Feature

posted 13 Dec 2003 in Volume 9 Issue 1

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

“Of comfort no man speak. Let’s talk of graves, of worms and epitaphs. Make dust our paper and with rainy eyes write sorrow on the bosom of the earth. Let’s choose executors and talk of wills,” (Shakespeare, King Richard II). In this third section of the ECA course, aimed at assisting beginners in the law affecting the elderly, and at providing useful reminders for those already engaged at expert level, David Coldrick indicates some further points relevant to the will-planning solution described in part two.

Part three: Practical options continued

Review of the options discussed so far

Part one of this work considered some preliminary gifting guidelines, addressed the case for and against outright gifts, and noted some general tax considerations. For most clients, outright gifts are an unattractive means to the end of securing a reduced liability to pay long-term care fees.

Part two began to address some of the practical solutions with the aim of care-fee mitigation assuming that outright gifting was not the solution. It began to address the issue of will-planning both for the relatively well off and less well-off client. It was noted that even some clients who consider that the issue of long-term care fees is of no relevance to them might usefully think again. The analysis of will-planning issues continues in this section.

As explained in the conclusion of part two where both an elderly husband and wife enter long-term care rather than either of them dying at home, practically all the value in their estates can still 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 regulations. This is why will-planning is only, at best, a partial solution.

The partial will-planning solution involves the foundation by each party of a will-trust. When the first 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, such as a part share in the family home, is not “available” to them for that purpose. It is simply not theirs. Also, 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 means-test regulations.

The aim of this section

This section aims to consider some of the legal matters associated with the analysis of will-planning made in part two. They are issues of importance that frequently face practitioners. Some solicitors may feel they know many of these points already, indeed some may consider it beneath them to read it. But in the author’s opinion there is no harm in sometimes reminding ourselves of the basics. Humility is the route to expertise. The artist of an exquisite portrait who forgets how to create the background with proper perspective will ruin the painting and may as well never have painted the portrait. The sitter may also refuse to pay.

The section succeeds if it explains some little legal mysteries in a straightforward way. For example, while the nature of the types of co-ownership will be familiar ground for many solicitors, it will not always be so clear to other readers. It is worth explaining these different natures at this stage for that reason alone. Some legally qualified readers may be amused to recall in reading the explanations given their first attempts at grasping the differences and of course “an expert is one who knows more and more about less and less”. That humility again…. Any explanation is prone to obscurity or faulty analogy. The author’s probably continues this long tradition.

Co-owned land, will-making and care-fee planning

The family home is not usually owned solely by one party to the relationship. Where it is jointly owned, there are important issues to be aware of. For the purposes of will-making the nature of co-ownership situations in land, usually in respect of the family home, is of crucial importance.

Where two or more people simultaneously own land, they will hold it either as tenants in common (Section 34 Law of Property Act 1925 as amended) or as joint tenants (Section 36 Law of Property Act 1925 as amended). Note: subsequent references to the Law of Property Act 1925 in this work refer to it simply as LPA 1925.

The expression “tenancy” refers to ownership and not being a tenant under some form of lease. The two forms of co-ownership may be described as follows:

Tenants in common

Tenants in common own a particular share in property. It has not been divided up as between the co-owners so one co-owner cannot point to a particular part or parcel of the land and plant their flag of individual ownership on it. But a share of it is quite distinctively theirs.

It is as though the very particles or atoms of the property are split between different owners in appropriate proportions. In the case of a simple plot of land, a measured surface area of individual tiny coloured atoms might be used to represent the underlying property ownership. Each co-owner has their own colour. But those atoms, if they are to properly represent the tenancy in common, are mixed thoroughly in such as way as to defy obvious coherent division between the co-owners. However, the overall quantities, although muddled together, correctly represent the total area of each share owned.

Should the tenants in common decide to divide the property between them, perhaps with a view to building homes upon separate plots they will be able to do so readily. Using the atomic example, they would achieve this by sorting the coloured particles to fill an appropriately cohesive area in the desired place and in the desired shape. Mercifully this process is much easier to achieve on paper, via plans and property deeds. The requisite deed may be considered to be a kind of sieve or a great magnet attracting some elements and rejecting others, but either way, they secure the appropriate clarity of division when the tenancy in common ends. When it ends, the individual owners have their own distinctive plot and the flag of individual ownership can be planted on it.

The undivided share in a tenancy in common can also be disposed of by will. This is because the deceased owner had something that was distinctive, fixed, in terms of its overall proportion to the whole although “unsorted”. The surviving co-owner retains their own fixed share in the land but, unless they are the beneficiary of the deceased’s share under their will or under the intestacy rules that operate if there is no will, the deceased’s share passes elsewhere. There will be a new tenant in common to replace the old.

Most domestic properties owned between husband and wife and between partners are not held as tenants in common. If it is held in this way, then the first to die may wish to consider what might happen if they left their share as tenant in common outright to the survivor. This can have the undesirable result of passing the entirety of the family home to a survivor who is or will shortly be in need of residential or nursing-home care. This could render the property as assessable capital for the local authority means-test. That unhappy possibility indicates action should be considered to mitigate this risk. One such form of mitigation is the will-trust device, which was explained in detail in part two and in brief in the introduction to this section. Upon the death of the first tenant in common, their share of the family home should be protected from the means-test applicable to the survivor cum resident in need of long-term care.

Joint tenants

Joint tenants are co-owners as between themselves, with rights as individual owners in the relationship between them, but they behave as a sole owner in relation to others.

Returning to the atomic representation given above for the purpose of explanation: At first glance, the situation would appear to be the same as in tenancy in common. The different coloured atoms representing different elements of the co-ownership would cover a plot of land in a similar muddled fashion. But this time, closer examination would reveal that each atom of one colour is fused with one of the other colour. Indeed there might be several different coloured atoms fused together depending upon the number of co-owners. Thus in whatever order the atoms were placed on the ground there would be joint possession of the land at all points.

Undifferentiated co-ownership exists at every point in a joint tenancy. There is no exclusivity of ownership. The co-owners are “stuck together”. Each co-owner owns all the property as a result, but because of that, they also own nothing because it is equally the property of the other co-owner or co-owners. This is often termed, the “unity of possession”.

Each co-owning joint tenant has equality with each other co-owner in terms of the vesting date, scope, nature and length of their ownership. These aspects are often summarised as the “unity of interest” and the “unity of time”. Furthermore each co-owner must hold their title under the same document, such as the same purchase deed or by virtue of the same act, such as the same entry into adverse possession. That is “unity of title”.

The undifferentiated co-ownership in land arising under a joint tenancy cannot be disposed of by will. The principle of “survivorship” applies to its devolution on death. This is because the deceased co-owner had nothing that was distinctive or fixed, in terms of its overall proportion to the whole. In short, they had nothing that was theirs alone, which they could give. It is thus what the Administration of Estates Act 1925 Section 3(4) calls “an interest ceasing on his [or her] death”. They owned everything but nothing. The surviving co-owner, in a simple two-party, joint-tenancy situation between X and Y, retains their own undifferentiated share in the land but also receives the undifferentiated entitlement of the deceased. But to say they “receive” it is misleading. On the death of X, nothing has really changed. Everything was owned by both X and Y but given the demise of X that same everything is now solely owned by the survivor Y. The survivor Y is not strictly gaining anything more than they owned already. At least that is the theory. If they are the sole survivor it inevitably makes a huge practical difference to them.

Most domestic properties owned between husband and wife and between partners are held by them as joint tenants. This can, by operation of survivorship have the undesirable result of passing the entirety of the family home to a survivor who is or will shortly be in need of residential or nursing-home care. This could render the property as assessable capital for the local authority means-test. That means that action should be taken to mitigate this risk. One such form of mitigation is to “sever” the joint tenancy creating a tenancy in common and separate shares in the land, which can be dealt with by way of the will-trust, which was explained in detail in part two and in brief in the introduction to this section.

Methods of severance

Using the nuclear analogy again: will-making, where there is initially an inconvenient joint tenancy, inevitably involves a bit of “atom splitting” before the will can operate to achieve some atom sorting. That splitting is effected by way of severance. It destroys the co-ownership by way of joint tenancy and replaces it by one of co-ownership by way of tenancy in common. A co-ownership interest in joint tenancy cannot pass by will and cannot take advantage of the will-trust technique for care-fee planning. A co-ownership interest or rather a share held as tenancy in common can take advantage of the will-trust technique.

It should be noted that the legal estate, basically the names in which the deeds are held, cannot be severed. The LPA 1925 Section 1(6) requires the legal estate to be held as joint tenants in co-ownership situations. Severance operates against the equitable or beneficial interest in the property, its real practical value. That is also, conveniently, the value that is relevant for the care-fee means-test. When a severance is effected, a restriction should be placed upon the land register where there is registered land or a severance should be placed with the conveyance where there is an unregistered title. Methods of severance include:

Any method applicable before 1926. The LPA 1925 simplified the previous nightmarishly complex land-law position leaving little pre-historic gems such as this to taunt future generations of law students. Mutual agreement may for instance suffice. Re Wilks: Child v Bulmer [1891] 3Ch.59 This is repeated at point three below;
Sale of an individual joint tenant’s equitable interest will sever the joint tenancy. Agreement to sell a joint tenant’s equitable interest will sever it. Burgess v Rawnsley [1975] Ch 429. But please note that following the Law of Property (Miscellaneous Provisions) Act 1989, this will need to be in writing;
Severance is possible by mutual agreement or “common intention”’. Again see Burgess v Rawnsley;
Notice of severance to other joint tenants. LPA 1925 Section 36(2); Re Draper’s conveyance [1969] 1 Ch 486 and Harris v Goddard [1983] 1 WLR 1203. The ability to effect a unilateral severance of a joint tenancy in equity is enshrined in Section 36(2) LPA 1925 (as amended). It states: “…where a legal estate is vested in joint tenants beneficially, and any tenant desires to sever the joint tenancy in equity, he shall give to the other joint tenants a notice in writing of such desire or do such other acts or things as would, in the case of personal estate, have been effectual to sever the tenancy in equity, and thereupon the land shall be held in trust on terms which would have been requisite for giving effect to the beneficial interests if there had been an actual severance.” Severance must be in writing. No particular form is prescribed so long as the intention is clear. The policy of the law, as indicated by Sir John Pennycuick in Burgess v Rawnsley is to enable severance by any joint tenant. Communication of a unilateral declaration by one joint tenant to the other joint tenants is sufficient. But there must be communication. That is essential.

The method of notice of severance under the particularly important provision of LPA 1925 Section 36(2) is dictated by Section 196 (1) LPA 1925. The aim of this section appears to be to make the giving of effective notice as simple as possible:

Section 196 (1) LPA 1925 states: “Any notice required or authorised to be served or given by this Act shall be in writing.”
Section 196(2) LPA 1925 states that such notice shall be “sufficiently served” if it is left at the last known place of abode or business in the UK of the person to be served;
Section 196(3) LPA 1925 states that notice by post in a registered letter addressed to the person to be served is “deemed to be made at the time at which the registered letter would in the ordinary course be delivered” so long as it is “not returned through the post-office undelivered”. In re 88 Berkeley Road London NW9 [1971] Ch 648 a notice sent by recorded delivery but never received was held to be effective. In the case of Kinch v Bullard [1998] 4 All ER 650, the notice was not sent by recorded delivery but was still held to be effective. Issues of proof inevitably appear relevant in problematic cases.

An important limitation upon severances

It is vital to note that if only one joint tenant out of more than two co-owning joint tenants severs their joint tenancy so as to create a tenancy in common it does not sever the joint tenancy between the other co-owners whose joint tenancy continues as between themselves. This should be borne in mind where a multiple joint tenancy exists, perhaps between parents and a child. This point is easily overlooked in practice. It does not, in the author’s mind, fit very logically with the general concept of joint tenancy.

Will-making involving jointly-owned property: Worked example incorporating important – and often overlooked – issues concerning severances and “deprivation of capital”

Let us now examine issues connected with will-making and severances in a particular scenario that will be familiar to most legal advisers.

Mr and Mrs Wise own a pot of cash of £50,000 and the family home worth £150,000. They decide that they are only prepared to effect will-planning and are not interested in any of the available financial-planning solutions. They approach their long-time family solicitor, the recently married Sophia Minerva, for advice. She finds, not surprisingly, that they have no idea who will die first and that, ultimately, Mr and Mrs Wise wish to benefit their son Pryce and their daughter Una. Both children live independently far away from home, which is a relief to Mrs Minerva who has just inherited three especially difficult teenage step-children. She is already actively encouraging them to study abroad. The Wise residence is held as joint tenants. Mr and Mrs Wise agree that a flexible life interest will-trust of their entire residuary estates should be incorporated within their wills. They then go home to await Mrs Minerva’s letter of advice and the draft wills. But while watching an especially violent episode of their favourite soap “Celebration Road”, Mrs Wise is afflicted with a stroke and rushed to casualty. Mr Wise contacts Mrs Minerva with the news. She is shocked but is a stoic and a great support in times of adversity. Mr Wise tells her he fears that Mrs Wise will never be able to return home especially because there are thirty-nine steps up from the driveway to the front door. He wants to go ahead with his will. Mrs Wise is currently unable to communicate at all. But despite his wife being the afflicted one, Mr Wise, a natural pessimist who is neither able to work the cooker, nor find his way out of the new super large retro fridge, fears he might die before her. He wants to secure his assets as far as possible without prejudicing his wife’s possible need for supplementary capital.

The first step to ensure that Mr Wise has assets that are transmissible by his will is to effect a severance of the joint tenancy in the family home. In an ordinary situation, a simple form of effective unilateral severance might be drafted by the solicitor as shown below.

NOTICE OF SEVERANCE OF EQUITABLE JOINT TENANCY I,

[ ] of [ ] your fellow joint tenant at law and in equity of the property at [ ] (“the Property”) give you notice pursuant to the Law of Property Act 1925 Section 36(2) that I desire to sever our joint tenancy in equity so that as from the date of this Notice you and I shall hold the property on trust for sale for ourselves as tenants in common in equal shares as if there had been an actual severance.

Signed ....................................... Dated ........... 2003

Signed ....................................... Dated ........... 2003 (Recipient of this notice by way of acknowledgement)

This example deals with the simple situation where ownership is considered to be equal though in undivided shares. It is possible that a share linked to the relative contributions of the parties can be asserted in some cases.

Strictly, the acknowledgment in the example is not necessary as notice can be given unilaterally, but the indication of receipt is evidentially helpful. But what about the situation where one joint tenant, Mr Wise in our example, wishes to sever the joint tenancy but the recipient of the notice of severance, Mrs Wise in this case, is mentally incapable or appears to be mentally incapable?

Without a severance on the death of Mr Wise, the entire family home could belong to Mrs Wise while a resident. That would be part of her assessable capital for local authority means-test purposes. Fortunately for Mr Wise, unilateral notice given in writing by one co-owner to the other is alone quite sufficient to sever the joint tenancy and convert it into a tenancy in common. Section 196 LPA 1925 and other legislation renders the recipient’s capacity irrelevant. This may seem slightly odd upon reflection but situations involving the co-ownership of land by way of joint tenancy should be separated in the mind from what might be called ordinary contractual situations. Contractual situations usually require an agreement to either bind or unbind the parties to a particular course of action or state of affairs. As a result of the nature of a joint tenancy, all one party should need to do to end that rather special legal relationship is to act in some way that is inconsistent with its continuation. A notice of severance is thus quite sufficient, irrespective of the wishes of the other co-owner. The ability to effect a unilateral severance is completely in accordance with the policy of the law particularly as expressed in Section 36(2) of The LPA 1925. It also accords with the established practice of the Land Registry.

Mr Wise can therefore take a notice of severance to his wife’s bedside and sever the joint tenancy accordingly. Notice must be communicated to the co-owner but the co-owner need not actually understand that this is what is being communicated. If they did then severance could not be truly unilateral and there could be any variety of problems with proof of severance. In the usual situation where there is mental capacity, the recipient will be able to sign in acknowledgement of receipt. Otherwise the co-owner asserting severance might consider effecting a statutory declaration in support of the communication of the notice of severance to avoid any future dispute. Alternatively, the Land Registry will accept a copy notice of severance with proof of recorded delivery. Even if a recipient is actually missing they will accept a copy notice of severance sent with proof of delivery to the last known address of the desired recipient. One hopes that despite its complexity, Mrs Wise will not be so lost in the health-care system as to be considered actually “missing”.

The author has seen one situation where a document declared that: “We the joint tenants sever …” The local authority involved in the financial assessment of the surviving joint tenant sought to claim that this failed to effect a valid severance because one party did not have sufficient mental capacity to sign it. While it is simplest to have a purely unilateral severance, the author considers that the assertion of the local authority concerned displayed a singular lack of understanding of the nature of joint tenancies and the ability of one co-owner to effect a unilateral severance. In fact, the signature of the possibly mentally incapable party appears to have been rather good evidence of the communication of the notice by the other party who was clearly, by their conscious act, effecting a perfectly valid severance.

Mr Wise, in our example, being an astute member of the rising “Consumers Association generation” and a regular listener to the Timmy Old radio show might be concerned to ask his solicitor a few additional questions about the effectiveness of severances. He hopes his mind will be set at peace by Sophia Minerva’s confident replies. He might ask: “Can a person who severs a joint tenancy be said to have effected a ‘deprivation of capital’?” This searching question refers to regulation 25(1) of the local authority means test – National Assistance (Assessment of Resources) Regulations 1992 (as amended).

Regulation 25 states: “A resident may be treated as possessing actual capital of which he has deprived himself for the purpose of decreasing the amount that he may be liable to pay for his accommodation.” This would mean that the person disposing of assets may still be billed for care fees as though they still owned them. A very awkward situation. Two examples should explain the legal position:

The point might arise if X and Y own the family home. X is ailing and expects to die soon. Y is already in long-term care. If X severs the joint tenancy by way of notice to Y with the aim of founding a suitable will-trust, what is the position? Whatever the technicalities of the effect of the severance for the deprivation of capital rules, X is the person effecting the severance. X is not “the resident” and it does not decrease the amount that “he may be liable to pay for his accommodation.” Y is the resident. Y is not doing anything at all. Y has not deprived themselves of anything. Regulation 25(1) is irrelevant;
The point might arise if X and Y own the family home. X is dying. X has executed a will leaving all his assets to a will-trust for Y for life and then to the children but not to Y outright. But he forgot to sever the joint tenancy of the family home. The solicitor sent it but he failed to sign it. So the family home will pass to Y irrespective of his will. X then loses his mental capacity. He cannot effect a severance but is still at home and is expected to die shortly. Y is already in long-term care but retains full mental capacity. If Y severs the joint tenancy by way of notice with the aim of facilitating X’s will vis half the family home, what is the position? Is there a deprivation of capital? The answer goes to the nature of deprivation and the nature of joint tenancies. To deprive oneself, one must initially own something. An interest in a joint tenancy is something which is owned. Both X and Y own something. While they both technically own everything and nothing at the same time (as explained in the sub-section describing joint tenancy) what does it actually amount to in practice? It is submitted to amount to a half share in the sale proceeds should the property have been sold prior to X’s death. So before severance the entitlement is as to half the value. After severance the entitlement is also to half the value excepting it is now as a result of being tenant in common as opposed to being joint tenant. There is no change in the values involved before or after severance. Conversely to “prove” a deprivation not only must the value owned by the resident fall, the value received by someone or something else must logically rise. X has not received anything extra as a result of Y’s action. Thus, it is submitted, there has been no deprivation of capital. The capital is merely sorted into the differentiated shares of tenancy in common rather than being in any way disposed of.

The reader whose knowledge is rather ahead of the point this work has now reached might also consider that if any asset was disposed of (which is strongly submitted not to be the case) it would have been a disregarded asset at the time of disposal. That is because it would be a share of the property X still occupied as residence, which would thus be a disregarded asset. If X died, that asset allegedly disposed of would also still either be capital unavailable to Y for capital assessment purposes as being in the will-trust or specifically disregarded capital as to the value of the stream of income from the trust. This should make the argument pointless in any event in these circumstances. Even if it succeeded on the severance point, it may fail on the basis of this explanation. The Charging For Residential Accommodation Guide (CRAG), the mandatory local authority guidance on the National Assistance regulations notes: “The local authority should only consider questions of deprivation of capital when the resident ceases to possess capital that would otherwise have been taken into account, for example, a resident gives a diamond ring worth £2,000 to her daughter the week before she enters residential accommodation. The local authority should not consider deprivation as had the ring still been possessed, it would not be taken into account as capital,” (CRAG Paragraph 6.058).

It is further submitted that the situation in the main example at point 2 above concerning Regulation 25 is radically different from that which can exist when a will is “varied”. If Mr X died and left his estate to Y outright (rather than upon trust for her) and she did not want it, she could seek to execute a “deed of variation” to that effect, for example, in favour of the children. As she owned that entitlement and there was both loss to her capital and gain to her children’s capital, there would be prima facie grounds for applying regulation 25(1). This is even if the variation was effected in respect of X’s unadministered estate because at that stage, Y still has a “chose in action”, which secures her right to have the estate properly administered in her favour. In the case of a joint tenancy, until either party dies, survivorship does not operate. It is irrelevant. There is no similar (valuable) right to the chose in action as either party can sever their interest at any time. The deprivation of capital rules may be applicable to transfers to an ailing spouse of the likely survivor’s share as tenant in common or the transfer of a joint tenancy into their sole name. The aim being to use a will-trust arising upon the death of the ailing spouse to shield assets. That is if the survivor needs to apply for local authority help with long-term care fees shortly after their partner’s death. In that situation detailed arguments surrounding the deprivation of capital rules discussed in later sections of this work will be relevant.

In summary, a clear understanding of the law of co-ownership and the law governing the validity of severances and their interaction with the rules on deprivation of capital is vital for the legal adviser. Other advisers will also find a basic understanding very useful in relations with legal advisers and in being able to confidently tackle the issues in terms of related financial-planning advice.

Editor’s notes:

The reader is recommended to obtain a suitably up-to-date professional land-law text. The author is pleased to acknowledge that he has, in the past, found Emmet on Title (Sweet and Maxwell) and Property Law Handbook (Butterworths) particularly helpful
Given the wording of Section 36(2) Law of Property Act 1925 (as amended), which states “… where a legal estate is vested in joint tenants beneficially, and any tenant desires to sever the joint tenancy in equity…” there is a question mark, though probably not a very large one given the policy of the LPA 1925, that unilateral severance is not possible where the legal owners and the equitable owners are different people. This view appears to be taken by Emmet on Title
Bankruptcy severs a joint tenancy. The effect of bankruptcy is to pass ownership to the trustee in bankruptcy, which contradicts a joint tenancy. A local authority might try to use the Insolvency Act to attempt to collect a resident’s fees. They should note that whereas a joint tenancy might place the property of an ailing joint tenant into the hands of the resident – thus increasing their assessable capital – this form of severance might create a different result if the ailing joint tenant’s will is not in favour of the resident. Timing is important.

David Coldrick is partner in charge of Wrigleys Solicitors Sheffield office and welcomes comments and queries. He can be contacted on 0114 2675588 or by e-mail at david.coldrick@wrigleys.co.uk. Additional research for this section was supplied by Lynne Bradey (solicitor).