Twice over the Christmas break I have found myself discussing how an Asset Protection Trust works and what one can be used for...
Both conversations were as a result of me being out and about getting ready for Christmas with my partner Tahnee. She had been speaking to her Mum about her Will and making sure it was set to pass to her, Ross, her brother and also her sister, Emma.
Then, in the car coming back from the Trafford Centre, Tahnee's old friend Sally from Airtours (they were hosties together) called about the same thing. Weird.
Tahnee's Mum Hilary is 67 and in good health. I call her Quentin. As in Tarentino. This is because she tells around 4 or 5 stories all in one go, all at the same time, none of which make any sense until around half way through, and you have to work out what parts match up to others. Think Pulp Fiction.
I don’t know Sally that well, but we did speak for around 30 minutes on the phone, and I think she now has a good grasp of the potential issues I shared, and the overall situation around protecting an estate. APT's were at the centre of both conversations.
Let’s start with a few potential problems and consider for a minute how things could work out.
If Hilary, for example, owned a Cottage in Parkgate, and a few personal items, that were collectively worth around £250,000 on a good day say, it might be considered normal for her to want to pass this to her three Children as a legacy when she dies. After all why wouldn’t she? Hil has worked hard all her life to pay off the mortgage on the Cottage and this is the norm isn't it. So she makes a Will to bequeath her home and possessions when she passes. At the moment Hil’s Will is standard. So she owns the house until she dies and then it’s inherited by Tahnee, Ross and Emma.
Problem? Perhaps. It depends. Standard Will's are OK if all goes to plan. But does it always go to plan? Mmm. It doesn’t does it. There is always something isn’t there.
What if Tahnee marries the wrong person - likely to be me when we eventually get around to it, and I end up with half of her share?
Or what if Ross starts a business that fails and he ends up with creditors on his back issuing insolvency proceedings, or he experiences personal financial difficulties that result in an IVA or Bankruptcy? Well this would undoubtedly result in him losing what he inherits.
Or what if Emma becomes overly involved with alcohol or drugs / substances? Again. Only joking Emma. A third of a £250,000 estate won’t last that long will it. It will have certainly dwindled away by the time her own Children are at the age when they need a bit of financial assistance.
And here’s a topical one - what if Hil needs care in say 10 or 15 years time? As we continue to benefit from advances in medical science and grow older as a nation, the need for us all to cover the cost of our long term care increases every year. The data show that 1 in every 4 people over 65 will go into care at some stage. In 2009 and 2010 over 21000 pensioners homes were sold to pay for care fees. That was around 60 every day! Or to make it real it's like 60 Tahnee, Ross and Emma's all missing out on their parents legacy every day. This figure has increased dramatically over the last 10 years.
If there isn't a medical need in the background that requires nursing care Hil will pay her own way. Yes that’s right. If you think the Local Authority are going to pick up the bill - just because she is 80 and unsteady on her feet, think again. Never in a million years. The LA will means test her and the person performing the test will be really pleased when Hil ticks the box that asks "Do you own your own home?" and she places her tick against the yes box.
Any assets including property that Hil owns will be used to pay 100% towards the cost of her care in old age right down to £23250! And even then the LA will take it down to £14250 on a tapered basis. Average care costs currently vary between £400-£900 per week. Annually that is £20,800 - £46,800. So that £250000 is not lasting long is it. You can listen to my debate with Adrian Goldberg on BBC Radio on this exact topic – it’s on the BBC podcast website from Feb 2012.
Let’s move on. What if Hil starts seeing somebody or remarries? Oh dear. Hil is currently single but for how long? If she started a new relationship and this ended in marriage then her house would be owned, technically jointly, by her and her new Husband - even if the title remains in her name. Married assets are joint. So technically this could mean that Tahnee, Ross and Emma might end up with zero! Ouch. It's called second marriage syndrome. If you read my other posts below you will see a sad example of this happening to a lady called Georgie who is a friend of ours. If Hil died, her house would simply be retained by her new husband. What about when he dies? Who will he pass it onto? You see where this is going don't you.
You also hear stories about men befriending women in their later years and taking advantage don't you. I'm not suggesting Hil would fall for this, but it does happen. Before you know it there is a second charge on the house, or as an unemcumbered asset it's being used as security to finance something else - a car, a boat or even another house for this newcomer and his new love! One must tread very carefully your worship.
Aarrhh! It's a nightmare from any angle isn't it!
So what's to be done?
In step left an Asset Protection Trust, or APT for short.
An APT is an Interest in Possession Trust. If Hil sets up an APT she (as the Settlor), retains an interest in the Trust assets but this is flexible so that she can, in the future, decide to transfer this interest to someone else. For example the beneficiaries of the Trust. i.e. Tahnee, Ross and Emma.
Hil would have full control of the assets within the Trust. If the Asset in the Trust is for example the Cottage then she can continue to live in this property free of rent for as long as she wishes. If she sells the property in the future and converts it into cash, then this cash will be invested and she will receive an income from the cash. If she decides to buy another property she can. The Trust will sell the old property and buy the new one. Essentially nothing changes - apart from the legal ownership of the Trust Assets. Hil would no longer own her Cottage. The Trust would. So in relation to the issue of funding care what box will she tick when she is asked "Do you own your own home” You see?
Second Marriage Syndrome…
If she remarried could her new husband claim any of the equity for himself? No. She doesn't own the property. The Trust does.
If she has full control of the assets within the Trust could she remove beneficiaries at will to suit any difficult or potentially damaging circumstances that were present at a specific time that were set to effect her legacy in a negative way? Yes! And she can add them back in whenever she likes too.
Ok let’s recap and look at the key points…
The ownership of assets passed into the Trust would not need to be dealt with after Hil’s death. This would reduce legal and Probate costs at that time.
There is no automatic inheritance after death. It is left for the Trustees Hil appoints to decide when inheritance is passed out of the Trust to Tahnee, Ross and Emma. This can be advantageous if there were problems like I have referred to namely divorce, credit issues, personal issues, or legal disputes.
Hil’s wishes for the Cottage can be set out flexibly in a “Letter of Wishes” to accompany the Trust, although she must be aware that technically the Trustees would not be legally bound to follow this. Hence why it’s important to choose Trustees carefully and also I would say make sure they are independent.
If Hil loses mental capacity in the future (er… actually) – no I’m joking of course, because the assets are in the Trust, the Court of Protection would not need to be involved in any dealings regarding ownership.
A further note on Care Fee Planning…
A question you may ask yourself at some point is why do I need to worry about this now? I am perfectly healthy and can not foresee the need for care, so why bother?
Local Authorities have the legal right to investigate something called “deprivation of assets”. An obvious example of this would be an elderly person suddenly and unexpectedly falling ill, for example suffering a stroke, then immediately gifting away their assets into Trust just as care was likely to be needed. In this example the local authority would be able to substantiate through medical records that the elderly person very likely gave away their assets to avoid paying for their care.
The problem is that the care system in the UK is not fair.
If Hil’s next door neighbor Mary owns a similar cottage, but takes out equity release and then spends her retirement holidaying 3 times per year, and having lunch twice a week at the Chester Grosvenor, by the time she ends up being means tested it’s likely that she won’t have anything left. But will she get a lower level of support from the LA? In a word no. The LA will pick up Mary’s tab but Hil will pay her own. Not fair is it.
The Government drafted in Andrew Dilnott to report on the problems faced and he has made perfectly logical recommendations that to be frank a 5 year old could have worked out, but the problem is
Implementation. If the level of care we pay for ourselves is capped, where does the balance come from? Well it’s Hil and Mary, Sally's Mum and Dad and the other 20 Million pensioners in retirement. I said it was topical didn’t I.
For the avoidance of doubt, and as I said to BBC’s Adrian Goldberg, we do not support anybody we consider has the sole aim of beating the system. If we suspect deliberate deprivation is on the cards we will not take on a case - normally when we have an 89 year old couple wheeled into our boardroom on deaths door, or at least on Oxygen, together with their Sons and Daughters all panicking. It has happened.
It’s Estate Planning!
Our exercises are carried out to ensure that chosen beneficiaries inherit an estate at the right time, allowing for flexibility of when assets are inherited, outside of the typical delays and costs associated with probate. So you see we conduct an ‘’Estate Planning Exercise” as opposed to a ‘’care fee avoidance exercise’’. It is merely a fact of matter that assets placed into trust are no longer owned by the Settlor and therefore outside of any means testing for care.
We strongly suggest that exercises are carried out by people on the right side of 75. If left any later the LA could attack any Trust work we do in court, and a Judge may side with them over our work and your case. If the Trust is revoked you will have paid fees and not benefited. Ultimately using ‘Our Hil’ as an example, there is no Judge in the land who would side with an LA - if she was in good health and 67 at the time she passed her assets into trust, to make sure Tahnee Ross and Emma definitely inherited her estate safely on her death. No Judge in the land. The LA would never in a million years even consider taking any action. It would be completely pointless.
It’s also worth mentioning that this type of planning we are talking about here is relative to a person’s wealth and is aligned to people like Hil who own property and assets under say £400000. The Maximum an APT can hold without incurring a tax charge is one nil rate band of £325000.
Whilst we can use 2 nil rate bands totalling £650000 for a married couple, generally speaking once people start to show wealth higher than this amount different problems are present, that require different solutions alongside protective measures. IHT etc.
A typical client response - “Oh I'll just give the kids the property now”
Why doesn't Hil just gift the property to Tahnee Ross and Emma now? Giving assets or a home to children is often quoted as being an ideal solution. It isn't. Gifting the property and continuing to live in it, is not a “true gift” in law unless a full market rent is paid. The Revenue would class it as a 'gift with a reservation of benefit' (GROB). Also from the date of the gift, it would not be Hil’s primary residence and Capital Gains Tax (CGT) would be levied on any increase in value if the property was sold. Ouch.
If Tahnee, Ross and Emma experienced any of those personal issues I have mentioned, became involved in divorce or bankruptcy, the house would be classed as one of their assets and would therefore be claimed in any legal proceedings.
If Tahnee Ross or Emma died before Hil, in whatever circumstances, the house would form part of their estate and go to their beneficiaries. That could be interesting couldn’t it.
If having gifted the property, Hil’s relationship with Tahnee Ross or Emma broke down, the ability to remain in the house would be prejudiced wouldn't’ it.
Income Tax on the rental value of Hil’s house would also be payable to HMRC every year.
It is simply not practical for all of these reasons to simply gift the property. It is vital that the property is properly administered within an Asset Protection Trust.
APT's are an excellent way to property property and other assets upto a nil rate band in value.
Wills & LPA's
We would also look at the Will and Lasting Powers of Attorney for health and well being and property and financial affairs as part of an exercise exploring the suitability of an APT.
And once we had completed the exercise we would have copies of all documents stored safely on your behalf.
We also have a solution for clients holding large balances on deposit, that could also be at risk of not passing in line with a will if the capital was going to have to be used to cover care costs. We can protect this and provide a secure income guaranteed for life at 4.25%. More on this later.