Planning for and paying for Care”

The following information is also available
as a leaflet that can be downloaded.

Click to download our Planning and paying for care PDF

When someone first starts contemplating that they may need Care in the future their first concern is to protect their estates for their children. While this is perfectly understandable, it is not necessarily the best course of action to take. You may want to reduce your capital down to the level at which the Local Authority will contribute towards your Care. This does not mean however that the Local Authority will pay all of your Care fees. Currently the Local Authority does not have sufficient funding to be able to fund Care at the level it actually costs in the private sector. This means that there could be a shortfall and that shortfall needs to be paid from somewhere, usually by your family. If no-one is willing to pay this shortfall you will be limited to the cheaper end of the range of Care providers.

So while it is understandable to want to protect your estate it could prove to be detrimental to your quality of life.

So how do you ensure you have your choice of Care providers whilst protecting your estate?

Wills

Usually when one spouse of a couple dies they give their entire estate to the surviving spouse, if that surviving spouse is in Care the entire estate of the couple could potentially be used to pay the Care fees. However, it is possible to protect the estate of the first spouse to die from the Care fees of the surviving spouse. The way that we do this is to separate the two estates and not give the estate of the first to die to the surviving spouse.

Option One: - Estate of the first spouse to die could be given directly to the children. However this is only really practical if the couple’s estate is large enough to ensure that the surviving spouse has sufficient funds in his or her half of the estate to maintain him or herself.

Option Two:- A Life Interest Trust – Under this trust the surviving spouse is not entitled to the capital sum held by that trust but, during their lifetime they are entitled to all the income arising. This means that the income can be used to pay towards the Care fees but the capital is protected for the children. This type of trust is also Inheritance Tax effective allowing the Nil Rate Band Allowance of the first spouse to die to be used in the estate of the surviving spouse when they subsequently die – i.e. 200% of the Nil Rate Band allowance at the death of the surviving spouse.

Option Three- A Nil Rate Band Trust Discretionary Trust - With a Life Interest Trust, your spouse is absolutely entitled to any and all income arising from the trust funds, which the Local Authority can then include in any means assessment. With a Discretionary Trust a beneficiary is not absolutely entitled to any benefit. They only benefit at the discretion of the Trustees. This removes any distributions from the Trust from any means assessment, as they are discretionary in nature. It is recommended that you only place as much as can be given before Inheritance Tax becomes payable into this Trust as this Trust is not effective Inheritance Tax planning if you are married or in a civil partnership.

Investment Option.

Usually your income will be used to pay towards your Care fees and then your capital used to make up the balance. What are the alternatives:

1. Long Term Care Insurance
2. An Immediate Care Plan
3. A Deferred Care Plan

Long Term Care Insurance ~ The risk with these plans is that you may never actually need Care. In addition when taking out the plan you will not know when or how much you will actually need it to pay.

Immediate Care Plan ~ What these Care Plans do is ensure that on payment of a one off premium the shortfall between income and the cost of Care is provided by the plan each year for the rest of your life. In order to ensure that this shortfall goes up with increases in fees an inflation factor can be included.

Deferred Care Plans ~ The premiums for Deferred Care Plans are cheaper because instead of the agreed annual sum being paid straight away, it is deferred for a number of years, which of course increases the chance that you will die before the provider has to pay anything out which reduced the risk to them.

The advantages of these plans are:

1. Care Fees will be paid for rest of your life and there is no worry that capital will run out.
2. It has limited the cost of the Care to a maximum of the one off premium.
3. Protects that the balance of capital for children.
4. There is complete control over Care costs.
5. Greater freedom in selection of Care homes and independence from Local Authority involvement
6. It is Tax Free for life
7. Protects Age Allowance

The risk that you and the plan providers take is how long you will live after you have taken out the plan. The plan providers will work out your life expectancy based on your age, sex and various other factors. The premium they charge will reflect their calculation of the average life expectancy of people your age etc. Then if you die earlier than the calculated life expectancy you will lose the overpaid premium but if you live longer than the calculated life expectancy, the plan providers lose, as they still have to pay out the agreed sum each year.

Lifetime Giving

If you make lifetime gifts of your assets you will reduce the amount that is available to pay for your Care Home fees. This has the advantage of protecting your assets for the next generation but is not necessarily the best solution.

For example a question commonly asked is “Should I give my house to the children to protect my estate from Care Home fees?” The answer to this is no is many cases.

There are inherent problems with giving your home to someone else, for example they may become bankrupt or get divorced, or die before you. In which case your home may need to be sold to pay off creditors, spouses or beneficiaries.

The alternative to make an outright lifetime gift to your children is to make a gift into a Self-Settled Life Interest Trust. You would give your house to a Life Interest Trust where you are the beneficiary entitled to benefit for life (known as the Life Tenant). During your lifetime you are entitled to receive any income arising on trust funds but you are not automatically entitled to any capital If the property is sold a new one can be purchased under the trust or the funds can be invested and the income paid to you. However the capital is protected and will eventually pass to the other beneficiaries on your death.

Warning

If you make a gift purely with the intention of reducing your estate to avoid paying Care fees then you may fall foul of the Deliberate Deprivation of Assets Rules, which means that the Local Authority can ignore or overturn a gift. They can look through your finances as far back as they wish. There is no limit set.