Lifetime TrustsLifetime Trusts and Care Fees

Lifetime trusts and care fees are commonly marketed together.  These arrangements are commonly presented as a way to preserve the family home from future care costs. These arrangements can appear attractive. However, it is important to understand how they operate in practice, particularly when the local authority assesses care fee contributions.

What is a lifetime trust over the home?

Lifetime trusts over a person’s home are often marketed as “asset protection trusts”, “home protection trusts” or “family trusts”.  There are a number of different structures, but all lifetime home trusts involve the settlor transferring all or part of their interest in the property into trust.

The trust may be structured so that:

• the settlor has a right to occupy or a life interest; or
• the trust is discretionary, with the settlor included as one of a number of potential beneficiaries.

Some trusts are designed to continue after the settlor’s death on a discretionary basis, while others come to an end at that point. In all cases however the settlor will normally be continuing to live in the property rent fee.

Lifetime trusts and care fees: how local authorities assess the position

When a person requires residential care, the local authority carries out a financial assessment. This determines how much that person should contribute towards their care.

As part of that assessment, capital and income will both be considered. If capital exceeds the applicable thresholds, the individual may be required to fund their care in full or in part.

This is where the interaction between lifetime trusts and care fees becomes particularly important.

What is deprivation of assets?

If a person has reduced their assets in a way that affects their contribution towards care costs, the local authority may consider whether deprivation of assets has occurred.

This commonly includes:

• transferring property;
• making gifts; or
• placing assets into trust.

When is deprivation “deliberate”?

A person is free to deal with their assets as they wish. The issue is whether the transfer was made deliberately to reduce future care costs.

The local authority will consider:

• whether avoiding care fees was a significant motivation;
• whether care needs were reasonably foreseeable; and
• whether the person could reasonably expect to contribute to care.

The timing of the transfer may be relevant, but it is not decisive.

The “seven-year rule” misconception

A common misconception is that a transfer made more than seven years before care is needed cannot be challenged.

This is incorrect.

The seven-year rule relates to inheritance tax and does not apply to care assessments. There is no fixed time limit, which is often misunderstood when discussing lifetime trusts and care fees.

Consequences of deliberate deprivation

If deliberate deprivation is found, the local authority may treat the person as still owning the asset. This is known as notional capital.

This could mean that:

• the trust may be ignored;
• the settlor still treated as owning the trust capital; and
• the settlor may still be required to fund their care.

As a result, the intended protection may not be achieved.

Conclusion

Lifetime trusts over the home should not be viewed as a method of protecting assets from care costs.

When considering lifetime trusts and care fees, the key issue is deliberate deprivation. There is no safe time period, and the outcome will depend on the client’s intentions and circumstances at the time of the transfer.

These arrangements are often marketed on the basis that they provide absolute protection from care fees. In practice, that is rarely the case. Where the evidence suggests that avoiding care costs was a significant motivation, a local authority can still take the property into account when carrying out a financial assessment.

In a follow-up article next week, we will consider lifetime trusts and inheritance tax, including how the gift with reservation of benefit rules apply, how trusts are taxed, and the potential impact on the residence nil-rate band.

 

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