A STRATEGY TO PROTECT THE FAMILY HOME AND ENSURE IT PASSES TO YOUR CHOSEN BENEFICIARIES
Anecdotal evidence suggests that between 40,000 and 70,000 are sold each year to cover the owner’s care fees.
The family home may also pass outside the immediate family if the survivor of a couple remarries after the first death.
Parents are also seeing nest eggs built up as intended inheritances for their children decimated over short periods once care fees have to be paid.
With advance planning this need not be the case. There are ways to protect the family home for the next generation.
This guide highlights the opportunity for planning, briefly describes some of the relevant regulations and suggests a simple strategy to protect the family home.
This is a highly specialised area. Local authorities around the country are experiencing severe financial constraints in funding care. This in turn leads to more aggressive assessment and the failure of planning measures if taken too late.
Many elderly people are desparately looking for way of protecting their estate to pass it on to the children and to avoid it being wiped out by care home fees, or lost to their children if the surviving spouse remarries.
Giving the home away to the children is sometimes seen as the solution – this is not to be recommended. There is also the misconception that if you give the home away at least 6 months before going into care, the local authority cannot touch it. There is a so called “six month rule” in the legislation but this is a rule applicable to a specific circumstance and should not be relied upon. In the real world, many local authorities have rules of thumb; some will only look back over one or two years but others may look back over a much longer period. “Deliberate deprivation”, that is depriving yourself of assets in order for care fees to be paid by the Local Authority, is a relevant concept and makes things more difficult.
Cash strapped local authorities are cracking down on people who they think are trying to avoid paying care fees and they are becoming increasingly sceptical about people saying gifts were made due to the natural love and affection for their children. This guide covers these various points briefly and highlights a simple and uncomplicated approach to sheltering the family home through a recognised planning technique, which has a proven track record.
The Basic Position
Those who cannot afford to pay privately for care must look to the local authority for funding or assistance with funding. The resident has free choice of home, subject only to the fee level quoted, which is usually within the funding arrangements available to the local authority.
Both income and capital resources are assessed.
- Above capital of £21,500 no contribution will be made by the local authority.
- Nelow £13,000 a full contribution will be made by the local authority.
- Between £22,500 and £13,000 there is a partial contribution made by the local authority.
Virtually all income is may be taken into account in assessing the ability to pay. The principal exception relates to part of an occupational pension in certain circumstances. A small amount of income (currently £19.60 per week) is not assessed currently, amounting to little more than pocket money. This is literally intended to cover toiletries, hairdresser etc.
This guide concentrates on the family home. It is not a guide to other potentially assessable capital. Advice on other capital is available on request.
The starting position is that the home counts as capital for financial assessment purposes. The value of the home, or an interest in it, is taken account of as a capital asset. It comes into the reckoning for means testing at its market value, less 10% (assumed costs of sale) and less any mortgage liability. Once sold, the home simply provides cash available for assessment.
The home is disregarded under certain circumstances:
- During the first 12 weeks of care.
- During temporary or respite care.
- If it is occupied by a husband, wife or unmarried partner.
- If it is occupied by a close relative over the age of 60 (or under the age of 16).
- If it is occupied by a relative under the age of 60 who is disabled.
The local authority may, at its discretion, ignore the value of the house if it is the permanent home of a carer, or in one or two other limited situations. Clearly the local authority’s discretion ought not to be completely relied upon.
The solution is to ensure that the home is not personally owned on entry into care. The local authority’s financial assessment can then legitimately and properly be completed on the basis that the home is not a capital resource of the resident.
The solution involves putting the home into a trust, so that the trustees are the owners.
Features of the trust are:
- The former owner has a guaranteed right of residence in the property for the remainder of his or her life. The trustees, usually the children, cannot evict the former owner in any circumstances.
- The former owner has the ability to direct the trustees to sell the property and to buy a new property of the former owner’s choice. The former owner can therefore move property or trade down. The trustees have no choice in the matter. Of course in the rare circumstance where the new property might be more expensive, the trustees can only be required to buy the new property if the additional capital needed is provided by the former owner.
- If the property is sold, for whatever reason, and a new property is not bought, usually on the former owner is entering care, then the proceeds of sale will be placed in the Trust, invested and the former owner will receive the interest or income earned on the invested capital.
- On the death of the former owner (or second of two former owners), but not before, the property, or its proceeds of sale, passes to the chosen beneficiaries; the trust at that point operates similarly to a will.
The trust described above is equally applicable to married couples as to single owners. In fact, married couples entering into the strategy will have the additional advantage that they do so at a time when if one of them went into care, the home would in any event be disregarded due to the other spouse still living in it.
Local authorities have a number of remedies available to them to counter planning in certain circumstances. The primary remedy available to local authorities is “deliberate deprivation”. A local authority may treat a resident as possessing the home, or an interest in the home, if it can show that the resident deprived himself or herself of the home for the purposes of decreasing the amount that he or she may be liable to pay for his or her care accommodation. ie the local authority can still treat the resident as owning the home and can financially assess the resident accordingly.
Anyone contemplating using this strategy can avoid the appropriate deprivation rule through one of two routes.
A. Through the passage of time after the transfer into trust. The time elapsed between putting the home in trust and entry into care may be of such a length that the local authority realistically cannot show deliberate deprivation. The absolute minimum would be two or three years but there is no set period or no period in respect of which a guarantee could be given.
B. Putting the home in trust at a time when entry into care is simply not an issue, is not on the horizon and is not currently something reasonably foreseeable as something that might happen. The planning relies on this scenario; that the home is put in trust at a time when entry into care, and the financial consequences which might follow, is simply the usual distant worry that most homeowners have at the back of their mind even though still only a minority of the population end up in care.
Planning in Advance
If planning is done well in advance then the various remedies and anti avoidance provisions available to the local authority can be overcome. The question is simply whether the measures taken ensure that assets are not brought within the financial assessment on entry into care.
Until the first death the family home carries a “disregard” status, therefore any planning undertaken while both spouses are alive is even more likely to be secure from local authority attack. If a husband and wife undertake long term planning while both are alive, their planning should usually be successful.
Comment was made earlier about gifting the home to the children. The risks are immense:
- Divorce – the home may be the subject of the child’s divorce settlement.
- Bankruptcy – the child may go bankrupt and the house become available to the child’s trustee in bankruptcy.
- Pre-decease – if the child dies before the parent, the ownership of the home may go eleswhere (eg son or daughter in law).
- Sale – the house will be the children’s to sell.
- Finance – a child could attempt to raise finance on the house.
- Pressure – children may consider the parent to be ready to enter care long before the parent themselves.
- There are numerous other reasons.
The trust strategy described by this guide avoids these risks.
The Home Protection Plan offers the significant benefit that the home will no longer be subject to probate on death. The home can be sold or transferred by the trustees immediately after death with no probate formalities at all. This is potentially a significant advantage. In some cases, depending upon the other assets of the estate, it may mean that probate can potentially be dispensed with completely, with consequent time and cost savings.
Please contact us for further information, and to discuss setting up the Trust.