November 27, 2017The Dementia Tax: why couples aren’t doing enough

Care fees protection - couple in front of house

There is a legitimate alternative to the so-called ‘Asset Protection Trust’, but couples need to take action now.

Channel 4’s recent edition of Dispatches, promisingly entitled ‘How to Avoid the Dementia Tax’, lifted the lid on so-called ‘Asset Protection Trust‘ companies who claim to help couples avoid care fees, in exchange for thousands of pounds. Peddlers of these trusts use pushy sales techniques to persuade unsuspecting homeowners to transfer their homes to the trust. But unbeknown to their victims, such an act is regarded as ‘deprivation of assets‘ by Local Authorities and can have serious adverse consequences.

It is clear that Asset Protection Trusts are bad news and our team have been urging clients to avoid them for years. But is there a viable alternative?

A legitimate alternative to the ‘Asset Protection Trust’

The starting point here is that if your partner needs care after your death, it is grossly unfair that the care should be paid for from both their funds and yours. Why should you pay for care you haven’t had?

The problem is that many couples will make ‘Mirror Wills‘ which leave everything to the other, then to the children and/or grandchildren. On the first death, the surviving spouse inherits everything – and this pot is then available for the Local Authority to dip into, should the surviving spouse need care. In fact, the Local Authority can take everything down to the lower limit of £14,250 before they take over paying the fees and even then, those needing care are often asked to pay a contribution.

For those with a severe need, Continuing Healthcare Funding may be available – but funds are very limited and few meet the criteria.

The solution to this problem is for couples not to leave everything to each other in the first place. Instead, each spouse can give the other a life interest in the family home, with the remainder to the children/grandchildren.

This is only possible if the couple hold their property as ‘Tenants in Common’ rather than ‘Joint Tenants’.

Property ownership: Joint Tenants vs Tenants in Common

Joint tenancy vs tenants in common

Under a ‘joint tenancy’ each owner has an indivisible share in the property and all of the owners are equally entitled to the whole property. On the death of one co-owner, that co-owner’s interest in the property will pass to the surviving co-owner by law. No action is required as the surviving co-owner is already entitled to the whole of the property.

If co-owners hold the property as ‘tenants in common’, they each have a distinct share in the property. Typically, a husband and wife might each own 50% of the property. When the first spouse dies, their share of the property passes in accordance with the terms of their Will (or if they have no Will, by the rules of intestacy).

If couples currently own their property as ‘Joint Tenants’, they can change their ownership to ‘Tenants in Common’ by ‘severing the tenancy’. This is usually done with a Notice of Severance, which April King’s team can arrange for you.

Protecting your share of the assets from care fees

Once the tenancy has been severed, rather than leaving your share of the family wealth to your partner, you can instead give them a life interest in the family home. This means after your death, your spouse will continue to own their 50% of the family home but they will not own your 50% share outright. Instead, they have a life interest in your share. With a life interest in your share:

  • They can stay in the family home for their lifetime
  • They can (with the permission of the ‘trustees’) sell the family home to buy an alternative property
  • If they need care, your share of the family home will not be taken into consideration when performing a means test
  • They can leave their share of the family home in their Will to whoever they like
  • On their death, your share of the family home will go to whoever you decide to leave it to in your Will (children, grandchildren or a trust, for example)

What is the difference between this solution and a so-called Asset Protection Trust?

With a so-called ‘Asset Protection Trust’, you transfer ownership of your home to a trust to avoid care fees. This means that you no longer own your home. One of the risks of this is that Local Authorities will class the transaction as ‘deprivation of assets’. This gives them very wide powers and lead to drastic consequences (look at our ‘Deprivation of Assets‘ guide to find out more). Councils are actively pursuing people for care fees who have used these type of trusts (see ‘Councils actively pursuing deprivation of assets cases‘).

With our solution, you do not give up ownership of your home and you have not deprived yourself of assets. You simply ensure that you own your home in such a way that you can leave your share to who you choose on your death. Then, rather than leaving your share of the home to your partner in your Will, you instead give them use of the family home.

Giving your partner a life interest in your share not only ensures that your share is not used up for your partner’s care fees (after all, as we said, why should you pay for care you never received?) but also protects it from third parties. For example, if your spouse remarries after your death, their new partner would be next in line to inherit the family wealth. With this solution, your share of the property is safe for your children/grandchildren as your spouse does not own it outright. Additionally should your spouse get into financial difficulty after your death, your share is safe from creditors.

You can go one step further and leave the residue to your children/grandchildren in a bloodline trust. This means that they have access to the money but it is safe from creditors and future divorce settlements.

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