How this retired couple mitigated against potential care home fees and ensured that most of their main asset would be inherited by their children.
Steve and Mary are a retired married couple in their seventies, with three adult children. Their main asset is their home, valued at approximately £450,000, there is no mortgage.
The house is in their joint names. They wished to make simple Mirror Wills leaving everything to each other on the first death, and to the children on the second. That way, they reasoned, whoever died first would leave the property to the survivor, the home would be secured, as would their children’s inheritance. However, they also wished to sign their property over to their children believing that this would safeguard them against an Inheritance Tax liability and also potential care home fees.
Should Steve & Mary sign their house over to their children?
Having heard a great deal of debate about the rising cost of care home fees, and seen the devastation caused to the finances of friends, Steve and Mary had started to feel concerned about the future. What if either of them needed to go into a home in their old age? Would the council be entitled to use the value of their home to pay for care? How would this effect their children’s inheritance? They were conscious of the fact that they had worked and saved for decades, and there was a possibility that everything they had built up in savings and in the value of their home was at risk.
One of Steve’s friends shared an idea with him. Why not sign the house over to the children and wait seven years? If the house was in the children’s names, the council, surely, wouldn’t be able to use it to pay for care if the “seven-year-rule” had kicked in. That was the Steve and Mary’s plan. Simple Mirror Wills and signing their home over to the children.
The advice here is very clear: don’t put the house in the children’s names! Doing so would be a ‘Deliberate Deprivation of Funds’, and the council could still use the value of the house to pay for care, no matter whose name was on the deeds.
There is no seven-year gift rule for care costs. It’s a very common misunderstanding. There is a seven-year ‘gifting’ rule, but it only applies to Inheritance Tax, and has nothing to do with the cost of care. The cost of care is bound by a set of completely different rules and regulations. It should also be kept in mind that if you sign the house over to your children, but continue to live in the property, then the, seven year rule, clock (for Inheritance Tax) would not start to tick until you move out of the property; or until after you have signed a new tenancy agreement formerly recognising the new arrangement and then taken steps to commence payment of rent at market rate to the new landlord(s), your children! Signing your property over to children, or anyone else, but continuing to live in that property is known as ‘A Gift with Reservation of Benefit’, and it simply does not work as a shield against either Inheritance tax or care home fees. Some of the other risks involved in signing over property to your children include losing out on the Residence Nil Rate Band (an additional allowance, against Inheritance Tax, of up to £175,000 per person, owning property, and leaving to a direct descendant). Another risk is that you may become homeless, as your children may decide to sell the property. Or your children may remortgage and then default on the re-payment. Or your child / children become entangled in divorce proceedings and the value of the share of the property belonging to them is added as assets for a final divorce settlement. Or your child/ children become subject to a County Court Judgement or bankruptcy proceedings thereby putting the property at risk of repossession. As you will see, this is something of a minefield with plenty of negative potential and none of the positive outcomes that you may have imagined.
Are Simple Mirror Wills enough?
Once Steve and Mary knew where they stood legally, they could start making decisions that suited their circumstances.
For as long as they were both alive and living together, they would, like most older couples, probably manage to support each other at home, perhaps with some assistance. The crisis in availability of care home places has led many local authorities to be stricter in assessing care needs and the squeeze on local government spending as added to the pressure on local councils to pass on as much expenditure as they are legally entitled to do. The average cost of residential / nursing care in this area is now rising over the £4,000 to £5,000 a month mark.
So, the sensible thing for Steve and Mary to do would be to make plans on the assumption that residential care, placing their savings and the value of their home house at risk, could become an issue if one of them were widowed.
This brings us to a point where Simple Mirror Wills are totally inadequate. If one of Steve or Mary died, the other would be the sole owner of the house. So, if either of them went into care after the other had died, the council could use their savings and almost the entire value of the house to pay for care.
What did they do instead?
By putting their house in both their names, as ‘tenants in common’, and making carefully structured Wills, incorporating Property Interest Trusts, they shielded at least half the value of the house from potential care home fees.
In their new Wills, they each left their half of the house in Trust to their children. They both also included a “right of occupation” for each other within their Wills, so that the children couldn’t sell the house until after they had both passed away.
If one Steve or Mary dies, half of the house immediately goes into Trust to the children, but the survivor of Steve and Mary has the right to continue to live in the property or any replacement property. If the survivor of Steve and Mary decide to downsize, the Trust allowing them the right of occupation would move with them into the new property. Monies freed up by the downsizing could be divided between the survivor and the children.
If the survivor later needs to go into council-funded care, the council could only use the value of the remaining half of the house to pay for that care. The value of the half share of the property belonging to the first to die is ringfenced, safeguarded against care home fees.
These types of Trusts incorporated into a Will are also very useful to ‘blended families. For example, if Steve had children from a previous relationship, he could ensure that all or part of his share of the property will definitely pass to those children, should he die before Mary. Given that, Mary would have the right to occupy Steve’s children would receive their inheritance upon the second death. Of course, this would work in reverse should Mary have children from a previous relationship.
With their former Simple Mirror Wills, the council could use the whole value of the house, less a modest “protected amount” of around £24,000 to pay for care, the council would, in an extreme example, be entitled to divert savings and up to £426,000 away from the children’s inheritance.
Leaving half the house in Trust to the children on the first death immediately keeps £225,000 out of the council’s reach. Once the “protected amount” of £24,000 is factored, the council’s entitlement, in this example, is further reduced to £201,000.
So, by making informed, rational decisions, Steve and Mary have protected up to £249,000 of their children’s inheritance.
In the ‘blended families’ example if Steve dies first, leaving children by a previous relationship, then his simple Will would pass his entire estate to Mary and on Mary’s death it would pass by her Will to her and Steve’s own children. However, unless Mary makes provision for them in a new Will, Steve’s children by the previous relationship would be completely disinherited.
A spouse that is awarded spousal maintenance after divorce may need some time to establish a new household and find an appropriate job. Some spouses, although they have the skills to obtain a job, prefer staying at home. Note that the party that pays spousal maintenance can’t insist their ex-spouse finds employment just to help them stop paying maintenance, but the Court will expect that they will work if they are able and the “paying party” is unlikely to be forced to make payments to former spouse who chooses not to work.
The non-working ex-spouse should find a work of suitable nature that can potentially earn them enough money to live on their own. High-skilled workers who haven’t been working for years or decades may have difficulties finding a job. And, even if they do find a job (low-paying), they will still receive maintenance.
What else did they do?
Steve and Mary wanted to give themselves the best chance to remaining independent and living at home for as long as possible. So, as well as planning their legacy properly, they decided to give their children the power to speak up for them and support them adequately should ill-health rob them of mental capacity in their old age.
They made Lasting Powers of Attorney for Property & Financial Affairs, so their children could take care of practical, day-to-day issues for them if necessary. They also made Lasting Powers of Attorney for Health & Welfare, so their children could ensure their wishes, about the most important issues in life, such as where they would live and how they would be cared for, would be respected.
How much does this cost?
Our Fees for Mirror Wills incorporating Property Interest Trusts are £580 plus VAT for the two Wills incorporating the Trusts.
If you own your property as ‘Joint tenants’, we will have to sever that joint tenancy to ensure that you own the property as ‘Tenants in Common’. The Trusts simply do not work if the property is held in a ‘sole’ name or in ‘joint’ names, the property must be held as ‘tenants in common’.
We can arrange this severance and lodge it at the Land Registry our fee for that service is £250 plus VAT.
If the property is solely owned it would have to be transferred into both names and held as ‘tenants in common’, our conveyancing department could advise and assist with this process.
Our fee for a couple arranging both types of Lasting Power of Attorney (Property and Financial Affairs and Health and Welfare) is £1,100 Plus VAT. There is also a registration fee, payable to the Office of the Public Guardian, of £82 per a document.
Other fees for single Lasting Powers of Attorney or ‘Deputyships’ are available on request. A ‘Deputyship’ would have to be obtained, through the Court of Protection, and it must include medical evidence, by an attorney, or attorneys, if the ‘donor’ is medically certified to have lost the capacity to make such a decision to appoint their own attorneys.
For probate matters, please Contact Us in order to discuss how we can help you.