We have met a significant number of new clients recently who have come to us after previously putting in place trust planning to protect their homes against care home fees – often marketed via seminars. Consequently, clients believe that they have protected their largest asset. However, the situation is often more complicated than this, with councils having to find ever more money that they simply do not have to provide for care home fees.
This article from our partners, The Will Company, clearly and simply sets out the actual situation.
Lifetime Trusts and Care Fees
Lifetime trusts and care fees are commonly marketed together. These arrangements are frequently presented as a way to preserve the family home from future care costs.
While these arrangements can appear attractive, it is important to understand how they operate in practice—particularly when a local authority assesses care fee contributions.
What is a Lifetime Trust Over the Home?
Lifetime trusts over a person’s home are often marketed under various names, including:
• Asset protection trusts
• Home protection trusts
• Family trusts
Trust Structures
There are several different structures, but all lifetime home trusts involve the settlor transferring all or part of their interest in the property into the trust. The trust may be structured so that:
• The settlor has a right to occupy or a life interest
• The trust is discretionary, with the settlor included as one of several potential beneficiaries
Some trusts are designed to continue after the settlor’s death on a discretionary basis, while others come to an end at that point. In all cases, however, the settlor will normally continue to live in the property rent-free.
How Local Authorities Assess the Position
When a person requires residential care, the local authority carries out a Financial Assessment to determine how much that person should contribute towards their care.
• Capital and Income: Both will be considered during the assessment.
• Thresholds: If capital exceeds the applicable thresholds, the individual may be required to fund their care in full or in part.
This intersection is where the interaction between lifetime trusts and care fees becomes particularly critical.
Deprivation of Assets
If a person has reduced their assets in a way that affects their contribution towards care costs, the local authority may consider whether a deprivation of assets has occurred. This commonly includes:
• Transferring property
• Making gifts
• Placing assets into a trust
When is Deprivation Deemed “Deliberate”?
A person is entirely free to deal with their assets as they wish. The core issue is whether the transfer was made deliberately to reduce future care costs.
To determine this, the local authority will consider:
• Whether avoiding care fees was a significant motivation.
• Whether care needs were reasonably foreseeable.
• Whether the person could reasonably expect to contribute to their care.
Note on Timing: The timing of the transfer may be relevant, but it is not the decisive factor.
The “Seven-Year Rule” Misconception
A common misconception is that a transfer made more than seven years before care is needed cannot be challenged. This is incorrect.
The seven-year rule relates strictly to Inheritance Tax and does not apply to care assessments. There is no fixed time limit, which is a fact often misunderstood when discussing lifetime trusts and care fees.
Consequences of Deliberate Deprivation
If deliberate deprivation is found, the local authority may treat the person as if they still own the asset. This is known as notional capital.
Consequently:
• The trust may be ignored
• The settlor is still treated as owning the trust capital
• The settlor may still be required to fund their care
As a result, the intended asset protection may not be achieved.
Conclusion
Lifetime trusts over the home should not be viewed as a guaranteed method of protecting assets from care costs. When considering these arrangements, the key issue will always be deliberate deprivation. There is no “safe” time period; the outcome depends heavily on the client’s intentions and circumstances at the time of the transfer.
While these arrangements are often marketed as providing absolute protection, that is rarely the case in practice. Where evidence suggests that avoiding care costs was a significant motivation, a local authority can still take the property into account during a financial assessment.
