Trusts to Avoid Care Home Fees

Asset Protection Trusts

The Internet is infested with websites proclaiming guaranteed routes to excluding assets from means-testing and my opinion is that these are, at best, disingenuous. Be wary of trusts to avoid care home fees.

Why Asset Protection Trusts are not a good way to avoid care home fees.

Many of the schemes are well presented and the advice given is utterly convincing, but the reality is that many such schemes are presented by salespeople more interested in their earning potential than the welfare of their Client. Fees of several thousand pounds are not uncommon for trusts to avoid care home fees, with additional fees and commissions arising from the consequential reorganisation of savings and investments.

Asset Protection Trusts in the Media

Following a BBC documentary in 2011, there was a lot of media coverage on this topic and it prompted then Chairman of STEP Worldwide (the professional body for Lawyers, Accountants and other specialising in Private Client matters) to issue a warning to all their members.

Michael Young said:

“Against such a background I believe STEP members should proceed very carefully in any discussions with clients about how to fund or avoid care home fees. Certainly in my view, any reputable advisor should be very wary indeed of promoting any scheme aimed at avoiding liability for care home fees. Indeed, given the uncertainties about both the practical application of the current rules and what will be the shape of any reformed scheme – likely to be introduced at some point currently unknown but very probably well within the lifetime of any arrangement set up today for a client – I simply do not see how any advisor can give well-based recommendations to their clients in this area. Relying on a local authority to turn a ‘blind-eye’ to an arrangement designed to circumvent the ‘capital adequacy’ rules in relation to liability for nursing home fees seems to me to be a very poor basis on which to advise a client.

What if a client approaches their advisor about such a scheme, perhaps because they have seen publicity or heard about them from friends? This, I know, is a situation many STEP members have encountered. In such circumstances the advisor has a clear duty to the client to explain carefully and fully the potential pitfalls. Should the client wish to go ahead in any case, it would be prudent in such circumstances to ensure that the warnings given had been very carefully documented and acknowledged by the client.”

What Michael Young is saying here is that the advocates of these Trusts are relying on Local Authority apathy for them to work. In these austere times, with unprecedented pressure on public finances and the bill for Social Care rising exponentially, Local Authorities are unlikely to remain apathetic. So, you could pay several thousand pounds for one of these Trust, have a whole load of disruption to your personal financial affairs only for your heirs to find that the planning has failed because it is deemed to be deliberate deprivation.

How can they be attacked?

The purveyors of Asset Protection Trusts rely on the Council to view the Trust as a potential deliberate deprivation exercise. So, if the placing of assets into Trust took place at a point at which the Settlor (the person setting up the Trust and transferring their assets to it) was fit and well, with no foreseeable need for care, the argument is that it isn’t deliberate deprivation.

To date, this argument seems to have prevailed. However, there is a new, more aggressive approach being taken by some Local Authorities based upon Inheritance Tax (IHT) legislation. For years, we have lived with the IHT rule regarding “Gifts with Reservation of Benefit”, an example of which could well be putting your home in Trust, living for 7-years and then your Executors claiming that you didn’t own a house at the date of your death, because it had been given away years ago. In this situation HMRC invokes the rule that says, if you have been living in the house rent-free throughout the period, you really didn’t give anything away and they still charge the IHT on the current value.

With an Asset Protection Trust, if you carry on living in the property and/or having access to your savings and investments as a beneficiary of your own Trust, it begs the question, what did you actually give away? If it wasn’t a gift, the rules governing deliberate deprivation don’t come into play!

If you need to go into a home, which one would you prefer?

One of the points the salespeople overlook when recommending Asset Protection Trusts is, do you really want to go into the Care/Nursing Home the Local Authority is prepared to pay for? My Clients certainly don’t!

Will the Council pay for your care?

In Eligible Care Needs I explain that Local Authorities are being very canny in the way they interpret the Care Act and, if they don’t believe that you have Eligible Care Needs, they won’t pay for your care in any event. Consequently, any attempt to shelter assets becomes futile.

Do you approve of aggressive tax avoidance?

In recent years, it has become socially unacceptable to indulge in aggressive tax avoidance. Even schemes that are deemed acceptable by HMRC are frowned upon by the Media and Public alike. Claiming a benefit – having your care paid for by the Council, for example – to which you wouldn’t be entitled if you hadn’t sheltered your assets, is the obverse of the tax avoidance coin. If you indulge in tax avoidance, it’s heads the Treasury loses through a reduction in tax revenue. If you indulge in a bit of benefit manipulation, it’s tails the Treasury loses through having to make a payment they otherwise wouldn’t have to.

I know it seems unfair that those who have worked and saved have to pay for their care and those who haven’t saved get their care paid for. However, Parliament has laid out the rules for all to observe, because, if all care was free, those of us still working would be facing income tax rates of 83%, i.e., back to the days before Maggie Thatcher’s reforms!

I am a registered Trust Estate Practitioner, so talk to me today before you enter into a Trust arrangement you may later regret.

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    About Clive Barwell

    Clive Barwell is one of the most experienced and qualified financial planners working in the later life market today, he specialises in advice and guidance for the over 55s. To ask Clive a question, please email him at Alternatively, you can follow Clive on Twitter, connect with Clive on LinkedIn or see Clive's profile on Google+.