Partner Caroline Casagranda, in our leading Probate, Tax &Trusts team, explains why it is important to use qualified lawyers when it comes to trusts and care fees.
For many elderly people, protecting the family home is an emotive issue. Attachment to the family home and the desire to pass it on to the next generation often seems to be far stronger than with other types of asset. This makes many people highly vulnerable to the sales pitch of cold-callers who approach them promising a product that will protect their homes against future care fees. Consumers frequently part with thousands of pounds in up-front fees to unregulated wills and trusts companies whose unqualified representatives visit them in their own homes and play on their fears that they may not have anything left to pass on to their children.
The products sold by these companies are often referred to as ‘asset protection trusts’, ‘home protection trusts’ or ‘protective property trusts’. The idea behind these trusts is that the homeowner transfers his or her home into a trust but is permitted, under the terms of the trust, to continue occupying it. However, he or she will no longer ‘own’ the property and, in theory, its value should not be available to pay care fees. However, such trusts can never be guaranteed to work and should come with a huge health warning. There are two key issues to bear in mind right from the start:
- If the property, or the owner’s interest in it, is worth more than £325,000 (the current Inheritance Tax Nil Rate Band) the excess value above that figure is immediately chargeable to inheritance tax at 20%; and
- You can’t simply give away a property to avoid the payment of care fees – this is a deliberate ‘deprivation of an asset’ allowing the local authority to challenge the trust and claim the value of the property. For the arrangement to work, you need to have some other important reason for creating the trust; unfortunately, there is rarely a good reason to give away your home!
The reason we don’t frequently hear of this type of trust failing to give the protection sought, is that in reality, relatively few of us have to move into permanent residential care. Far more people receive care in their own homes, in which case the value of the property is not taken into consideration at all in assessing the owner’s contribution to care costs. This means that these trusts are seldom put to the test.
It is also worth bearing in mind that if your care is funded by the state, you are unlikely to be offered a choice of care home. You may wish to pass your assets on to your children, but they may actually prefer these assets to be used to fund the best standard of care available to you. It is not uncommon for us to be asked by families to unravel these trust arrangements in order to free up funds to pay for care.
Companies frequently sell wills, Lasting Powers of Attorney and asset protection trusts as a package. Whilst anyone can produce wills and Lasting Powers of Attorney, the preparation of trust deeds is an activity reserved to solicitors and barristers. A reputable will writing company will out-source the preparation of trust documents to a solicitor, however, some companies flout the law in this regard. As a result, many trust deeds are poorly drafted and some have significant defects, which can be costly to put right. In the worst case scenario, there are phoney companies which take your money and never produce any documents at all. The following is a list of issues recently encountered:
- A will writing company persuaded a couple to put not only their own home into trust but also a rental property. The amount placed in trusts was above the couple’s nil rate bands and they were not informed of the immediate inheritance tax liability. By the time they sought advice, the tax was already overdue. In addition to this, they were not informed that by putting the rental property in trust for their children, they would no longer be able to receive the rental income that they relied on.
- In a similar situation to the one above, the property owner was persuaded to put a number of properties in trust; the total inheritance tax bill was subsequently calculated as in excess of £100,000!
- In neither of the above examples did the will writing company advise that there was also a potential capital gains tax charge when the rental properties were placed in trust and that their clients needed to claim a particular relief to avoid the tax becoming payable.
- Many people enter into these trusts and then forget all about them. Where a couple places their marital home in trust, it is common for the two of them to be named as trustees. If, as happened in one recent case, the husband subsequently dies and the wife loses mental capacity, the property may need to be sold. However, in order to sell, the incapable trustee will need to be removed and replaced. With this type of trust, it is necessary to obtain a court order to do this. The delay can mean the sale is lost.
- A long-standing client of the firm recently contacted us to say she was worried about a visit she had received from the representative of a will writing company. She already had a will that she was satisfied with and had made Lasting Powers of Attorney. She has no children or other financial dependants. Despite her misgivings, she was persuaded to part with a considerable sum of money. When we reviewed the trust document that had been drafted (and that she had fortunately not signed) it had such fundamental errors in it that the trust would not have been valid. We are currently trying to get our client’s money back.
If you are contacted by one of these companies, think very carefully before inviting them into your home. They are salespeople rather than qualified lawyers and they want you to buy their ‘products’. Check the company’s website (and be careful, as some of them have names which are very similar to reputable companies) and look up the company directors; you may find that they have a string of failed businesses behind them, been censored by the Financial Conduct Authority or have been investigated by Trading Standards. Some companies display an affiliation to a phoney professional body. There are two professional bodies which reputable will writers are likely to belong to: the Society of Will Writers and the Institute of Professional Will Writers. However, even the best will writing companies cannot offer the level of consumer protection provided by a firm of solicitors. Solicitors are highly regulated and are required to have professional indemnity insurance in case they get it wrong.
The law and taxation of trusts are extremely complex, as are the rules concerning the funding of care fees. Blandy & Blandy LLP has dedicated specialists in both areas. It takes years to acquire the knowledge and expertise to advise clients properly, so it makes sense to use a qualified professional rather than rely on the advice of someone who might have attended a brief training course before being sent out on the road to sell his company’s products.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
