As an estate planning practice, the subject of what happens - or more accurately, who pays - should our clients move into long-term care is being raised more frequently than ever.
The issue is particularly relevant to those who are homeowners, specifically to those who still own their properties as joint tenants. Most people will have bought their properties as joint tenants, and there is nothing wrong with this, it's the way most people still buy their properties even today. It simply means that both parties on the mortgage own the property 100% simultaneously, so that if one party dies, the survivor owns the property outright. Mortgage lenders much prefer this option, as it allows them more opportunity to recover losses should the mortgage fall into default.
Scenario 1: Percy & Phyllis own their property as joint tenants. When Percy goes into long-term care, the Care Act 2014 states that while Phyllis remains in the home, the value of their home must be disregarded for care costs; that is to say that the value of their home cannot be included when they are being means tested. Some Local Authorities will at this point try and negotiate a deferred payment agreement (DPA) with the remaining homeowner (and/or their family), which will effectively allow the local authority to place a charge against the deeds of the property, allowing Percy's care costs to be claimed back when the property is later sold. Percy and Phyllis are entitled to refuse this by law.
However, if Phyllis dies while Percy is still in long-term care, the house becomes empty and it's whole value can be used against Percy's care costs. The same is true should Phyllis go into long term care herself. When the house becomes unoccupied, the whole value of their home can be used when calculating both Percy & Phyllis' ability to pay for care, resulting in a potential total loss of all equity in the home.
Scenario 2: Percy and Phyllis own their property as tenants in common. This means that they have undergone a process known as 'splitting their tenancy'. So instead of them owning the property 100% simultaneously; they now own a distinct 50% each. When Percy goes into long-term care, Phyllis remains in the family home and therefore their home still cannot be taken into account when they are means-tested. As in Scenario 1, the local authority could try to impose a deferred payments agreement (DPA), the difference being that in this case the DPA could only be charged against the value of Percy's half of the house, as they are tenants in common. Again, Percy and Phyllis have the legal right to refuse acceptance of a DPA. When Phyllis later dies, she gifts her half of their home to their children in her Will. This means that the local authority can only take into account Percy's half of the property for his care costs.
However, should Phyllis later follow Percy in to long-term care, both of their respective halves of the house can be taken in to consideration when they are means tested, as their home would be unoccupied.
Lifetime property Trusts and care fees: As outlined above, changing the ownership of a home can help to protect up to half the value of the property. However, where ownership of the property is changed to that of a trust, the family home can be totally disregarded from consideration for care purposes. This option is only effective if the trust was established for purposes other than for the owners to deliberately deprive themselves of the asset in order to later avoid paying for care fees. Often, lifetime trusts are established because there is a risk or threat to a beneficiary or their inheritance.
Ethel's story: One of our clients, we'll call her Ethel for these purposes, had a relatively meagre estate of around £12,000 cash and her terraced home of 50 years, which was worth around £80,000. Ethel had two daughters; the elder of the two daughters had been diagnosed with mixed dementia and despite the fact that it was indeed a fairly recent diagnosis, she was already showing signs of illness, which meant she was not in a position to inherit any of Ethel's estate. The younger of Ethel's daughters had a serious long standing addiction to alcohol, and some history of mild drug use, which also rendered her not a worthy candidate to inherit Ethel's estate.
It was Ethel's wish that her home was to be gifted to her three grandchildren upon her death, with any money she may have to be given to her youngest daughter. Upon closer examination, these simple wishes could have had disastrous consequences. For example, if Ethel had sold the property and moved into an assisted-living apartment, her entire estate would have been cash, which would have been gifted to her alcoholic younger daughter, and this gift of a large sum of money likely would have killed her; whilst also resulting in nothing going to her three grandchildren. Other factors for consideration were the fact that Ethel's youngest daughter's partner was seen to be a controlling and somewhat negative influence, who would have taken pleasure in squandering any inheritance, again resulting in nothing, or little, going to her grandchildren. Ethel also wanted to ensure that those of her grandchildren who are married had their shares of the inheritance protected should they ever have divorced in the future.
The solution was to put Ethel's property in to a lifetime trust. This meant that Ethel and her grandchildren became the legal owners of her house as trustees. Ethel's house is now protected should she go in to long-term care because she hasn't set the trust up to deliberately deprive herself of the asset, she has set the trust up to ensure that her legacy can be distributed to her chosen beneficiaries, and is protected against a range of threats such as the addictive habits and lifestyle of her beneficiaries, divorce, or even bankruptcy. If she now sells the property, the trustees can open a trustees bank account and deposit the cash, which provides the same protection as if it were still bricks & mortar.
Conclusion: There are differing opinions as to whether a family home should be taken into consideration for payment of care fees. Some believe if you've got an asset it should absolutely be considered; others believe that it should be protected and passed on as their legacy, come what may; and there really is not any clear answer as to which opinion is correct. What is clear though, are the rules around payment of care fees, when property can and cannot be considered towards payment, and what constitutes deliberate deprivation of assets. The key to navigating all of this, is to begin your planning in plenty of time, whether you feel "ready" or not, at least start to have discussions with your family or other beneficiaries, read articles, and ask for advice pertaining to your individual circumstances from a trusted source.
As members of the Society of Will Writers, Elliott-George Estate Planning are governed by the Society's Code of Conduct, and can advise on all aspects of later-life planning. For a free copy of the Code of Conduct, or for any help or advice on this, or other matters relating to later life planning, please email email@example.com, or call the team on 01925 321 231.