Planning for the cost of care fees

My neighbour put his home in a trust to avoid future care fees – can you do the same for me?

When considering lifetime planning and getting your affairs in order, it is sensible to contemplate the type of care you may like and need in the future. The possible costs of care can be unsettling, particularly the effect this may have on your retirement planning and wealth you may like to pass on to others.

When an organisation says “if you put assets in trust while you’re healthy you can avoid care fees in the future”, you should proceed with caution. It is likely the trusts they are describing are what are known as asset protection trusts. These trusts are legal structures that aim to separate the ownership of your assets which may in turn safeguard assets from potential creditors, legal judgments, or reduce the value of your estate that is assessable for care costs.

The term ‘asset protection trust’ can be misleading on first glance. Whilst trusts can prove to be a powerful tool in an individual’s or family’s financial strategy (such as part of inheritance tax planning and preserving assets for the next generation), they are not impenetrable.

In relation to care fees, if it can be shown that such a trust is established with the primary goal of avoiding care fees, this could be seen as a deliberate deprivation of assets. The local authority has very wide powers to look back and undo financial transactions (i.e. disregard the ‘protection’ of the trust and treat the assets as if you still owned them) where it can be shown these were done to avoid care fees. These powers extend to all assets and not just property.

Trusts

There are many justified reasons for setting up a trust and they can offer protection and flexibility benefits. One type of trust which can be created during your lifetime is a life interest trust. This allows you to ring-fence a portion of your property by placing it into a trust while giving your spouse/partner the right to live in the property for the rest of their life. Upon their death, the property can then be passed on according to the terms of your Will.

Benefits

• Can form part of a valuable inheritance tax planning tool, provided additional conditions are met.
• Indirectly, the property, if in trust, may fall outside of a financial assessment from care fees and may protect against familial relationship breakdowns. 

Drawbacks

• If either the main or part intention is to avoid care fees, this would be challenged as deliberate deprivation of capital. 
• Expensive to setup and require an ongoing market rent to be paid (with regular reviews), which may not fit with plans for the future. 
• Affordability versus future retirement plan considerations.
• There would be ongoing trust administration and associated professional fees.  
• Depending on the value put into trust, an inheritance tax entry charge may be payable (any value in excess of £325,000) as well as 10 yearly anniversary charges.

Another option is to own your home as tenants in common and to make provision in your Will to leave respective interests in the property on a life interest in favour of the survivor, and thereafter to chosen beneficiaries.

Benefits

• The property is still yours and you retain control to do whatever you want with it. 
• The trust allows the survivor to downsize and purchase a replacement, using the whole sale proceeds. 
• The professional fees of including this in a Will would be a lot less than setting up a lifetime trust.
• No need for any ongoing trust administration during lifetime and no ongoing tax reporting during lifetime. On the first death, when the trust takes effect, reporting will then be required.
• On second death if the survivor needed care, the capital in the life interest should fall outside of a financial assessment, as the survivor is not entitled to the capital. The income would, however, be assessed. The local authority does have wide-reaching powers to bring further assets into a financial assessment.
• Whilst the survivor is not entitled to the capital, if the survivor is a spouse or civil partner, from an inheritance tax point of view, the trust will benefit from the spouse exemption and so is free of inheritance tax. 

Drawbacks

• This would not work if a couple needed care during their lifetimes as Wills only take effect on death.
• The survivor will not have unfettered access to the capital.
• This does not aim to reduce the estate for inheritance tax purposes.
• It is important to appoint the right trustees as there is the potential for conflict between trustees and beneficiaries, especially when there are disagreements about the management of trust assets.

The seven year rule

There is often the belief that if an action was made more than seven years ago, e.g. assets transferred into trust or to others, then these assets are disregarded and safe from being called upon. However, case law stipulates that there is no time frame for local authorities looking back at past transactions, so assets given away more than seven years ago may still be considered as part of your estate in a financial assessment for care home fees.

The seven year rule concerns gifts falling outside of your estate for inheritance tax purposes. There are conditions that need to be satisfied for it to be deemed a ‘gift’ in these instances, and if any benefit is reserved in the assets then the associated value will still be part of your estate for inheritance tax purposes at death.

Treatment by HMRC

HMRC recognises the legitimacy of trusts, but they are subject to specific tax rules and regulations. For instance, transfers into a trust may be considered chargeable lifetime transfers for inheritance tax purposes, potentially incurring an immediate tax liability. Additionally, they may also be subject to periodic and exit charges, depending on the trust’s structure and the timing of asset transfers.

Asset protection trusts already set up

There have been cases where companies promoting asset protection trusts did not fully disclose the potential tax implications and the risks involved, leading to legal issues, loss of access to assets for the trust’s beneficiaries and damaging inheritance tax consequences which were not anticipated.

It may be possible to bring such a trust to an end. This may be because the arrangement is no longer appropriate, there are concerns about matters being complex on death, unanticipated unfavourable tax treatments or you did not fully understand what you were signing up to. You may also like to explore recourse from the original advisors to see what can be done to rectify the position. 

The bottom line

It’s essential to seek expert legal advice when undertaking lifetime planning to:

• understand your options and the associated implications fully, including the legal and ethical considerations;
• ensure that any action taken is within the legal framework;
• ensure proper documentation is in place to prove the legitimacy of the trust should it be challenged in the future; and
• establish a legitimate purpose of any trust beyond merely avoiding care fees.

Overall, it is crucial to understand that the timing and intention behind setting up a trust are of paramount importance. Trust structures can offer a valuable means of safeguarding assets, but they must be carefully assembled and managed to be effective. Professional advice is strongly recommended to navigate the complexities and to develop a robust plan that aligns with your long-term goals and needs.