ECA course: Protecting the interests of older people

Feature

posted 3 Oct 2003 in Volume 8 Issue 6

ECA course: Protecting the interests of older people

In this second 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 possible will-planning solutions for the adviser and the client in the context of asset-protection planning.

Part two: Practical options

Part one of this work considered some preliminary gifting guidelines, addressed the case for and against outright gifts, and noted some general tax considerations. This part begins to address some of the practical solutions with the aim of care-fee mitigation, assuming that outright gifting is not the solution.

Will-planning: A partial solution

“I hold the world but as the world, Gratiano; A stage where every man must play a part, And mine a sad one.” (Shakespeare – The Merchant of Venice)

Some contrasts

Certain people fulfill a sad role in our lives. Some things can equally represent to us the grey weather quality of sadness and loss. Wills, excepting the highly unusual – and most welcome – humourous ones, usually fulfill a sad role. But some wills over the last ten years or so have conveyed a new poignancy together with the usually expected sadness.

Consider the two parallel lives described below, set apart by distance, talent, fame and recognition, whose legacy is valued using differently weighted scales.

Example one: The heroic foreigner

Imagine the life of an exceptionally creative person – a writer, poet, composer or musician. Now set them in a distant country. Their first work is filled with vibrant promise and originality delivered with an unusually light touch. Their last work brims over with the ripened and full-bodied maturity that old age can bring. Lightness is now replaced by an attractively studied gravity. The last work of a writer, artist or composer is invariably one of the best remembered. Along with the first work it is a benchmark of the career. But each work of whatever period will be eagerly sought by generations of readers, musicians or listeners, who all benefit from the inspiration granted by some aspect of the master’s labours.

Imagine if, in old age, the forces of a despot arrived in the distant land. Armed with weapons, lists and well-trained bureaucrats, the despot’s ideology involves the banning of books, closure of the galleries, cancellation of performances and the imprisoning of anyone with originality. Such despotic forces, always insecure, despise imagination and the dreamers are harassed for representing this threat from the gods.

That last work might never get written as oppression intervenes to crush it. It would certainly not be published in its home country. It might, however, be published here. Government ministers might attend its first performance and even offer the widow or widower of the late genius a new home in exile while propagating the memory. They would surely denounce the despot as a destroyer of liberty and as a fool to his nation’s present needs and to his own posterity. But in their own country only the ashes of the burned earlier works of the creator would remain for future generations.

The reader might understandably have mixed feelings about the validity of the link implied between the two examples of the heroic foreigner and the man (or woman) on the Clapham omnibus. The reader may consider there is no inherent conflict of values and that the two situations are so totally different in content as to make any connection specious or even absurd. The purpose was to provoke thought rather than to make a bold assertion of absolute right and wrong. In any event, given the possibly extreme negative results of failing to do anything to protect the client’s chosen beneficiaries, will-planning to help minimise the impact of long-term residential care fees is inevitably an important aspect of the adviser’s role.

The man on the Clapham omnibus

Now imagine instead the life of an ordinary person - an ordinary worker, single person, spouse or parent, in trade business or profession - it makes little difference. In any event, living much closer to the reader than any distant writer, poet or composer. Perhaps they are just around the corner or even in the reader's own circle? They have a life beginning with no small promise, marked by hard work, support for family and community. They give service in peace and war. Their generation is an inspiration to others.

In mid-life their duly elected government tells them to save money carefully and buy a house to benefit themselves and their children. This they do willingly. But in later life what amounts to political expediency changes somewhat and at the same time they fall ill and need care. The cost was met, so they thought, by the high taxes they paid throughout their life. But there has, it seems, been some mistake. Certainly some sleight of hand means they must pay again for their care. Suddenly their savings are no more. They will never mature and never come into the hands of others in the family. No weapon-laden despot is there to be blamed for this expropriation. It is simply the law. Brutal but undeniably the result of democratic process.

Even if the ordinary person never publishes anything, their will operates as the one written composition of their life that is sure to be published. That is if only as a matter of the public record. It is the final script of the last humble production. The curtain closes. There is more sadness than usual attached to the publication of a will drafted in the realistic hope of granting the lives of others significant improvement but which at time of death is practically devoid of assets to pass. It is a work that was written but might as well not have existed.

Only the bare words of the will remain to benefit future generations. Though the family is disturbed and friends are troubled, no government ministers clamour for its performance to be reinstated. They do not mourn the loss of this legacy as evidence of liberty destroyed. But it is, they assure us, good to live in liberal times in a democratic and civilised country.

The reader might understandably have mixed feelings about the validity of the link implied between the two examples of the heroic foreigner and the man (or woman) on the Clapham omnibus. The reader may consider there is no inherent conflict of values and that the two situations are so totally different in content as to make any connection specious or even absurd. The purpose was to provoke thought rather than to make a bold assertion of absolute right and wrong. In any event, given the possibly extreme negative results of failing to do anything to protect the client's chosen beneficiaries, will-planning to help minimise the impact of long-term residential care fees is inevitably an important aspect of the adviser's role.

The adviser’s role in will-planning in the context of care-fee planning

Gifts, lifetime trusts and wills are all designed to secure benefits for some and none for others. Ideally, these forms of disposal operate in the context of long-term care-fee planning to benefit the chosen beneficiaries and minimise the claims of the local authority. The local authority is the body that is responsible to assess the resident’s capital. If the NHS does not have to fully fund the resident’s care (of which more in subsequent sections) and the local authority finds relevant assessable capital for the purposes of the long-term, care-fees means-test under the National Assistance (Assessment of Resources) Regulations 1992 (as amended), then there will be care fees to pay. If there is no or limited assessable capital then the resident’s capital is protected.

The difference between the impact of the first two forms of gifting, namely gifts and lifetime trusts, and the last, namely wills, is that in the first two cases the protection against the means-test is being sought by the donor or settlor, who may become a care-home resident and thus subject to the means-test. In the last case, it involves protection from the means-test assessment of the assets paid under the will while in the hands of a beneficiary under the will who is already or who later becomes a resident and subject to the means-test. Passing money by will to such a person in such a manner as to allow its being unnecessarily swallowed up in care fees is usually considered as a significantly worse outcome than ordering it to be used as the stuffing of next years Guy Fawkes. At least the burning of the Guy on top of the festal winter bonfire, surrounded by crowds wafting sparklers and tucking into their pie and peas, will generate a certain morbid entertainment value.

A will in itself cannot protect the assets of the will-making testator or testatrix for their own purposes while they still live, be that in respect of securing them from the means-test or otherwise. Clients are sometimes, though more rarely in these more financially astute days, under the unfortunate illusion that directing an asset shall pass to a certain beneficiary upon death by will protects it from the means-test in the meantime. It does not because a will has no effect until the testator dies. It is “ambulatory”. It can be changed so long as the testator lives, as can the financial circumstances of the testator. That change can arise, among an infinite variety of other events, as a result of the means-test for care fees. It behoves upon the adviser to check that the client understands the ambulatory nature of wills.

Long-term, care-fee planning whether involving will-planning or other means, should not simply be a reaction to the spur of ill-health, the immediate prospect of mental or physical decline or entry into care. Planning ahead should:

Involve encouraging clients to commit to thinking and acting many years ahead of the arrival of care needs. It should involve the client carefully considering what they really want to achieve rather than engaging in a knee-jerk reaction or saying the “right” thing;
Involve the legal adviser from the outset with a view to making the legal options known to the client and to deal with any resulting transactions involving existing assets;
Involve financial planners to consider wider possibilities including existing assets and potentially some appropriate asset creation.

This summary states the obvious to make it clear that the will-planning process, with care-fee mitigation in mind, is generally only a part of the legal aspects of the process dealing with the transmission of existing assets to succeeding generations. It does not encompass the whole set of possibilities. In the author’s experience, many legal advisers appear to pay scant regard to care-fee planning as part of the will-making process. That is both in the context of drafting the will itself, so it achieves what it can, and also in thinking around the subject for other options to assist it in that objective. Given that legal advisers have all been expected to think around their subjects to obtain good A-Levels and Degrees, this indicates both unacceptable intellectual laziness and the pernicious impact of time-cost pressures, which can arise if a properly rounded service is not charged for according to its real value to the client.

Although some have undoubted ability, will-makers, who are primarily trained outside the legal profession, have sometimes appeared to the author to have a lower level of technical skill than their legal colleagues. This is putting it rather tactfully in certain cases but some solicitors have proved equally inept, perhaps assuming “any fool” can draw up a will. Indeed any fool can do lots of things, which have an adverse impact upon professional-indemnity premiums. But combined with an aggressive sales pitch adopted to purvey linked long-term care products as an adjunct to their will-making, the will-makers have often proven off-putting to many clients who have returned to their legal advisers. This return traffic is encouraging to solicitors. This is partly as a result of their wholesome and selfless desire to increase standards. There is rumoured to be a Law Society regulation that requires such thoughts. But it is also partly because they resent those outside the profession who are able to make lots of money out of legal-type services without their level of qualification, expertise and overheads. Such is the lot of the professional in a truly competitive environment. The author suggests it just means the legal adviser must strive to be the best source of rounded advice and assistance.

The will-makers outside the legal profession have made a perfectly valid link between legal and financial services, which many legal advisers either never make or refuse to acknowledge and act upon. From the client’s perspective, the qualified legal adviser with all their technical ability, experience and indeed insurance cover should be ideally placed to provide a more rounded service than a will-maker. But this involves advising the client that the will is not an isolated incident, that there are other things to think about, which might involve third-party financial advice and that there is also cost attached to good legal advice. It may not be met by product sales commission so far as the legal adviser is concerned, but it needs to be met nonetheless. The legal adviser should think twice about offering wills as a cut-price, second-tier, back-room service.

The impact of the client’s financial resources on the will-planning solution

As with any planning, will-planning in the context of long-term care cost mitigation involves taking different options based upon the client’s circumstances.

The relatively well-off client

The client who is likely to be able to pay all their own long-term care fees without denuding their capital, may decide to do no care-fee planning at all. They may instead concentrate upon other seemingly relevant planning such as to facilitate payment of the grandchildren’s school fees or to mitigate their potential liability to inheritance tax. Alternatively, they may just decide to sustain a high standard of living for so long as they are physically able to enjoy its benefits and perhaps pay the premiums of a care-fees plan as they go along. By this, they consider they retain maximum control of their own resources, flexibility and personal choice. They may decide that they do not even need to consider will-planning and are content to let the estate of the first to die pass outright to the survivor on the assumption that there will be “plenty to go around”.

Even in the case of the financially comfortable, relatively well-off client, it is important to assess how realistic the client’s view of their financial circumstances is with different scenarios in mind. Daniel Defoe observed through his character Robinson Crusoe that: “... I should always find, that the calamities of life were shared among the upper and lower part of mankind but that the middle station had the fewest calamities.” Despite this philosophy, Crusoe, a middling sort, wound up marooned for years on a desert island. Middle income, middle-class Britons can easily find that their cherished, comfortable, expectation of sailing off gently into a tropical third-age sunset is subject to some distinctly choppy waters after the nature of the North Sea in January. By way of example:

Mr and Mrs Wise have annual occupational and other pensions of £20,000, outgoings of just £8,000, a pot of cash of £100,000 and the family home worth £200,000. They consider they are “relatively well off”. They live in the north, as do their children, and they would be happy with a care home supplying care for £13,000 a year net of the non-means-tested attendance allowance, which they would expect to obtain as “full-payers” should one of them enter care. This would, they believe, leave the partner at home with about £7,000 a year (excluding interest on the £100,000 of say £3,000 per year), which would be, they think, “ample”. They are, in fact, more concerned to make gifts to avoid the perceived threat of inheritance tax because they have total assets of £300,000 significantly over the inheritance tax free threshold of £255,000 (tax year 2003-2004) creating a liability of £18,000 on the second death.

How well off would Mr and Mrs Wise feel if they knew that the first to die would be Mr Wise who takes £10,000 of the pension entitlement with him to the grave? What about if they could foresee the children deciding to move to an expensive area around London? The equivalent care fees in that area, where surely Mrs Wise would wish to be as well, are £40,000 per year. Annual income would be £10,000 (with a bit of attendance allowance and interest on top) and outgoings £40,000 per year. The result? As Mr Micawber might say “Misery” or at least potentially significant capital destruction. Over the course of ten years care for an ailing Mrs Wise, short of other solutions being used by way of mitigation, would render the value of the estate, which seemed to make the Wise family “relatively well off”, virtually exhausted. A “cheap and cheerful” will-planning solution might have prevented at least half of that loss. This scenario proves the point that the threat of inheritance tax often proves rather more illusory than the threat of long-term care fees. In this case, it is a contrast between the threat of a liability of £18,000 (inheritance tax) versus a liability of £300,000 less the lower capital threshold of the survivor (£12,000), which is £288,000. The threat of care fees in terms of value is sixteen times greater.

To some extent, the risk of care fees is reduced if basic inheritance-tax-planning wills are put in place even if the greater risk in absolute terms of capital destruction is that of long-term care fees. These inheritance-tax-efficient wills ensure that not all the assets of the first to die are paid outright to the survivor. To do that would waste the inheritance tax free nil-rate amount of the first to die. That allows up to £255,000 – or a reduced amount if certain gifts within seven years of death must be deducted – in the tax year 2003-4 to be given to anyone. This simple inheritance-tax planning reduces the amount accruing to the survivor’s estate. The survivor also has a £255,000 nil-rate amount. Thus, a potential inheritance tax liability on the second death can be reduced or even eliminated because use of the nil-rate amount is doubled.

By operation of the long arm of coincidence, the inheritance-tax-planning technique can also reduce the amount that might be subject to the care fees means-test. This is because the amount paid to third parties will simply not belong to the survivor. That is even if the amount given, other than to the surviving spouse, is placed in a discretionary trust with that survivor as a potential beneficiary subject to the decision of the trustees. The use of the “nil-rate-band discretionary trust” is the most flexible form of basic inheritance tax efficient giving in a will.

Clients should be clearly advised that they must have assets in their separate names to avoid them automatically accruing to the survivor irrespective of the terms of the will. This is essential for inheritance-tax-planning purposes, but it also works effectively for will-related aspects of care-fee planning.

In the case of Mr and Mrs Wise, if Mr Wise directed his £50,000 share of assets, apart from the family home, into a nil-rate-band discretionary trust that would both reduce the potential risk of care home fees exposure by £50,000 and take his wife’s estate, even including the family home, below the £255,000 threshold eliminating the potential £18,000 inheritance-tax liability.

As to inheritance-tax planning with a share of the family home, this is a complex inheritance-tax-related issue not readily or appropriately discussed in detail here. The author suggests that the reader considers professional literature on the subject of loan-based, nil-rate-band discretionary trusts. In those, the half share of the family home of the first to die passes into the nil-rate-band discretionary trust. The will trustees then grant the share to the surviving spouse for an IOU secured on the property. The end result is that the surviving spouse owes a debt to the nil-rate-band discretionary trust founded under the will of the first to die. This reduces their estate for inheritance-tax purposes while permitting rent-free residence in the family home (or its replacement) until death. Otherwise the inheritance tax rules may make effective use of the share of the family home of the first to die inheritance-tax inefficient so far as the estate of the survivor is concerned. The reader with more advanced knowledge than the stage reached in this work grants will understand that the charge taken by the trustees in a loan-based will prevents the charged share from being attacked as an assessable asset by the local authority. It should also be noted that the “share of the family home” must be a share by way of “tenancy in common”. The subject of co-owned land and/or the residence will be addressed in a subsequent sub-section.

Some clients have a significant estate in their sole name above the nil-rate amount. In such cases the nil- rate-band discretionary trust may be combined with a flexible life interest will-trust of that surplus for the surviving spouse. The protective purpose of such a trust is explained in the following sub-section dealing with the less well off client.

In summary, so far as the relatively well-off client is concerned, neither the adviser nor the client should be lulled into a sense of false of security in the context of care fees because their financial circumstances are presently comfortable. In fact, it can be argued that those who feel the most comfortable but are still at the lower end of the wealth scale have the most to lose through doing nothing. Their situation is often little different to that of the significantly less well-off client who might only own a modest family home worth say £100,000 as their primary asset for whom, even in days of property price inflation, an inheritance-tax liability seems a remote prospect short of a major lottery win. The possible cost of care fees is something that many comfortably well-off clients forget or choose to ignore. Their advisers might, therefore, consider putting some friendly advice in that overdue client newsletter or flagging it up at that equally deferred presentation to be held in the local hotel or church hall. It can be attractively combined with advice on inheritance tax. But even with all the positives for both the client and the legal adviser, will-planning is only ever a partial solution to the potential problem of care fees. That is if it turns out to be a solution at all as the facts unfold with time.

The less well-off client

The client with more limited resources might possibly have a more realistic appraisal of the actual “capacity” of their wealth. They might consider the timely lifetime gifting of assets such as, the likely main one, the family home. This might be outright or more appropriately perhaps by way of a trust through which they retain some benefit. Alternatively, or alongside this, they might feel that the death of their partner should be the appropriate trigger to secure some degree of long-term, care-fee planning. They may feel psychologically unwilling to part with significant assets to any degree before then. Will-planning is often considered in this context and is also often considered to be the least expensive and least intrusive option.

If a will is executed so that the deceased’s estate passes to the survivor then there is a substantial risk, as explained in the example above, that circumstances will conspire to ensure that inheritance is whittled away in the survivor’s care fees. The same will happen if all the assets are held in joint names and pass by way of co-ownership to the surviving co-owner irrespective of the terms of the will. Most joint assets pass in this way. The special case of co-owned land/the residence held by way of tenancy in common will be addressed in a subsequent sub-section.

If instead, a will is executed upon the terms that the assets belonging exclusively to the first to die pass to be held on a “life interest will-trust” this can be avoided. The executors, who are also the trustees, hold the deceased’s estate upon trust only to pay the income from it to the survivor or to allow the survivor to inhabit the property involved. In law, the two things practically amount to the same thing. After the death of the survivor, the trust fund (which may be simply a share in the family home) as to both capital and undistributed income (if any) will then pass to the children or grandchildren or the other beneficiaries named in remainder under the terms of the will.

The right of the beneficiary for life is different from that possessed by a mere “potential” beneficiary named in a nil-rate-band discretionary trust. It arises without the exercise of the trustees’ discretion. It is “as of right”. Because of this “interest in possession”, it is inheritance-tax inefficient. On death the capital generating the right to income/residence is treated as belonging to the beneficiary for life for inheritance-tax purposes. This is even if the trustees of the life interest will trust can pay some of the capital away from the beneficiary for life. Only so far as the income-generating capital is actually paid away from the beneficiary for life under the terms of a “flexible life interest will trust” will it cease – usually after a delay of seven years – to be subject to cumulation with their other assets to constitute their inheritance-taxable estate at death. Hence, the use of the nil-rate-band discretionary trust when inheritance tax is an issue.

Importantly, the capital value of the trust fund in the life-interest will-trust does not belong outright to the beneficiary for life. It cannot, therefore, be assessed as their capital under the local authority means-testing regulations. It is simply not “available” to them so it cannot count as assessable capital. That is even if the executors/trustees have, as they probably should, flexible powers to advance capital for their benefit to supplement income. So long as capital payments are not made to meet the proportion of the resident’s care fees the local authority has to pay there should be no impact upon their entitlement to local-authority-funded care fees or other means-tested benefits. So, if capital distributions pay for a holiday or extra comforts or similar there should be no problem. That is at least so long as such payments are not made to the resident’s own account so as to take them over the lower capital threshold for care-fees purposes (£12,000 for 2003-4).

The present value of the stream of income from a life-interest will-trust might, in theory, have an assessable capital value for the purposes of the local authority means-test. Actuaries can calculate this capital sum, which is potentially saleable. But “the value of the right to receive any income under a life interest” is specifically disregarded under Schedule 4 Paragraph 11 of the National Assistance Assessment of Resources Regulations 1992 (as amended). It is also submitted that a more flexible type of life interest will-trust, which allows the capital generating the income stream to be appointed to an alternative beneficiary, would in itself render such an income stream valueless. The value could not be calculated with certainty because it would be subject to change instituted by the executors/trustees. There would never be any willing buyer for it as their receipt of the income stream would be prone to arbitrary termination. Thus, there could never be any capital value attached to it. It would be too risky. Only as good as a bet at the races.

Payments by way of income, which can be used to settle top-up fees to facilitate choice of care home can lead to a re-assessment of local authority contributions, but usually the pluses still outweigh the minuses in such a situation. It should also be checked that the local authority has not set an arbitrary ceiling upon what it is willing to pay to meet the resident’s care needs.

Some attempt to require “top-ups” that are nothing of the sort because they are practically “mandatory” in all cases. That is unlawful. Investment strategy might if necessary reduce life interest will-trust income to a small amount. Wide powers of appointment of income and capital within a suitably worded flexible life-interest will-trust might also secure its payment elsewhere if that is of advantage to the wider family, subject to serious consideration of the survivor’s care requirements and need for choice. The local authority is unlikely to have sufficient legal standing to object to any chosen investment policy or use of powers of appointment. This is especially bearing in mind it may stand to benefit from a higher-trust income being paid to the survivor. This places it in a conflicts situation.

It is possible to use a discretionary will-trust akin to a nil-rate-band discretionary trust instead of a life-interest will-trust. However, particularly where the family home or a share in it is involved as the main asset, the life-interest version is submitted to reflect reality of the situation rather better than a discretionary trust. Furthermore, if a discretionary will-trust is used, there is the disadvantage of no capital gains tax free uplift on gain-bearing assets when the survivor dies, which is also something to point out in the case of inheritance-tax-efficient, nil-rate-band discretionary trusts. The principal-private-residence exemption to capital gains tax may come to the rescue so far as a share in the family home is concerned but not in respect of other gain-bearing discretionary will-trust assets. Following the case of Sansom V Peay [1976] 3 All ER 375 it appears that, assuming trustees have a power to permit residence, they can obtain the benefit of that valuable exemption.

In summary, so far as the less well off client is concerned, if the family home is the main family asset and the partner who is likely to die first owns it entirely, the life interest will-trust offers a simple solution. The surviving partner may go into care but the capital value in the will-trust, i.e., the value of the family home will not be assessable capital for the purposes of the local authority means-test. The knotty problem of protecting the survivor’s interests while minimising the survivor’s liability to care fees can be achieved in that situation. If it is certain that the non-owning partner will die first then the property may, after careful consideration of practical and tax-related matters, be transferred to them to achieve a similar end. If it is uncertain who will die first, as is usually the case, or the property is jointly owned, then it becomes a lottery. Indeed if there is only one property owner, the clients may decide to reduce the risk of loss by creating a co-ownership situation. That is just in case the sole owner of the property unexpectedly and inconveniently outlives the other and then needs expensive means-tested care. Co-ownership would be by way of tenancy-in-common. (Co-ownership issues will be dealt with in the next part of this work.) In the situation of co-ownership, arising from the outset or by way of conversion from ownership by one party into joint ownership, should one partner enter care while the other stays at home then the family home is entirely disregarded for means-testing purposes. This is because the residency at home of that relevant relative secures a disregard of that property under the means-testing regulations (National Assistance (Assessment of Resources) Regulations 1992 – Schedule 4. Paragraph 2). Later, if the partner who is still at home dies, their share in the family home will be preserved. It forms the capital of the life-interest will-trust arising on their death. It is not paid over outright to the survivor who is in care. The capital value of the will-trust is either not relevant to the mean-test (as it does not belong to the survivor) or is disregarded for means-testing purposes (National Assistance Assessment of Resources Regulations 1992 Schedule 4 Paragraph 11). The survivor benefits by way of income generated from the capital and may even benefit by supplementary capital distributions if the executors/trustees consider this is appropriate and they have power to make such payments under the terms of the will. The share of the family home owned by the survivor in care is exposed to care fees and that former family home will usually need to be disposed of. However, the total loss so far as the beneficiaries under their wills are concerned is much reduced.

Unfortunately if both partners enter care in their mutual lifetimes rather than dying at home then 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 that both are allowed to retain under the regulations. This is why will-planning is only, at best, a partial solution.

This section only scratches the surface of the issue of wills and care-fee planning. There can be additional complexities when the ownership of the property concerned is not as simple as it is in the most common situation involving an older married couple. In the following parts related issues are examined in detail.

David Coldrick is partner in charge of Wrigleys Solicitors Sheffield office and welcomes comments and queries. 0114 2675588. david.coldrick@wrigleys.co.uk.