as they will need to administer the trust for the rest of your spouse’s life and will need to be agreeable to advancing capital in the circumstances envisaged by you. Nevertheless, this can be an incredibly powerful tool to safeguard the value of property and is particularly effective for couples whose overall estates do not exceed £500,000.
Trusts do involve a degree of technical administration and invariably do incur professional costs. Nevertheless, it may well be that this form of planning becomes less relevant following the introduction of the new care cap in October 2023. Assuming that cap is implemented as proposed, that would limit any individual’s lifetime exposure to care fees to £86,000. On top of this are so called “hotel costs” of which the Government have currently been silent. These are ostensibly daily living and accommodation costs.
Nevertheless, it is felt that those costs are likely to be in the region of £12,500 per year, significantly less than the current average cost of care (being around £45,000 per year). It is hoped in many cases, that the availability of pension income will go a significant way to covering those hotel costs and for many people will cover them entirely.
One off shot of this, I am delighted to say, is that the creation of asset protection trusts (of the type set out in my earlier blog) should become entirely obsolete as the costs of care become more affordable for the average person.
Legitimate Expenditure of Capital
As was also set out in my earlier blog, if you deprive yourself of significant sums of capital with a view to minimising your future exposure to care fees, any such transaction can be looked at by the Local Authority and undone if they believe you have taken that action deliberately. There is no time limit on which the Local Authority can look back for transactions that deliberately deprive yourself of capital.
Nevertheless, there are many circumstances under which it is entirely appropriate and reasonable to spend significant sums capital and I have set out a non-exhaustive list of these:
As part of an inheritance tax mitigation exercise
On the renovation of your home to accommodate any physical or mental disability (or simply in general)
On luxurious holidays for yourself and your family (in this case your need for care should not be immediately foreseeable)
Even if a relative is already resident in a care home, there could be entirely legitimate expenses you could be making from their funds to enhance their quality of life. For instance, this might be making funds available for them to go on outings from the care home assisted by paid staff, the purchase of a suitable adapted vehicle so that they can go on such excursions, or simply the purchase of any item for their room that would enhance their quality of life (for example a nice new TV).
If you are ever unsure as to whether expenditure might be deemed a deliberate deprivation of capital, professional advice should be sought.
Personal Injury Trust
If you have ever received compensation as a result of a personal injury or clinical negligence, it is highly advisable to transfer that compensation into a personal injury trust.
Assuming that you transfer such compensation into trust correctly, the value of funds in a personal injury trust will not be subject to any assessment for care fees. In short, the compensation that you receive under those circumstances is designed to remedy the injury you have suffered, not to be taken for the later purposes of general care.
There are some technicalities to follow when creating a personal injury trust, and we would suggest you take professional advice as soon as possible after receiving a compensation payment (and ideally beforehand) to make sure your trust offers the greatest benefit possible. Please also see our earlier blog for more general information about these trusts.
As can hopefully be seen above, not only are there legitimate steps that you might take to mitigate future liability care fees, but I am hopeful that the introduction of the new care fee cap will significantly help to preserve the estates of many more taxpayers in the future making this much less of a concern.
If you have any queries, relating to the issues raised in this blog, please do not hesitate to contact Alex Stanier on 01494 893 533