Feature

posted 4 Feb 2004 in Volume 9 Issue 2

The ECA course: Part four
Protecting the interests of older people

David Coldrick continues his series of practical articles looking at the adviser’s role and responsibilities in protecting the interests of older people. In this article, he addresses the main areas of worry in respect of local authority powers and pressure upon executors and trustees.

The flexible life-interest will trust: Concerns when the testator dies

Review of the options and matters discussed so far

Part one of this work considered gifting, addressed the case for and against outright gifts, and noted some general tax considerations. For most clients, outright gifts during their lifetimes are an unattractive means to securing reduced liability to long-term care fees. They reduce choice and financial security.

Part two addressed practical solutions, with the aim of care-fee mitigation assuming outright gifting was not the solution. It began to address the issue of will-planning. Even some clients who consider that long-term care fees are of no relevance to them might think again.

Where both members of an older couple enter long-term care, rather than either of them dying at home, practically all the value of their estates can be lost. That is irrespective of the terms of their wills, which only come into effect too late. That is right down to the lower capital threshold of £12,000 (2003-4), which both are allowed to retain under the National Assistance (Assessment of Resources) Regulations 1992 (NA(AR) Regs). This is why will planning is at best a partial solution.

The partial will-planning solution involves the foundation of a will trust. When the first partner dies, that will trust, usually a flexible life interest but possibly a discretionary trust, is not part of the assessable capital of the survivor who may at some point require long-term care. The capital of the trust fund, which may contain such as the whole or a part share in the family home, is not “available” to them for that purpose and is not assessable under the means-test as a result. The capital value of any right to income from the trust fund that might exist, depending upon the nature of the will-trust, is also specifically disregarded under the regulations. Only actual payments of capital and income are assessable in practice.

Part three analysed shares in jointly-owned residential property, which can be placed in a will trust on the first death to avoid loss through payment of care fees for the survivor. The nature of severances of joint tenancies was addressed. Such severances can be effected whether or not one of the parties has mental capacity. It does not amount to a “deprivation of capital” under the means-testing regulations.

Part four addresses areas of concern expressed by many clients and legal advisers. These are the possibility of local authority claims against deceased estates.

The scope of local authority powers against trustees of will trusts: The Saga of the Wise family wills continues…

Readers will recall that the scenario addressed in part three relating to Mr and Mrs Wise:

Mr and Mrs Wise own a pot of cash of £50,000 and the family home worth £150,000 held as joint tenants. They ultimately wish to benefit their son Pryce and their daughter Una. Both children live away from home. Mr and Mrs Wise decided that they were only prepared to effect will-planning and were not interested in any of the available financial-planning solutions. They agreed with their solicitor that a flexible life interest will trust of their entire residuary estates should be incorporated within their wills. That night however, while watching an especially violent episode of a soap, Mrs Wise was afflicted with a stroke. Mr Wise wanted to go ahead with his will. Although Mrs Wise was unable to communicate, he was able to execute and effect a valid severance under Section 36(2) of the Law of Property Act 1925 to ensure his share could pass under his will rather than to his wife by survivorship should he die first. He is also taking steps to transfer “his share” in the joint cash account into his sole name.

Power politics

The story continues. It would be naïve to suggest “politics” does not play a part in client worries and decision making:

Even after having made a decision and having agreed to the form of his new will, and to the slight infuriation of his solicitor Sophia Minerva, Mr Wise has had second thoughts. He is troubled…

He is concerned that the, seemingly all powerful, politicos at the council are on a new drive against older homeowners. Citizen Marx has unexpectedly returned to tread the red carpet of unfettered power at the town hall. This was after a coup left a former wartime refugee from Romania called Vlad in charge of the opposition. Vlad is known locally as “The Inhaler” on account of his notorious wheezes. Citizen Marx is letting it be known that he is opposed to all forms of private-property ownership and considers asset-protection planning to be even less ideologically correct than his party leader. He is, he explains, committed to selling his four family homes and donating the money to the poor “come the revolution”. He has installed a hall of mirrors on the main staircase of the town hall and planters, in delicate pastel shades containing wild garlic, around the council chamber. He has described both actions as a “security measure”. All late night sessions have been cancelled. Citizen Marx’s recent election slogan “the opposition are bats” appeared to do the trick with the voters.

“At the very least I am worried that council pressure on my trustees might run up legal costs,” exclaims Mr Wise.

Mr Wise asks his solicitor a few questions:

Whether or not the trustees of his new will might be put under pressure by the council, which would render all his careful will-planning redundant;
Whether or not the local authority could attempt to make a claim against his estate on the basis that they were acting in his wife’s interests;
Whether or not the trustees will be able to provide a “top up” for his wife’s care fees in case a more expensive care home, which the local authority will not pay for in full, is found to be necessary for her well-being;
Whether or not a will-trust is really simple and inexpensive to administer.

Question four is to be answered in detail in part five of this work. The other three questions are dealt with below. Local authority powers against will trusts:

Refusal by trustees to sell a share in a trust property and “Section 22” charges;
Pressure on trustee-investment policy;
Pressure on trustees to distribute capital.

What pressure can a local authority really bring to bear against the trustees of a will-trust?

Trustees who are reluctant to sell a share in property

If a will-trust is in operation containing a share in the former family home, can the trustees refuse to co-operate in a sale of that property? Refusal to sell might be in the hope of protecting the surviving care-home resident’s own share in the property. There are two relevant periods: first, the period to death of the resident; and second, the period after their death.

During the period to the death of the resident, the question may usually be answered without considering the complex matters surrounding forced sales by co-owners and creditors. Such issues are more properly addressed in a work on property law. The key reference to be considered in practical terms is usually the application of Section 22 of Health and Social Services and Social Security Adjudication Act 1983 (HASSASSAA 1983) the “Section 22 charge”.

The share in the property of the survivor who is or becomes a care-home resident, which is not protected by being within the will-trust could, in principle, be subjected to a local authority Section 22 charge under HASSASSAA 1983:

The Section 22 charge is not, in itself, a power to sell the property in question. This may seem like good news to the resident and indeed any third party then living in the property;
The Section 22 charge operates rather like a mortgage. That charge enables the local authority to collect properly assessed and unpaid care fees owed to it from the ultimate sale of the property. So what, in stable market conditions, would be the point of retaining such a property? It may become more of a liability than an asset. In a rising market there may be some advantage by way of asset creation for the co-owning will-trust and the care-home resident, but that assumes that a sale is ultimately made. A careful costs : benefits analysis will be necessary;
The Section 22 charge can only ever apply to the extent of the share of the property in the ownership of the survivor in care. It cannot be applied to the share held inside the will trust. That is not assessable capital under the means-testing regulations. The local authority has no right to charge it;
Interest cannot be levied under a Section 22 charge until the resident survivor dies. This should be part of the costs : benefits analysis.

The nature and effect of the Section 22 charge will be addressed in more detail in a later part of this work but it is stressed that it can only be applied to collect properly-assessed and unpaid care fees owed to the local authority:

Attempts by a local authority to register “speculative” Section 22 charges, where there are no outstanding fees, should be resisted;
Even if the share in the property belonging to the resident is a disregarded asset under the means-testing rules, for example by virtue of the occupation of a dependent relative, the Section 22 charge can still sometimes be applied to it. That is not because the value of that disregarded share is being taken into account in the means-testing assessment. It cannot be. It may be applied where there are other assessable assets that have been properly taken into account and payment has not been made by the resident;
The case of Chief Adjudication Officer v Palfrey (1995) (139 SJLB 65) may also sometimes be relevant to the appropriate application of the Section 22 charge although the impact of that case is tempered, in the opinion of the author, by the case of Wilkinson v Chief Adjudication Officer (The Times, 24 March 2000). In Palfrey the Court of Appeal agreed that the share of the family home belonging to a resident in a care home could be effectively valueless on account of a co-ownership situation. Who would be willing to buy a share in a property co-owned by a will-trust? In some cases, this could have the effect of reducing the value of the resident’s assessable capital below the means-testing threshold and eliminating the applicability of the Section 22 charge;
The capital of the care-home resident must not be allowed to fall below the lower-capital threshold for means-testing purposes. The value of the resident’s share in the capital of the family home when combined with their other remaining capital assets at death should not be below that level. Otherwise, there is the possibility that the local authority may have overcharged the resident. As the size of the Section 22 charge accrues gradually this may be a particular problem in cases where it is applied.

What happens upon the death of the care-home resident?

Interest starts to run on the amount secured by the Section 22 charge. It is charged at a “reasonable rate” (not necessarily the statutory rate) under Section 24 HASSASSAA 1983;
Usually a life interest will-trust ends, dieing with its income beneficiary, and the capital will be distributed to the ultimate beneficiaries of that capital. The role of the trustees in respect of the share of the property in the will-trust usually finishes with either the sale and distribution of proceeds or the transfer of the trust’s share to the ultimate capital beneficiaries;
A discretionary will-trust is more likely to continue beyond the death of the resident. It will usually have been founded for a fixed period, usually 80 years, even though it might be terminated sooner by the trustees. Some life-interest will trusts may also continue if they contain successive and not terminal interests in the trust fund;
Sale proceeds will be apportioned between the ultimate capital beneficiaries of the will-trust (or added to any continuing trust fund), the creditor local authority and the beneficiaries under the deceased resident’s own will to the extent there is still net equity available to them in their share of the property after the charge and other estate dues are paid;
If the trustees, or indeed recipient beneficiaries, refuse to sell after the resident’s death then the court, at the request of the local authority, might then obtain an order for sale to realise its security and it may also be awarded costs should they be able to force such a sale. Trustees in such a situation would usually be best advised to remain as neutral as possible and could seek directions from the court if they truly felt that there were important reasons why a sale should not take place. Valid reasons may, for instance, include continuing residence by a third party. The possibility of an extra capital gain in any future rapidly rising market would probably not amount to a sufficient reason to delay sale. In a falling market, the local authority could still only ever recover the proceeds of the lawfully charged share, which may or may not cover the entire debt owing to them. In that situation, it is assumed that the trustees may also wish to sell, bearing in mind that in those circumstances property retention may be as much a liability as a potential investment. The philosophy of “a bird in the hand” might also suggest a sale;
If the property should be retained as a result of a careful analysis of all the circumstances it remains open to the trustees or beneficiaries to pay off the local authority charge freeing the entire property for their purposes. As interest will be running from death early consideration of this option may be prudent.

There may be a perception that the Section 22 charge supports a wrong, that is, the imposition of care-fee charges upon the former family home. But, there will usually be neither a legal, nor a more personal good cause for the trustees to resist a sale after the death of the surviving care-home resident. It will not usually be worthwhile or cost effective for the future to seek to avoid such a sale. This may also be the case practically as soon as the survivor enters care unless there are special circumstances such as continued residence by a third party.

Pressure on trustee investment policy

Perhaps after the first death, the family home will be sold if the survivor is already in care or subsequently enters care. This renders money available for investment in the will-trust as a result. Perhaps the deceased also had other funds as well, which form part of the will-trust. The same applies. Once funds are available for such general investment by the trustees of a will-trust can a local authority require those investments to be made in a particular way?

One valid perspective on this question might be to note that good judgement in the past has rendered the result of funds now under the trustees’ control. So what might be the sources of similar good judgement for the future management of such funds? Are local authorities noted for their financial acumen? If not, then they should have no place in influencing the investment policy of trustees. As a matter of law, it is found that neither they nor any other similar organ of the state have such influence. This might simply be coincidence or an accident in the history of the law. The reader can decide.

Pressure from a local authority upon trustees might arise as part of its endeavouring to secure more income for a care-home resident. Perhaps the resident is the beneficiary of an income stream under a life-interest will trust. An increased stream of income achieved by the adjustment of investments would tend to reduce the liability of the local authority to meet the resident’s care fees. An ability to pressurise the trustees would have a clear attraction to a local authority. This is for two main reasons: such pressure is unlikely to be either initiated by any prudent local authority, especially one with an eye to costs, or, if pursued, bear any fruit for a local authority. Those two main reasons concern conflicts of interest and the nature of the duties of trustees as investors.

The strikingly transparent conflict of interests evidenced by an application for extra income for the beneficiary of a life-interest type will trust would, it is submitted, weigh heavily against the local authority in any court faced with a claim of this nature. A suggestion that such a claim was primarily to the benefit of the beneficiary and not the local authority would, it is submitted, be treated with some scepticism. It would be akin to sanctioning a legal claim against a generous relative of the person in care. A relative who was in the ill-advised habit of “helping out” by paying money over to the resident, which only served to reduce the local authority’s financial obligations. As a turkey has no duty to the farmer to gobble more before Christmas, the local authority would not be entitled to ask for anything more from the relative. There is the additional element of a fiduciary nexus between the trustees and the resident beneficiary, which may not exist between the relative in the example and the resident. But this does not, it is submitted, extend to creating an obligation to make payments from the trust, which would only result in financing a local authority without any discernible benefit to the income beneficiary. Unless some clear benefit existed for the income beneficiary, then the possibility of a significant conflict of interest must naturally exclude any claim made by the local authority. It would be viewed as a mercenary claim. If there were some potential benefit to the beneficiary in increasing the value of the income stream then reasonable trustees might well react to that without any pressure upon them.

What if the “usual” balance between investment for income and investment for capital growth is not the policy of the trustees and it is clear that ultimate capital beneficiaries are, therefore, potentially being favoured? The author submits that, even in an extreme case, the local authority has insufficient legal standing to require any change of investment strategy. If they could bring such a claim it would probably, though not necessarily, be by way of an action for failure in the trustees’ duty of care and perhaps for breach of trust. This would be a hard claim to sustain. It would involve a detailed analysis of the law relating to trust investment and its application to the particular circumstances.

The Trustee Act 2000, which took effect on 1 February 2001, ensures that trustees, such as those of the will trust currently being addressed have, as a starting point, the ability under to invest as they see fit (Section 3). But they also have a duty to consider the “suitability to the trust of investments” (Section 4(3)(a) and to take up “proper” advice (Section 5)). The trustees have a statutory duty of care, which has both objective and subjective elements. For instance, the trustees have a duty to consider “the need for diversification of investments of the trust”, but that is only “in so far as is appropriate to the circumstances of the trust” (Section 4(3)(b).

The Trustee Act 2000 takes a realistic approach to the interconnectedness of trusts with the myriad relationships, needs and obligations, inevitable in modern daily life. But most will trusts are drafted with even greater scope for flexibility. The Trustee Act is often seen as a mere default position, but the “standard investment criteria” apply to all trust investment. Any financial advice sought by the trustees must fit the Act. It must also be periodically reviewed in accordance with the Act.

Usually a will trust contains something akin to the STEP standard provisions on investment, which indicate that: “The trustees may invest trust property in any manner as if they were beneficial owners [and] the trustees may decide not to diversify the trust fund” (STEP Standard Provision 3.1). While this is not such a broad authority as it might appear, being tempered by the statutory duty of care, it is indicative of the possession of very wide powers of investment, which may not be restricted lightly.

The trustees always have a duty of care, but only part of that should be expressed towards any income beneficiary. If the income beneficiary is, in all the circumstances, adequately supported by their own pension, a modest trust income and a local authority contribution, who is to say that the trustees should do more? The trustees are not obliged to take what may amount to a political position in seeking to relieve the local authority of some of its legal responsibilities to the resident. If they did take such a stance, they might be in breach of their fiduciary obligations to the ultimate capital beneficiaries as a result of such a perverse decision. There is nothing in the Trustee Act 2000 to indicate that prudent capital preservation, even capital enhancement, in such circumstances would be inappropriate.

Further, provisions are often incorporated within will trusts that are akin to STEP standard provision 3.4: “The trustees may decide not to hold a balance between conflicting interests of persons interested in trust property. In particular: (a) The trustees may acquire (i) wasting assets and (ii) assets which yield little or no income for investment or any other purposes…” This means that a decidedly unusual balance may be struck between capital and income beneficiaries if the trustees reasonably conclude that is the correct approach to make in the circumstances. Given this is legitimised under the terms of the will, it is likely to be even harder to make out any challenge to such a decision.

In practice, claims against trustees based upon investment issues have been rare. They arise through the neglect of the trustees to invest outside cash, their neglect in considering risk properly or their neglect in reviewing and thus changing investments at appropriate times. They tend to be the result of long-term systemic failure and particularly inertia on the part of the trustees and their advisers. The claims also tend to be made by aggrieved beneficiaries or their heirs. The ultimate capital beneficiaries are unlikely to be aggrieved by the trustees taking little notice of an aggressive local authority in search of extra income. The law relating to trustee investment is also unlikely to support any local authority that seeks such extra income from the trustees.

Pressure on trustees to distribute capital

A local authority may decide to seek distributions or “appointments” of capital from a will trust to supplement the care-home resident’s income in order to reduce the local authority’s liability to pay care fees. There are a number of reasons why such a pursuit is unlikely to arise or be fruitful for a local authority.

A local authority may not assess the capital held by a will trust for care-fees purposes as it is disregarded under the means-testing regulations. Logically, therefore, the local authority should not even consider asking the trustees for a distribution of any of that disregarded capital for any purpose. Arguably such a request would itself be quite improper. A capital distribution could certainly not be made a requirement of a care package.

Capital distributions are not always legally possible even if a local authority decides to ask for one. They depend upon the trustees having power to make such distributions under the terms of the will trust. If there is no power to make such payments then capital cannot be distributed. Most modern life-interest will trusts are, quite properly, of the flexible variety and include such powers. It is unlikely that a discretionary will trust would not be drafted so as to contain a wide power of distribution in respect of trust capital. The existence of a power enabling trustees to make distributions of capital is different to the power of a beneficiary or third party to require a distribution. Such powers are unusual. More usual are powers subjected to the prior consent of a certain person. The court will not usually allow exercise of such a power without consent. See Re Forster’s Settlement [1942] Ch 199. In some cases, this will be the consent of an ultimate beneficiary of capital. Such a person, without accepting there is some very good reason, is unlikely to grant their consent where the only true beneficiary of such an exercise is a local authority. Such a consent provision is arguably a useful safeguard against capital loss, but the person granted that authority does not appear to be under the same obligations as the trustees to engage in a fair decision-making process. They may make their decision arbitrarily. That may not be helpful to the smooth running of the trust or to family relations and the author suggests that the careful choice of trustees who are bound by their fiduciary duties should be adequate.

In some circumstances, where a beneficiary might make use of a capital supplement for extra comforts or to facilitate a genuine choice of care that would not otherwise be available, then the trustees may consider making a payment. But any payment should only be made after careful consideration of the local authority’s obligations to the resident and the impact of such distributions upon their means-tested care fees and other benefits. Prior consultation with the ultimate capital beneficiaries of the trust would also be prudent.

The House of Lords case of Gisborne v Gisborne 1877) 2 Appeal Cases 300 is the prime authority on the nature of the exercise of discretionary dispositive powers by trustees. So long as trustees exercise a discretion in good faith after due consideration the court cannot get involved, however much a beneficiary or a third party might wish them to. “Good faith”, among other things, requires honesty and rational behaviour, taking into account the circumstances. The possible use of discretionary powers, including those relating to capital, should be considered by the trustees from time to time. But, it is for the trustees to talk through matters and to apply to the court for directions on that subject if absolutely necessary. It is not usual for beneficiaries or third parties such as a local authority to get involved other than by way of submissions to the trustees. Third parties cannot usually get involved unless they are a receiver appointed by the Court of Protection or an attorney operating under an enduring power of attorney. Such appointees might be able to apply to the court for directions in appropriate cases. However, that would be upon the behalf of and in pursuit of the interests of a vulnerable beneficiary for whom they have been appointed to act. They are not truly third parties but an extension of the beneficiary. Even then, they may only be able to ensure that the decision-making processes of the trustees are properly effected. The application for directions may not necessarily ensure a changed result. Even if the trustees make some honest mistake, the court may decide not to intervene. If a local authority did have legal standing to make a “claim” for a capital distribution or perhaps joined with an aggrieved beneficiary to this end, then the matter of its conflict of interests would undoubtedly be a prominent feature of any proceedings.

The will’s trustees, in cases involving modern life-interest will trusts, usually have wide powers of appointment of capital and income away from an initial income beneficiary to an additional class of potential beneficiaries. This ability must tend to undermine even the income beneficiary’s ability to influence the trustees. It may be considered to be positively lethal to any local authority attempt to secure extra income or capital payments. Such powers can be used to restrict the flow of income to such a beneficiary if the trustees reasonably consider that the situation demands it. Income will follow capital appointments to other beneficiaries. The exercise of these powers, as with the power to distribute capital, is not subject to the intervention of the local authority, which has no legal standing to resist them. And nor, usually, will the beneficiary, their representative receiver or attorney have any practical recourse other than an application to the court. Even then, assuming absolute discretion has been granted to the trustees who have properly considered the beneficiary’s interests and have otherwise acted in good faith, resistance may prove futile.

Summary on pressure on trustee investment policy and pressure on trustees to distribute capital

The last two matters addressed in this sub-section are common questions that are often posed at professional conferences and in other submissions to the author. They are raised so frequently that there appears to be an operating presumption in much of the legal profession that there is something disreputable about trustees deciding to invest in such a way as to preserve trust capital at the expense of the income beneficiary or refusing to make capital distributions to income beneficiaries when asked to do so.

Such a presumption, if it exists, is false. In certain circumstances, doing the very things that currently appear to be presumed against may be the most prudent and legally correct course of action. The false presumption and its unhelpful deterrent effect should, therefore, be laid to rest.

There are also a couple of further general points to be made that do not fit neatly within the legal analysis already given:

If an income beneficiary under a life-interest type will trust is able to express their own view then they might also express themselves to be perfectly content with the income and capital situation. They may not be pleased to agree that the local authority is seeking to advance anything other than its own interests by seeking a change in investment strategy or a capital distribution for them. Such an assertion by the very person who is the concern of the claim would be likely to undermine its case;
The whole question of capital distributions should also be set in the wider, but often forgotten, context that the care-home resident is likely to have paid national and local taxes for many years. Why should there have to be an extra “tax on trustees” to secure extra support for them? In brief, there is little or no ability on the part of a local authority to obtain a change of trustee-investment policy or a distribution of capital in favour of a beneficiary to facilitate payment of care fees.

Local authority powers against will trusts: The use of Inheritance (Provision for Family and Dependants) Act 1975

The Inheritance (Provision for Family and Dependants) Act 1975 (IPFDA) allows certain persons to apply for “reasonable financial provision” against the deceased’s estate. That includes value, which upon completion of the administration of the estate is set to be held in a will trust. The IPFDA is limited to those entitled to apply under Section 1(1) of the 1975 Act, as now amended. It applies to those who were the deceased’s spouse, ex-spouse, co-habitant, children, persons treated as children of the family and those financially dependent on the deceased. That dependence has to either be literal dependence or dependence in the circumstances of that relationship for a particular standard of living.

Dependence may, and often does, arise from the provision of free accommodation. The IPFDA has caused concern on the part of solicitors considering the effectiveness of will-planning and other solutions to long-term, care-fee mitigation. Brendan Hall in the STEP guide, Administration of Estates (Tolleys), notes: “The 1975 Act is not intended to be a charter for disappointed beneficiaries.” Depending upon how one chooses to define beneficiaries, this comment applies to both relatives and local authorities.

For the purposes of this work, the spousal example is most relevant. The local authority charged with the care of a surviving spouse, who is restricted by the will of their late partner as to what they receive on that death, might consider making a claim on the behalf of such a person. Disabilities and the need for care are relevant considerations in IPFDA claims. A claim by a local authority would be made in the same way as a relative might seek to make a claim for the survivor if the circumstances dictated that the survivor was unable to effect a claim on their own behalf. Importantly, a local authority is not able to apply against the terms of a deceased’s will on its own behalf. It can only make a sponsored claim for the benefit of the survivor even if it is paying for the resident’s care.

A mentally capable survivor is unlikely to be willing to assist the local authority in making a claim. It is unlikely to be of any benefit to them to support such a claim. The limitation on the direct action of a local authority in this context applies even if substantial value might have been expected to pass on death, which would otherwise be assessed as capital for the purposes of the means-test after distribution to the survivor. That fact is not relevant in such cases.

The author notes the comments by Brendan Hall in Administration of Estates but, assuming he has not misunderstood them, finds himself somewhat in disagreement. He states: “The Court of Protection [operating in the interests of the patient if there is an element of incapacity] is unlikely to resist the claim as it is obviously in the patient’s interests for further funds to be made available to assist him, notwithstanding the effect that this may have on his entitlement to benefits.” The courts do usually take the view that means-tested benefits are not the primary way for inter-personal obligations to be met. However, they may be taken into account where the resources available are modest in comparison with the claims upon the resources. See, for instance, Colins deceased [1990] Fam 56 at page 62 referring to matrimonial practice. It is submitted that it is not “obviously in the patient’s interests” to engage in a potentially costly dispute with an uncertain outcome, which may only serve to create a temporary loss of means-tested care and associated knock-on effects before reversion to the previous status quo. That is especially if the will trust is being operated in a carefully balanced way by the trustees by the time the matter comes to court.

Some local authorities have acted as Court of Protection receivers for their own residents who are incapacitated, and it might be possible for them to apply on behalf of such residents. The appointment of independent members of the Court of Protection’s Panel of External Receivers as “receivers of last resort” since the turn of 2001 has reduced this particular risk. It is uncertain how far the courts would be willing to effectively help a local authority aggrieved by the content of testamentary planning. It is not a circumstance considered by the 1975 Act itself. There would be a very real potential conflict of interest between the local authority as collector of care fees and the surviving partner and their family. That would not be attractive to the court. The IPFDA is designed to ensure that the applicant is not unreasonably financially disadvantaged. How could an application by a local authority acting for a resident, for whom it has a duty to care, be of any advantage to that resident? Any release of funds for him or her would be of no benefit to them as it would tend to be swallowed up in care fees. In the author’s opinion any such application would be unlikely to succeed.

There is a time limit for applications under the IPFDA of six months from the grant of representation - probate of will or letters of administration on intestacy. The time limit arises under Section 4 of the IPFDA. The court’s power to extend this limit is used sparingly, but where the estate is undistributed and there is no other prejudice, the court may be inclined to extend it in favour of a meritorious claim (see the article by barrister Giles Harrop in ECA Volume 8 issue 5 September/October 2003 at page 15). The time limit is, the author suggests, quite likely to limit any attempt by a local authority to use these provisions. A local authority may simply fail to make a claim quickly enough. Section 20 of the IPFDA releases the executors from possible liabilities arising as a result of claims of which they have no notice after the six months period expires. It is not clear whether or not a late claim can be pursued more readily as a result of the estate having passed into a will trust as opposed to having been distributed outright to beneficiaries.

Concerns over the possible use, arguably “abuse”, of the IPFDA by local authorities should not be overstated. The likelihood of a timely application being made by a pro-active local authority is not high and nor is the likelihood of the court being at all sympathetic to such a claim especially, it is submitted, if a modest estate is involved. That is unless perhaps the local authority has additional reasons that would make a claim to be genuinely of benefit to the survivor in whose interests they claim to act and they have good evidence to support this.

Executors will need to be aware that they should not act with partiality if an application is made. Otherwise they may, in some circumstances, be at risk on costs. They should also remember that wills can be varied with the agreement of the parties. This can mitigate the risk of expensive litigation.

To round off this subject, the author notes that it is possible to insert a carefully worded provision in a will to terminate a spousal interest under that will if a claim is made by them or upon their behalf for extra support. That would not, in itself, be void. It may make any “aggressive” local authority think again if such additional persuasion is necessary. The court might reinstate such a terminated interest whatever it decided as regards the totality of the claim, but the risk would be that it would not, which could leave the surviving spouse with less choice available to them. The author is not persuaded that such provisions should be incorporated.

A will trust as a provider of top-up care fees

The need for a third party
If a local authority arranges care, there may be a shortfall between the fees of the care home the resident wants to live in and the standard or contract rate the local authority is prepared to pay. The local authority might refuse to pay that extra amount. An individual resident cannot usually lawfully act to top-up their own care home fees from their own resources. The CRAG 2003 (22) paragraph 8.018 applies to explain the regulatory position: “A resident cannot use their own resources to pay for more expensive accommodation, i.e., act as their own third party.” The resident can only effect a self top-up if they are subject to the 12-week property disregard or have entered into a deferred payment agreement. Both situations potentially allow use of otherwise disregarded capital. The resident’s “personal-expenses allowance” (£17.50 in England – 2003-4) is designed to secure a small amount for extra comforts pocket money. It cannot, therefore, be used to help top-up care fees (See LAC (94)1 Paragraph 13 and R v Sussex ex parte Ward CCLR 6/2000).

Assuming the local authority is not setting a universally low rate that unlawfully eliminates any genuine choice, the only option may be to secure additional funding from a third party. A will trust, in the nature of a life interest or a discretionary trust, counts as such a third party. A suitably drafted trust can potentially improve the care choices of the beneficiary. The benefits impact is not straightforward but in appropriate cases, payments of income and capital can be made to ensure that a will-trust beneficiary has additional care choices available to them.

Special considerations for third parties Third-party top-ups made from will trusts are broadly subject to the same considerations as top-ups from other third parties but, given the trusteeship situation, there are also additional considerations:

Trustees should be aware that the primary contract for care provision, where third party top-ups are relevant, should be made between the care home and the local authority and not by the resident or the trustees as third party. The trustees may agree to either pay the care home direct or pay the local authority that will then pay the care home. Care fees may rise faster than local authority contributions. This has often happened historically and may be expected to continue. Third parties can become exposed to unexpected increases and an inequality of burden;
The trustees have duties to present and future beneficiaries and should usually ensure that potentially onerous obligations are not accepted so as to denude capital. The trustees may wish to consult with all the beneficiaries so far as possible. That is to avoid the issue of the trust bearing certain care-home costs, which become a potential source of dispute. The trustees will naturally want to preserve detailed written records of their communications with all parties and their deliberations. It will also be important that suitably qualified and authorised financial-planning advice is obtained by the trustees. The issue of investment strategy is extremely important.

The treatment of third-party contributions

The trustees will wish to engage in a detailed costs: benefits analysis to ensure that the best possible overall financial result is achieved. The rules and the CRAG guidance on the subject are practically impenetrable even to the reader familiar with such matters. In the author’s opinion, they would benefit from significant amendment.

The CRAG 2003(22) paragraph 8.018 states the basic rule: “Where a local authority agrees to place a resident in a higher-price home on the grounds that there is a third party willing to contribute towards the higher fee, the payments made by the third party should be treated as the resident’s income and should be taken into account in full.”

The general rule is that enhanced income will, therefore, reduce the local authority contribution towards care fees.

Lump sums paid by third parties are dealt with under the CRAG paragraph 6.037A. Following NA(AR) Regulation 16(4) they are: “Divided up by the number of weeks for which the payment is made and taken fully into account as part of the resident’s income.”

As can be seen, third-party payments can be treated as notional income and taken into account accordingly:

Following the general scenario, if a care home for Mrs Wise, with an above average view and rather pleasant surroundings, costs say £400 per week and the local authority are only prepared to pay £350 per week there is a £50 per week shortfall. Her children Una and Pryce would be able to agree to pay the required £50 per week. If Mrs Wise had a correctly assessed weekly income of £250 per week she would be treated as having an income of £250 + £50 or £300. From this sum, Mrs Wise would retain her personal expenses allowance of £17.50 leaving the balance of £282.50 to be paid to the local authority. The local authority would pay this sum and the shortfall of £117.50 to the care home.

However, this only provides part of the picture and only in so far as trusts are concerned. There is a difference between the receipt of income to which a beneficiary is entitled to under the terms of a will-trust and income and capital payments to a beneficiary who has no actual entitlement to them.

Income to which a beneficiary is entitled to under the terms of a will trust is taken into account under NA(AR) Regulation 17(1). The CRAG 2003(22) paragraph 10.017 applies: “Where a person has absolute entitlement to income from a trust, the income he receives or which would become available to him on an application being made should be taken into account in full in the assessment.”

The effect of this is that income paid or accrued that the beneficiary receives or has the right to is assessed in the same way as ordinary third-party contributions. The example given above concerning Mrs Wise may be applied. Trustee investment strategy will be particularly important if the adverse means-testing impact is to be minimised in cases of trusts with a specified income beneficiary such as a flexible life-interest trust. A capital-biased strategy may be appropriate. While treating the income payments by the will trust as notional income may appear a little unfair it may at least secure the care choice the resident desires. Apparent unfairness arises with the treatment of trust payments. The resident is treated as having another resource and as such does not need assistance through means-tested benefits.

Income and capital payments to a beneficiary who has no actual entitlement to them should, it is submitted, be treated differently by an assessing local authority. The CRAG 2003(22) paragraph 10.021 applies: “Payments from a discretionary trust are effectively voluntary payments. Treat them in accordance with the normal rules for the treatment of voluntary payments…”

“Voluntary payments” are taken into account as capital unless they are regular payments, in which case they will be fully disregarded or if the sum is for any item already covered by the standard charge for the care home, then only the first £20 is disregarded. NA(AR) Regulation 22(7) applies and see the CRAG paragraphs 8.051-8.054. Special rules apply when the voluntary payment has been made as a top-up of care fees and are treated as notional capital by way of third-party contribution (CRAG paragraph 8.057).

While the CRAG refers to “discretionary” trusts, it should be noted that the CRAG, in general, expresses only a naïve understanding of trusts. This comment also refers to all discretionary payments under the control of the trustees. For instance it is submitted that a capital payment made by the trustees of a flexible life-interest will trust falls within this category. The author’s view is also the opinion expressed in the Paying for Care Handbook (CPAG 2003), page 309. Readers will struggle to find any regulatory definition for the expression “voluntary payment”, but it refers to payments made for which a donor, such as a will trust, receives no return. CRAG 2003(22) refers to it at paragraph 8.051 as a payment, “which the payer is under no legal obligation to make” but that would, it is suggested, cover practically all third-party payments, which is not logically correct.

The author submits that a trust can make “voluntary payments” for the top-up fee. Even if these are made on a regular basis they should not, it is submitted, be taken into account as the resident’s notional income. The reason is that they are classified as payments that are made with the intention of and are actually used for something that means-tested benefits will not cover. Means-tested benefits are designed to cover “normal expenses of daily living”, which includes the amount a local authority is willing to pay to a care home. The excess payment for the care home, which the local authority refuses to pay is not such a normal cost. As there is only a payment being made for something benefits would not meet, the usual notional income rules should not apply.

It will be seen from the above that there is often scope for negotiation with a local authority over the issue of third party top-ups. Will trusts are useful instruments both to facilitate negotiation and choice.

David Coldrick is partner in charge of Wrigleys Solicitors Sheffield office and welcomes comments and queries. He can be contacted on 0114 2675588 or david.coldrick@wrigleys.co.uk Technical assistance from barrister Giles Harrap and solicitor Caroline Bielanska in finalising this section for publication is gratefully acknowledged.