Property Trusts in Wills boom as long term care spirals

As little as five years ago, most people that approached us for legal advice on the issues associated with ageing were primarily interested in IHT planning. Now it’s almost 50/50 with clients and their families equally worried about, not just protecting assets over the nil rate band from the hands of HMRC but as importantly, a complete erosion of assets, especially the family home, through the ravages of residential care costs, reports private client solicitor Carla Brown.

To place this into context, in the last 12 months over 20,000 pensioners were forced to sell their homes to pay for residential care. The number selling has soared by 17 per cent since 2005, and figures also show that a third of all those paying the cost of their care end up without their house. With the cost of care home fees having increased by more than 20 per cent over the past five years, to an average of £25,896 per year, with the home counties well above £30,000, it doesn’t take a great mathematician to deduce that, in a relatively short time, an estate may we wiped out.

Historically, this may have been less of an issue for advisers because elderly people requiring care may not have had a particularly long life expectancy.  However, huge advances in medicine coupled with the fact that families are often geographically spread, an elderly relative with, say, dementia may need care for many years and the only option is a care home.

There are limits in place which dictate how much of your savings (if any) must be paid towards care, but most advisers’ clients will exceed these. Currently, in England or Northern Ireland, if you have over £23,250 in capital you will have to pay for everything. This limit is £22,750 in Scotland, £22,000 in Wales.

The sad reality is that if your home is your only asset it will usually have to be sold to pay the bills, unless it is required as part of your on-going care plan. But there are things that can be done and all have their advantages and disadvantages. From a traditional financial planning perspective both equity release and long term care insurance can be considered. And from a legal perspective trust planning is a key element.

 “Life interest” trusts
Following the introduction of the transferable nil rate band in 2007, we have seen an increase in the number of people including life interest trusts in their Wills. This is because, following the change in legislation, married couples no longer need to use a discretionary trust to utilise the individual nil rate band, as any unused portion of the nil rate band on the first death is claimable on the second death. Therefore, the marital home is only liable to IHT if it exceeds £650,000 and so many spouses choose to leave their home to the other spouse on death.

The problem with this being that if the surviving spouse needs to go into care, the total estate would be taken into account and used to pay for the care costs, which can often mean the sale of the house.

One way of protecting the assets to ensure that the house does not have to be sold and it goes to the intended beneficiaries, is to use a “life interest” trust or as its correct legal term - Immediate Post-death interest trust.

In order to utilize this, the married couples would need to first hold the property as tenants in common. They would then elect for half the property to be put into a life interest trust for the surviving spouse on the death of the first spouse.

This would ensure that the surviving spouse can continue to live in the marital home for the rest of their life but they are not entitled to the capital value, which under the terms of the trust is now ring-fenced for the named beneficiaries. Therefore, should they require care in the future, the value of the house would not be taken into consideration. If the surviving spouse would like to move house after the first death, there is normally a provision to move to a new property on the same Trust terms.

In simple terms, the inheritance tax situation of such cases is that on the death of the first spouse, the gift of the life interest in the deceased's share of the property to the surviving spouse is treated, not surprisingly, as a tax-free gift due to the spouse exemption.

However, on the death of the surviving spouse, their interest in the life interest trust is treated as part of their taxable estate, even though the beneficiaries of the trust after their death will be the beneficiaries named in the Will of the first spouse to die and therefore inheritance tax may be payable.

A popular misconception is that establishing this type of trust arrangement is very expensive, which is wrong. Assuming you use a firm of solicitors that specialise in this type of arrangement, then in common with many other now ‘commoditised’ legal practices, a fee of around £800 should be expected; a relatively small price to pay to know that the capital value of a substantial asset is protected for the family; obviously if highly complex the charges may be more.