Dealing with Property and your Home and Probate Issues |
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Digby Bew looks at how wills can offer protection against nursing home fees.
The question of how we fund care home costs has historically been one of the more intractable challenges for the individual and their family brought into sharper, recent, political, focus in our present period of financial austerity and cuts in public expenditure. In its Report, the Commission on Funding of Care and Support, chaired by Andrew Dilnot, described a system, which it recommended for radical reform, as ‘confusing, unfair and unsustainable’. At root is a sense of the injustice of a system that can see an individual’s home and life savings liquidated and used by a local authority to pay for the individual’s care costs; the Dilnot Commission’s suggested reform was the introduction of a ceiling on the amount an individual could be expected to contribute towards long-term care although there seems to be little political appetite, currently, to see through such a reform which might therefore be many years away. In the meantime the individual and their family are left struggling with a legal and regulatory framework around the issues of care home fees which is patchily and inconsistently applied by individual local authorities.
In summary, before a local authority can take responsibility for the cost of an individual’s care it must carry out two assessments; an assessment as to whether an individual needs care in a care home and a financial assessment when it will look at an individual’s capital resources and income.
On the capital side if an individual has available capital assets, after disregarding certain excluded assets, of over £23,000, the individual in treated as being able to meet the full costs of care. It might therefore be that an individual, faced with having to leave their home for full-time care, would decide to give away their assets to, say, their children. After all, individuals often wish to consider estate and tax planning in their lifetime to provide for their families; they might want to make gifts or set up a trust which might be used to benefit the family over the longer term. One might, perhaps, have thought that the end result would then be that his family have been provided for by the lifetime gifting and, being then left with less than the capital cut-off point, the fees for the individual’s ongoing care will be provided for by the local authority. Unfortunately, this is far from the case, and individuals making such disposals need to be aware that they may also be affecting their eligibility for the local authority’s assistance towards meeting the cost of their care fees.
In such circumstances, what is considered by the local authority on assessment is whether assets have been intentionally or deliberately removed by an individual to avoid paying for care fees; if the local authority concludes that any transfer of assets is a deliberate deprivation, it will include a notional assessment of those assets as part of the individual’s means. The difficulty is that all rests on an intention test, and proving intention, which will be for the local authority, is never easy. An individual might be aware that a gift into a trust may result in a reduction in the value of his estate for Inheritance Tax purposes, as well as providing a vehicle to protect assets in the event of a beneficiary’s death, divorce or bankruptcy, and additionally results in a reduction in the individual’s capital for the purposes of the care fees financial assessment; but the realisation that this latter is one of the results of the gift does not make it a motivator for the gift.
Thus a great deal of uncertainty surrounds the consequences of action that an individual might wish to take in their lifetime; in many respects, however, the position is more straightforward when considering arrangements that might be made after an individual’s death to both safeguard the financial positions of dependants and to maximise the eventual inheritances of those whom the individual ultimately wishes to benefit from his estate, as the focus in means testing terms shifts from a subjective assessment of an individual’s own actions and intentions to a simpler objective review of what is left to a dependent or other beneficiary.
Past articles have examined aspects of Jack’s tragically early death survived by his wife, Jill, who continues to live in their matrimonial home, Dunfallin. In reviewing his affairs before his accident, Jack made it clear to his advisor that he wished to ensure that, should something happen to him, Jill would be taken care of but also that as much as possible of the family wealth, so far as not required for Jill’s future maintenance, might eventually pass to his children. Jill, being considerably older than Jack, might be expected to need care; indeed, her fall after Jack on their ill-fated water-collection trip, has resulted in her now needing to consider taking up full-time care after a couple of years of living at Dunfallin after Jack’s death.
Fortunately Mr Dumpty, Jack’s advisor, was alive to the potential issues when he prepared Jack’s Will. Instead of leaving his estate to Jill in her own right, Mr Dumpty suggested that Jack should leave a will by which his estate passes in the first instance to trustees, Owl and Pussycat, who are given complete discretion by the terms of the will to determine how the Trust Fund should subsequently be distributed amongst a specified class of potential beneficiaries, including Jill; Jack has also left a separate, non-binding, letter of wishes addressed to Owl and Pussycat setting out his views as to how they might exercise the discretionary distribution and management powers conferred on them by the will, including a statement that Jill is to be regarded as the principal beneficiary of the Trust; the letter goes on specifically to state that in arranging financial provision from the Trust for Jill, account should be taken of the effect that such provision might have on any means-testing assessment that might need to be carried out in respect of Jill’s financial position..
Had Jill inherited Jack’s estate in her own right, the entire value would now fall into account for the purposes of her financial care assessment. However, as only a potential recipient of funds from Jack’s Will Trust, with no legal right to call for any part of either the income or the capital of the Trust, the value of the Trust Fund remains out of account. Thus, if Jill’s own savings are limited, there would be no reason why she should not claim a full entitlement to local authority funding for her care fees, perhaps leaving the Will Trust Fund as a fall-back safety net. On the other hand, it might be that the type of care that can be funded by Jill’s local authority is somewhat short of a standard to which Jill has become accustomed in which case Owl and Pussycat might think it appropriate to make the whole of the Will Trust available to her to provide entirely for Jill’s care, or perhaps otherwise support her, financially, in ways which will not directly impact on a local authority care funding award. The point is that with such flexible will trust arrangements decisions can be taken after Jack’s death, based upon the trustees’ own assessment of family etc. circumstances, whether fiscal, financial or personal, applicable at the time; indeed, following changes made in this area of the law, effective after 6th April 2010 [1], such trust arrangements can last for up to 125 years.
Alternatively, Jack might establish a Trust by his Will in which Jill is given the use and income of the Trust Fund for her life, and with discretionary powers given to Owl and Pussycat over the capital of the Fund should recourse be needed to the capital in the future for Jill’s further financial support. When it comes time to complete Jill’s local authority financial assessment, the income generated by Jack’s Will Trust Fund would be taken into account as part of Jill’s means as she has the legal right to that income; however, as the capital of the Fund remains outside her own ownership its value will, again, not fall into account for means-testing purposes. There can be an estate planning wrinkle with such arrangements since, when it comes time to value Jill’s own estate on her death for Inheritance Tax purposes, although she has no rights or entitlement in the capital of the Trust Fund, nevertheless she is legislatively deemed [2] to own the underlying value of the Trust Fund for Inheritance Tax purposes. This will be a significant issue if the combined value of the Trust Fund and Jill’s own estate exceeds the threshold above which Inheritance Tax at 40% becomes payable [3]. This is not a consideration were a fully discretionary form of Will Trust to be used.
The key point to review when using a will structure in this way is to ensure that assets are owned in a form which enables them to pass under the will. If Dunfallin is in Jack’s own, sole, name it will clearly be dealt with as his asset under the terms of his will.
If the property is jointly owned by Jack and Jill, one needs to determine the form of that joint ownership. In a previous note [4] I summarised the two differing types of joint land ownership, namely a joint tenancy and a tenancy in common. Nothing is gained by Jack creating a Trust structure in his will to protect his share of the property if the property itself is owned by Jack and Jill as joint tenants; Jack’s property share will pass to Jill, as the surviving joint owner, and without any reference to the terms of Jack’s will. It follows therefore that, if they were joint owners of the property, Jack and Jill should own Dunfallin as tenants in common. Jack’s share in the property then passes, as one of his own assets, through his will into the trust structure created by the will. Jill can continue with her own free, and undisturbed, use of the entire property as her home by virtue of her ownership of her own property share. That share, ultimately, will be an asset to be taken into account for the purposes of Jill’s means-test; however, the value of Jack’s property share is ‘ring-fenced’ within his Will Trust and so protected for the future whatever Jill’s personal circumstances.
Furthermore, the valuation of Jill’s own property share will be advantageously affected by Jack’s Will Trust arrangements over his property share. The valuation provisions are to be found in the snappily entitled National Assistance (Assessment of Resources) Regulations 1992; Reg. 27(2) provides that the value of the property share to be used in these circumstances is the value which the share would fetch if sold to a willing buyer less 10% as well as any debt secured on the property share. The challenge is coming to a view as to what a hypothetical purchaser would be prepared to pay for the bundle of property rights, largely codified in the Trusts of Land and Appointment of Trustees Act 1996, attaching to Jill’s property share; the answer to this question is particularly fact-sensitive but is likely to turn on the perceived ability of the hypothetical purchaser of Jill’s property share to be able to force a sale of the property another day and recover his investment. Although the answer will differ from case to case, what is clear is that some measure of discount, often substantial, will be available against the strict mathematical equivalent of a percentage share of the value of the property as a whole; thus, the value of Jill’s property share is diminished without her having to take any action.
Furthermore, if Jill is able to defer payment of all or part of her assessed care contribution and gives the local authority a charge over her own property share as security for the deferred balance, that charge will also be deductible from the capital value of Jill’s property share such that the point might well come that a combination of the joint ownership valuation discount, the local authority charge, and the 10% expenses deduction would bring the value of Jill’s capital resources down to a point where Jill’s ability to pay is assessed solely by reference to her income; in effect a substantial proportion of the value of Dunfallin is then left for eventual inheritance by the family heirs, a position that could not have been achieved had Jack’s property share simply been left to Jill.
[1] The Perpetuities and Accumulations Act 2009.
[2] Section 49A, Inheritance Tax Act 1984.
[3] Currently £325,000.
[4] ‘Dealing with Property and your Home and Probate Issues’.
November 2012
Disclaimer:
The question of how we fund care home costs has historically been one of the more intractable challenges for the individual and their family brought into sharper, recent, political, focus in our present period of financial austerity and cuts in public expenditure. In its Report, the Commission on Funding of Care and Support, chaired by Andrew Dilnot, described a system, which it recommended for radical reform, as ‘confusing, unfair and unsustainable’. At root is a sense of the injustice of a system that can see an individual’s home and life savings liquidated and used by a local authority to pay for the individual’s care costs; the Dilnot Commission’s suggested reform was the introduction of a ceiling on the amount an individual could be expected to contribute towards long-term care although there seems to be little political appetite, currently, to see through such a reform which might therefore be many years away. In the meantime the individual and their family are left struggling with a legal and regulatory framework around the issues of care home fees which is patchily and inconsistently applied by individual local authorities.
In summary, before a local authority can take responsibility for the cost of an individual’s care it must carry out two assessments; an assessment as to whether an individual needs care in a care home and a financial assessment when it will look at an individual’s capital resources and income.
On the capital side if an individual has available capital assets, after disregarding certain excluded assets, of over £23,000, the individual in treated as being able to meet the full costs of care. It might therefore be that an individual, faced with having to leave their home for full-time care, would decide to give away their assets to, say, their children. After all, individuals often wish to consider estate and tax planning in their lifetime to provide for their families; they might want to make gifts or set up a trust which might be used to benefit the family over the longer term. One might, perhaps, have thought that the end result would then be that his family have been provided for by the lifetime gifting and, being then left with less than the capital cut-off point, the fees for the individual’s ongoing care will be provided for by the local authority. Unfortunately, this is far from the case, and individuals making such disposals need to be aware that they may also be affecting their eligibility for the local authority’s assistance towards meeting the cost of their care fees.
In such circumstances, what is considered by the local authority on assessment is whether assets have been intentionally or deliberately removed by an individual to avoid paying for care fees; if the local authority concludes that any transfer of assets is a deliberate deprivation, it will include a notional assessment of those assets as part of the individual’s means. The difficulty is that all rests on an intention test, and proving intention, which will be for the local authority, is never easy. An individual might be aware that a gift into a trust may result in a reduction in the value of his estate for Inheritance Tax purposes, as well as providing a vehicle to protect assets in the event of a beneficiary’s death, divorce or bankruptcy, and additionally results in a reduction in the individual’s capital for the purposes of the care fees financial assessment; but the realisation that this latter is one of the results of the gift does not make it a motivator for the gift.
Thus a great deal of uncertainty surrounds the consequences of action that an individual might wish to take in their lifetime; in many respects, however, the position is more straightforward when considering arrangements that might be made after an individual’s death to both safeguard the financial positions of dependants and to maximise the eventual inheritances of those whom the individual ultimately wishes to benefit from his estate, as the focus in means testing terms shifts from a subjective assessment of an individual’s own actions and intentions to a simpler objective review of what is left to a dependent or other beneficiary.
Past articles have examined aspects of Jack’s tragically early death survived by his wife, Jill, who continues to live in their matrimonial home, Dunfallin. In reviewing his affairs before his accident, Jack made it clear to his advisor that he wished to ensure that, should something happen to him, Jill would be taken care of but also that as much as possible of the family wealth, so far as not required for Jill’s future maintenance, might eventually pass to his children. Jill, being considerably older than Jack, might be expected to need care; indeed, her fall after Jack on their ill-fated water-collection trip, has resulted in her now needing to consider taking up full-time care after a couple of years of living at Dunfallin after Jack’s death.
Fortunately Mr Dumpty, Jack’s advisor, was alive to the potential issues when he prepared Jack’s Will. Instead of leaving his estate to Jill in her own right, Mr Dumpty suggested that Jack should leave a will by which his estate passes in the first instance to trustees, Owl and Pussycat, who are given complete discretion by the terms of the will to determine how the Trust Fund should subsequently be distributed amongst a specified class of potential beneficiaries, including Jill; Jack has also left a separate, non-binding, letter of wishes addressed to Owl and Pussycat setting out his views as to how they might exercise the discretionary distribution and management powers conferred on them by the will, including a statement that Jill is to be regarded as the principal beneficiary of the Trust; the letter goes on specifically to state that in arranging financial provision from the Trust for Jill, account should be taken of the effect that such provision might have on any means-testing assessment that might need to be carried out in respect of Jill’s financial position..
Had Jill inherited Jack’s estate in her own right, the entire value would now fall into account for the purposes of her financial care assessment. However, as only a potential recipient of funds from Jack’s Will Trust, with no legal right to call for any part of either the income or the capital of the Trust, the value of the Trust Fund remains out of account. Thus, if Jill’s own savings are limited, there would be no reason why she should not claim a full entitlement to local authority funding for her care fees, perhaps leaving the Will Trust Fund as a fall-back safety net. On the other hand, it might be that the type of care that can be funded by Jill’s local authority is somewhat short of a standard to which Jill has become accustomed in which case Owl and Pussycat might think it appropriate to make the whole of the Will Trust available to her to provide entirely for Jill’s care, or perhaps otherwise support her, financially, in ways which will not directly impact on a local authority care funding award. The point is that with such flexible will trust arrangements decisions can be taken after Jack’s death, based upon the trustees’ own assessment of family etc. circumstances, whether fiscal, financial or personal, applicable at the time; indeed, following changes made in this area of the law, effective after 6th April 2010 [1], such trust arrangements can last for up to 125 years.
Alternatively, Jack might establish a Trust by his Will in which Jill is given the use and income of the Trust Fund for her life, and with discretionary powers given to Owl and Pussycat over the capital of the Fund should recourse be needed to the capital in the future for Jill’s further financial support. When it comes time to complete Jill’s local authority financial assessment, the income generated by Jack’s Will Trust Fund would be taken into account as part of Jill’s means as she has the legal right to that income; however, as the capital of the Fund remains outside her own ownership its value will, again, not fall into account for means-testing purposes. There can be an estate planning wrinkle with such arrangements since, when it comes time to value Jill’s own estate on her death for Inheritance Tax purposes, although she has no rights or entitlement in the capital of the Trust Fund, nevertheless she is legislatively deemed [2] to own the underlying value of the Trust Fund for Inheritance Tax purposes. This will be a significant issue if the combined value of the Trust Fund and Jill’s own estate exceeds the threshold above which Inheritance Tax at 40% becomes payable [3]. This is not a consideration were a fully discretionary form of Will Trust to be used.
The key point to review when using a will structure in this way is to ensure that assets are owned in a form which enables them to pass under the will. If Dunfallin is in Jack’s own, sole, name it will clearly be dealt with as his asset under the terms of his will.
If the property is jointly owned by Jack and Jill, one needs to determine the form of that joint ownership. In a previous note [4] I summarised the two differing types of joint land ownership, namely a joint tenancy and a tenancy in common. Nothing is gained by Jack creating a Trust structure in his will to protect his share of the property if the property itself is owned by Jack and Jill as joint tenants; Jack’s property share will pass to Jill, as the surviving joint owner, and without any reference to the terms of Jack’s will. It follows therefore that, if they were joint owners of the property, Jack and Jill should own Dunfallin as tenants in common. Jack’s share in the property then passes, as one of his own assets, through his will into the trust structure created by the will. Jill can continue with her own free, and undisturbed, use of the entire property as her home by virtue of her ownership of her own property share. That share, ultimately, will be an asset to be taken into account for the purposes of Jill’s means-test; however, the value of Jack’s property share is ‘ring-fenced’ within his Will Trust and so protected for the future whatever Jill’s personal circumstances.
Furthermore, the valuation of Jill’s own property share will be advantageously affected by Jack’s Will Trust arrangements over his property share. The valuation provisions are to be found in the snappily entitled National Assistance (Assessment of Resources) Regulations 1992; Reg. 27(2) provides that the value of the property share to be used in these circumstances is the value which the share would fetch if sold to a willing buyer less 10% as well as any debt secured on the property share. The challenge is coming to a view as to what a hypothetical purchaser would be prepared to pay for the bundle of property rights, largely codified in the Trusts of Land and Appointment of Trustees Act 1996, attaching to Jill’s property share; the answer to this question is particularly fact-sensitive but is likely to turn on the perceived ability of the hypothetical purchaser of Jill’s property share to be able to force a sale of the property another day and recover his investment. Although the answer will differ from case to case, what is clear is that some measure of discount, often substantial, will be available against the strict mathematical equivalent of a percentage share of the value of the property as a whole; thus, the value of Jill’s property share is diminished without her having to take any action.
Furthermore, if Jill is able to defer payment of all or part of her assessed care contribution and gives the local authority a charge over her own property share as security for the deferred balance, that charge will also be deductible from the capital value of Jill’s property share such that the point might well come that a combination of the joint ownership valuation discount, the local authority charge, and the 10% expenses deduction would bring the value of Jill’s capital resources down to a point where Jill’s ability to pay is assessed solely by reference to her income; in effect a substantial proportion of the value of Dunfallin is then left for eventual inheritance by the family heirs, a position that could not have been achieved had Jack’s property share simply been left to Jill.
[1] The Perpetuities and Accumulations Act 2009.
[2] Section 49A, Inheritance Tax Act 1984.
[3] Currently £325,000.
[4] ‘Dealing with Property and your Home and Probate Issues’.
November 2012
Disclaimer: