Planning for future Care Home Fees
If your relative has Capital above the maximum threshold of £23,250 they may want to seriously consider effective legal ways to mitigate their liability to pay for their care costs in the future. In effect to get help with legally avoiding care and nursing home fees in the future.
There are a number of ways your relative can effectively dispose of Capital without breaching the Local Authority Guidelines, including:
- Setting up a Trust
- Repaying legitimate debts
- Producing receipts for legitimate expenditure
- Purchasing an Investment Bond with Life Cover (depending on the circumstances and timing of the investment)
However, the Local Authority has the “right” to scrutinise any arrangements which it considers may have caused the deprivation of capital, in other words avoiding care home and nursing home costs and no arrangement is guaranteed to prevent Deprivation of Capital rules being applied.
There are ways to legitimately dispose of Capital without breaching Deprivation of Capital Rules, the most common of which is to place your Assets into a Discretionary Trust.
So what is a Discretionary Trust and what are the benefits?
A Trust is a private legal transaction where the ownership of your Assets (property, shares, cash etc) are transferred to someone else (usually a small group of people or a trust company – called the Trustees) to look after for the benefit of the Beneficiaries (usually yourself and your spouse, your children and any other people you may wish to benefit from the Trust in future)
In terms of planning for Care Cost liabilities, a Trust needs to be set up in advance of you or your relative having a requirement for care – to avoid the deprivation of capital rules.
That is why it is important to set up a Trust as soon as possible and not to delay.
Having said that, there is a specific 6 month rule for setting up a Trust in terms of the deprivation of capital rules. If the Trust is set up 6 months before your relative goes into care, then the Assets in the Trust must be disregarded. Whilst this is useful to know, it can be risky trying to plan 6 months ahead, when health and social care needs can arise very quickly – so again the best advice is to set up a Trust as soon as possible.
It’s too late to think about a Trust when you or your relative are already in care as the opportunity to protect your Assets has already passed, however anyone looking into retrospective claims for care cost refunds, or looking at advice on paying for care should consider setting up their own Trust as a matter of urgency.
Sometimes people are concerned about the perceived loss of control of their assets if they are transferred into a Trust. In fact the position is quite the opposite. You can give the Trustees specific instructions about how you would like the assets to be used and although these are not legally binding on your Trustees, they will at least have a note of your wishes. It is necessary however for all the Trustees to agree on any course of action in relation to the Trust property, so you will not have to move out of your home if it’s placed into a Trust. You can also sell your home at any time and re-invest the money into another property, which will still be owned by the Trust – so there’s no need to worry about any loss of control.
There are a number of distinct advantages to setting up a Trust beyond the obvious saving in terms of care costs. These include:
- Avoiding expensive Probate Costs – when you die, even when you have made a will, your Executor will need to get a Grant of Probate. The costs of this can often be up to 3% of your estates value – so for example a £300,000 estate could incur around £9000 in Probate costs. If you have set up a Trust you will avoid these costs.In addition, obtaining a Grant of Probate can take months or even years. With a Trust, the Probate requirements don’t apply and the Assets within the Trust can be distributed to the Beneficiaries straight away.
- Avoiding Sideways Disinheritance – this is an issue which can arise that is often overlooked by families. Sideways Disinheritance can arise when one partner dies and the remaining spouse inherits the whole estate. If the remaining partner subsequently re-marries, then existing Will arrangements are often revoked. On the surviving partners death the estate will then pass to the new partner, which means that children can be disinherited.With a Trust this can be specifically prevented from happening.
- Children inheriting at the wrong time – this issue can arise where your estate is distributed according to your Will (often passing to your children), but the timing of the inheritance might not be right. If your children are going through a divorce for example, the inheritance could be caught up in the divorce settlement and therefore wouldn’t pass to your child as you’d intended.With a Trust, your assets are distributed by your Trustees in accordance with your wishes. The Trustees can therefore withhold the distribution of assets if they believe that it would not be what you had wanted to happen at that particular time.
- Dependant relative claims – even if you have made a Will, if you have chosen not to pass part of your estate to a dependant relative, for whatever reason, they can still challenge your Will. With a Trust any legal challenge is unlikely to succeed unless the dependant relative is a named beneficiary.
- Incapacity – if your mental capacity reduces to the point where it’s determined that you no longer have the capacity to make decisions about your health and finances and you haven’t set up a Lasting Power of Attorney, your family would have to apply to the Court of Protection to be granted powers to make decisions on your behalf. This can be expensive and it takes time.With a Trust, a Lasting Power of Attorney is not required because the Trustees already have your authority to deal with your assets under the terms of the Trust Deed, so there’s no delay in dealing with any financial matters once you no longer have the capacity to make your own decisions.
These are all valuable reasons to set up a Trust well before you or your relative go into care, in addition to reducing your liability to pay for your social care costs.
There are few disadvantages to setting up a Trust and transferring your assets. One consideration however, is that you do transfer the legal ownership of your property to the Trust, which means that you can not use your property to secure a loan for example.
One other potential disadvantage is that the Trust will be liable to pay immediate Inheritance Tax on assets transferred into the Trust beyond the Inheritance Tax threshold of £325,000. This can be mitigated however, with good Independent Financial Advice.
One alternative to setting up a Trust is to Gift your assets to a third party, your children for example.
We don’t recommend doing this however, for a number of reasons. First and foremost, you lose total control over your assets. It might seem like nothing could go wrong and you have a close relationship with your children, but things can change. The most obvious example would be divorce, where your assets would be caught up in any settlement. Another situation could arise if your child died before you did, then your asset (home) would be passed to your child’s spouse, with no guarantee that they would continue to provide you with any continued support.
There are also tax implications to transferring your property as a Gift and it could be very expensive for your children.
In summary then, we believe that the most effective way to mitigate your social care costs is to set up a Trust well before you or your relative have a requirement for care.
There is a cost associated with setting up a Trust and you will need to consult a solicitor.
Please remember, Trusts are not just for the rich. A Trust will help to protect your assets no matter what their value. If your assets are worth more than the threshold of £23,250 then you should protect them.
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