Hands off their assets?

As many elderly clients find their financial position potentially deteriorating in light of long-term care provision, succession planning inevitably becomes part of ?the estate planning process. Inheritance tax (IHT) mitigation is now not the ?only consideration when making a ?will. Clients are asking how they can protect their estates against significant costs and still pass wealth down to the next generation.

Unlike in England, the Scottish government provides nursing and personal care allowances for everyone over 65. The entitlement is not means-tested but based on the individual’s care needs. These allowances may provide a small subsidy, but nursing home fees vastly exceed them. Once someone, decides to move into a care home (or their welfare attorney decides for them), a social worker carries out a financial assessment to determine the individual’s contribution towards the fees.

The local council covers the cost of personal and sometimes nursing care, ?and must follow the Charging for Residential Accommodation Guide (available on the Department of Health website) when calculating out how much an individual must pay. It needs to know an individual’s capital, income and any property owned or ?part-owned.

The upper and lower capital thresholds for residential care charges are £24,750 and £15,250 respectively, which are reviewed in April of each year. Any amount above that is taken by the state to pay for the nursing home fees. Any savings, ISAs, land, buildings, stocks and shares, premium bonds, tax refunds and the surrender value of any investment bonds (unless it includes a life assurance element) count as capital in the financial assessment.

However, the surrender ?value of any life insurance policies/annuities, some types of payments from charities, personal possessions (such as paintings and antiques), any social fund payments and personal injury compensation don’t qualify.

Capital deprivation

Because of the relatively low thresholds, many are concerned that their assets will be depleted. They seek to protect the assets, such as their house, by transferring them to others. Strict regulations –National Assistance (Assessment of Resources) Regulations 1992 – surround the transfer of property (capital deprivation) in such circumstances. Residents may be treated as actually having the capital they transferred.

It’s not completely clear how far back the local authorities can go to catch ‘capital depriving’ transactions, but recent case law has provided some insight.

When a person knowingly and with the intention of avoiding charges for accommodation has transferred any asset to some other person not more than six months before they begin to live there, the person to whom the asset is transferred is liable to pay the local authority providing the accommodation. In certain cases, local authorities have looked back over 12 years to capture such a transaction.

The uncertain time limits make lifetime planning and asset protection complex. Apart from these rules, it may not be appropriate to transfer the family home to adult children because of the deferred payment scheme (available on the NHS website).

In summary, this is where a local authority is providing residential accommodation for a person, the payments for which the relevant person may be liable can be deferred and become due either after the date of death of the person or another date as agreed by that person and the local authority. No interest is payable on the portion ?of the payment deferred.

Although this legislation can offer some assistance, there has been limited uptake of the facility. To qualify for the deferred payment scheme, the house must be in the applicant’s name. Although the scheme will ultimately reduce the inheritance of the families involved, it’s an option for those who cannot afford the type of insurance solution discussed below.

Trust options

Deprivation of capital during lifetime to avoid nursing home fees is a complex and tightly regulated area. Therefore, more and more clients are looking to protect their assets through succession planning. The common provisions in wills that can help with care home costs include a liferent trust (known as an interest in possession trust in England) for the surviving spouse with the capital passing to children or grandchildren on the second death.

Or there’s a discretionary trust, where ?the surviving spouse is a potential beneficiary among others.

Liferent trust

A liferent trust provides the liferenter (or life tenant in England) the right to use or occupy the trust property and to receive the income from the trust. This type can work well with the family home and ensures that the surviving spouse has a place to live for the rest of their life. From an IHT perspective, a liferent trust set up under the will of a deceased spouse or civil partner will be subject to the spouse exemption and no inheritance tax will be charged on the death of the first spouse/civil partner.

During the trust’s lifetime, there are no ongoing IHT liabilities. On the death of the liferenter, the value of the entire trust fund is aggregated with the liferenter’s estate and IHT is charged as if the liferenter owned the trust fund. This type of trust arrangement can and often will include a provision to allow a surviving spouse to renounce their interest during their lifetime, which could be useful for generational IHT planning, and can allow the executors to terminate the liferenter’s interest. The property will be owned by the trust and therefore will not be included in any capital assessment relating to nursing home fees.

Discretionary trust under the will

A second option is to create a discretionary trust under the will. The trust could simply hold a sum up to the value of the nil rate band, currently £325,000 (nil rate band discretionary trust), or the deceased spouse’s entire estate. The potential beneficiaries could include the surviving spouse, children and grandchildren. There are ongoing trust administration costs associated with discretionary trusts including ten-year IHT charges (in certain cases).

With a discretionary trust, the executors can decide which beneficiaries are to benefit from the trust estate and have the ability to look at each beneficiary’s circumstances before ?making payments to them. It is common for an individual looking to set up ?this type of trust under their will to leave a letter of wishes about the administration of the trust fund.

Deeds of variation

When a will does not provide for a liferent or discretionary trust, a family may enter into a deed of variation, which redistributes a person’s assets after death. The document can change a distribution under intestacy or the requested allocation within the will. It can also correct mistakes and is often used for IHT planning purposes. Deeds of variations must be completed within two years of death.

Although a deed of variation is an option for clients, it should be noted that some local authorities have indicated that if a family enters into one and an elderly person relinquishes part of their inheritance, this may be seen as deprivation of capital. One response to this is to position the deed as having been entered into for general IHT planning purposes and not solely to deprive an individual of capital in relation to nursing home fees. There is, however, no case law or legislative guidance on the point.

Insurance solution

Another option, although not suitable in all cases, is insurance. Immediate care plans are impaired life annuities, which are available even for a care home resident. Individuals are medically and actuarially assessed. As these plans are essentially an annuity, if the individual taking out the annuity dies an early death, the capital cost of the plan is, ?in effect, wasted. This can lead to significant financial loss to the estate unless re-insurance of the capital is sought at the outset.

It’s clear that nursing home fees and an increasing ageing population will put considerable pressure on local authorities across the UK. Although Scotland provides for further assistance now, this may not continue. As more and more older people will have to self-fund their care, a will is a simple and effective means of protecting at least part of the estate for their potential beneficiaries.

Simran Panesar-Saggu is an assistant solicitor at Bird Semple