FAMILY ASSET PROTECTION TRUST (what is a Trust?)
A - The Five Problems
As clients get older they face five problems:
- Probate Costs
Probate costs are often much higher than people expect. With fees from some solicitors often in ten’s of thousands of pounds, with a modest estate of £350,000 at a 3% charge the fees would be £10,500. Not only that there is the inconvenience and normally substantial delay in administering someone’s estate especially on the second death. However if clients whether single or a couple put the bulk of their assets into a Family Asset Protection Trust then there will be no Probate procedure to be carried out on either death.
- Sideways Disinheritance
This is something which clients do not normally foresee but can be a problem. Say the husband dies first and leaves everything to the wife. The wife then remarries and dies before the second husband. Her estate transfers to the second husband. He means to make a Will to put things right but does not get round to it and accordingly on his death the whole estate devolves to his children and the children of the original couple are disinherited. Having your assets in a Trust set up during your lifetime will avoid that.
- Unreliable Children
Unfortunately there are many clients who have children with problems whether they be drug, alcohol or gambling problems or indeed children with shaky marriages. When the parent dies it is therefore not advisable that a large proportion of the estate devolves to such children but of course that is what usually happens. However if the assets are in a Trust this can be avoided so that the assets can remain in the Trust for the benefit of the children without being available to them unless the trustees decide at some time in the future that that is what the parents would have wanted. For example the son with shaky marriage gets divorced.
- Incapacity
If the client has substantial estate including the house and becomes incapacitated then that is a real problem and for that reason clients are always advised to set up a Lasting Power of Attorney (LPA). However this can be expensive especially if a couple need two LPAs. If the client has the bulk of their estate in a Trust then if they become incapacitated the Trustees will take their place and continue to control the Trust assets. Accordingly there is no need for an LPA.
B - Care Costs
- The Size of the Problem
One in three women and one in four men will eventually go into care. If you require care then the local authority can take all of your assets to pay for the care. They make you pay at the full rate until your capital runs down to £23,000 and then at a reduced rate until your capital runs down to £14,000. Accordingly only the last £14,000 of your capital is protected. Whereas Inheritance Tax is 40% above the £325,000 threshold, care cost tax can be 100% above the £14,000 threshold. Technically the local authority cannot make you sell your house but if you do not sell voluntarily they simply put an Order on the property which means when you die or when it is sold whichever comes first the care costs have to be repaid.
- The Options
First They can simply bury their head in the sand and hope that they never go into care.
Second They could transfer their assets to family which is ill advised as they immediately lose control and to take the risk of the family member becoming divorced or bankrupt or falling out with them or (as sometimes happens) predeceasing the parent. In any event unless the family member also lives in the property then the Principal Private Residence Relief for Capital Gains Tax will be lost and the family member will have to pay Capital Gains Tax when the property is eventually sold.
Third The client could wait and when care was needed purchase an Immediate Care Cost Plan and some people do but again this is very expensive.
Fourth The client could set up a Family Asset Protection Trust and transfer the bulk of the assets into the Trust.
- Basic Rule 1
The first basic rule is that if the care assessment carried out by the medical people finds that someone needs long term nursing care then the local authority must provide that care if the client is not in a position to do so and there is no-one else who is willing and able to do so. This means that the family can if they wish arrange their own care and pay for it themselves but if they do not wish to do so then the local authority must provide the care. It is a statutory obligation, which they must meet, and there are no conditions attached to it. Local authorities are not allowed to refuse to arrange the care because they do not have the funds in the budget and they are not allowed to put clients on a waiting list for that purpose.
- Basic Rule 2
The very important House of Lords decision in Robertson v. Fife Council decided in 2002 that if someone needs long term nursing care the Council are not allowed to take assets into account when deciding whether to provide that care. They are of course allowed to take assets into account including deciding whether you have deprived yourself of assets deliberately in order to avoid paying for long term care but that decision is only relevant in deciding whether they have the right to recover the costs from the client or from the recipient of the funds. They are not allowed to take considerations of capital or alienation or notional capital into account in deciding whether to provide the care in the first place. Accordingly that case decided that if someone needs long term nursing care and they satisfy Basic Rule 1 then the Council must arrange the care no matter what the client has done with their assets and thereafter the Council may or may not have the right to try to recover the costs.
- Basic Rule 3
Central Government has issued a guide called the Charging for Residential Accommodation Guide “CRAG” which is the bible used by all Social Work Departments for all Councils in the UK and is known as the CRAG Rules. This states that it would be unreasonable to decide that deliberate deprivation had taken place if the disposal took place when the claimant was fit and healthy and he could not have foreseen the need to move into residential accommodation. There are really two parts to the Test, firstly the timing is important and obviously the longer the gap between putting the assets into the Trust and the client going into care the better. The other Test which is probably more important is the Foresee-ability Test i.e. at the time of the transfer did the client foresee the need for a move into care. In deciding this, the local authorities appear to work on the basis of when a Social Worker was appointed to the case. In other words if you transfer your assets to a Trust before a Social Worker becomes involved then the need for care is not foreseeable but if you transfer it after a Social Worker becomes involved then the care was foreseeable. Accordingly for most clients there should not be a problem as they will be setting up a Trust when they are still reasonably fit and healthy and when there is no Social Worker involved. If that is the case then the local authority should not take the view that they made the transfer to avoid care costs and accordingly they should not form the view that that transfer was deliberate deprivation. Accordingly they should not bring in the notional capital rules. That means that the client’s position is in exactly the same position as clients who had set up Nil Rate Band Wills for IHT purposes. In Nil Rate Band Wills we set up a Trust on the first death and transfer the first spouses assets into the Trust so that when the survivor died there would be no liability to pay IHT. In other words we had used the Discretionary Trust arrangements to cancel the liability for IHT, which had been there at the beginning. If the client satisfies the CRAG Test then they are in exactly the same position in that they have used the Discretionary Trust arrangement to put them in the position where at the point of need they have no obligation to pay. That is quite different from having an obligation to pay, which you then do not pay.
- Basic Rule 4 – The 6 Month Rule
Under the Health & Social Securities and Social Security Adjudication Act of 1983 (known HASSASSA) if an asset is put into a Trust and even if the client has failed the CRAG Test, all is not lost. The local authority can only recover the asset from the trustees if the client takes up residence in the care home within 6 months of the transfer to the Trust.
There are many misconceptions about the timing involved in this rule. Some people mix it up with the 7-year IHT term. Some people mix it up with the period, which the local authority could go back to see what you did with your assets. In law the local authority can go back as far as they like to ascertain what you did with your assets. However, as far as being able to recover the costs of care from the trustees then the period is 6 months. The 6-month period starts not when the Trust is set up but when the assets are put into the Trust and the 6 months ends when the client moves into the care home.
Accordingly the 6-month rule is quite simple. If the client goes into care within 6 months of the transfer to the Trust then the Trust will fail and the trustees must pay the care costs from the Trust assets. In that case no harm is done except that the Trust did not work for care costs but would still be worthwhile for Probate costs. If the client on the other hand moves into care more than 6 months after the transfer even by one day, then the local authority that are providing the care must continue to provide the care, but they cannot recover the cost from the trustees. In that case they can only look to the client as an individual to pay the costs but if the client does not have the assets then there is nothing the Council can do and they simply write off the debt.
However everything in the client’s name including Capital Investment Bonds can be taken. We should of course be marketing FAPTs to clients at a time when they are reasonably fit and healthy and when there is no Social Worker involved as we much prefer our clients to satisfy the CRAG Test when they then have no liability to pay than to rely on the 6 month rule where they will have a liability to pay but can avoid payment.
Treat the 6 Month Rule with care. Firstly if the Government changes any rule, it is likely to extend the 6-month period. Secondly, the Council might just refuse to pay and the client would need to threaten or even take Court Action. Thirdly, the Council could attempt to make the client bankrupt and recover the costs under The Insolvency Act of 1986 but very few have tried.
- How It Works
The client should consider the Trust as a safety deposit box into which they put their house and other assets. They have the key but the local authority does not. The idea of the Trust is to keep the assets away from the local authority and for other purposes like Probate cost avoidance but not to keep the assets away from the client. There are normally three trustees who are normally the settlor, one professional e.g. solicitor who takes charge of the Trust a Family Member. However the client who is the Settlor of the Trust, directs the trustees in all their actions. The Settlor has the power to sack the trustees if they do not do what they are told and the Settlor can add beneficiaries into the Trust and delete beneficiaries from the Trust.
The Settlor will continue to occupy the property and if the Settlor wishes to move house then there is no problem as he simply arranges to move in the ordinary way except that the trustees sell the present house and the new house is purchased in the name of the trustees. Additionally the Principal Private Residence CGT exemption continues to apply. The trustees will take care of the administration of the estate and if there is a dispute with the local authority at the end of the day then the solicitor a trustee can assist with that.
C - Why Use a Family Asset Protection Trust
From the clients’ point of view these are an excellent product for avoiding Probate costs, avoiding the risk of Sideways Disinheritance, avoiding any problems with Unreliable Children, avoiding problems of incapacity if there is no LPA in place and if the client has care cost concerns also avoiding those.
More importantly, of all the clients who put their house into a Trust, it is likely that around one in three of them will go into care. At that point the house can and should be sold by the trustees. The sale price of course stays within the trust fund and should not be paid out until the client dies in case the funds are required for care costs at some time in the future. Accordingly the sale proceeds (say an average of £150,000) require to be invested and that business is referred back to the introducer/financial adviser.
D - Property Subject to Mortgage
If a client wishes to put a property into a Trust while it is subject to a mortgage the FAPT is not available as the consent of the lender would be required and they are generally reluctant to enter into any agreement with trustees. However if the mortgage is for a small sum like £100 or less then we would generally advise that this is paid in full and the mortgage cancelled before proceeding.
E - Morality
Parliament has set up a framework for care costs. They have provided that the Local Authority must arrange the care in the first place if required. They have arranged that transfers within 6 months be effectively barred. Accordingly they have arranged that transfers more than 6 months old be allowed. Our clients simply operate within this framework. If it is regarded as a loophole then it must be in order for clients to use that loophole. Clients have always had the right to transfer property away if they want to, provided they do not leave it till the last minute. A Family Protection Trust simply uses that right and ensures that it is not lost. This is exactly the same as a Nil Rate Band Will where every couple has two Nil Rate Bands but if they did not put one Nil Rate Band allowance into a Trust on the first death it was lost. Accordingly Parliament has given people the right to transfer their assets away provided it is out with the 6 month period and the Family Protection Trust, just like the Nil Rate Band Will, uses a Discretionary Trust to ensure that that right is not lost
