The cost of social care in England and Wales has been a growing concern for many individuals, particularly those with considerable assets. As people age, the need for long-term care services often becomes a reality, and this can be quite expensive. One solution for asset protection is the use of trusts, which can be an effective way to ensure that an individual’s property and money are safeguarded from the impact of social care costs. This post, will explore the benefits of setting up a trust for this purpose, as well as the relevant laws, legislation, and cases in England and Wales.
The Importance of Asset Protection
The cost of social care services in England and Wales is significant, with residential care homes charging an average of £33,000 per year, and that amount can increase depending on the level of care required (1). Furthermore, the government uses means-testing to determine the level of financial assistance an individual can receive for care services, with anyone owning assets above a certain threshold expected to contribute to their care costs (2).
The current threshold in England is £23,250, meaning that individuals with assets above this amount must contribute towards the cost of their care. In Wales, the threshold is slightly higher at £50,000 (3). These thresholds can result in substantial financial burdens, particularly for those with significant assets.
Trusts as a Solution for Asset Protection
A trust is a legal arrangement in which assets, such as property or money, are transferred to one or more trustees, who then manage these assets on behalf of the trust beneficiaries (4). There are different types of trusts, each with its unique features and advantages.
By transferring assets into a trust, the individual, known as the settlor, can effectively protect their assets from being considered when means-testing for social care costs. This can potentially reduce or eliminate the individual’s obligation to contribute towards their care costs, allowing them to preserve their assets for their family or other beneficiaries.
Relevant Laws and Legislation
The laws governing trusts in England and Wales are derived from common law, statutory law, and the principles of equity (5). Key legislation includes:
- The Trustee Act 1925 (6): This Act outlines the powers and duties of trustees, as well as the rules for creating and managing trusts.
- The Trustee Act 2000 (7): This Act modernized trust law in England and Wales, giving trustees increased powers and a statutory duty of care.
- The Inheritance Tax Act 1984 (8): This Act sets out the rules for inheritance tax, including the taxation of trusts.
- The Mental Capacity Act 2005 (9): This Act outlines the legal requirements for creating a trust for someone who lacks mental capacity, such as an individual with dementia.
Types of Trusts for Asset Protection
When setting up a trust for asset protection against social care costs, there are several options to consider:
- Discretionary Trust: This type of trust allows the trustees complete discretion over the distribution of assets to the beneficiaries. It can offer the greatest flexibility and protection against means-testing, as the beneficiaries do not have a fixed entitlement to the trust assets (10).
- Life Interest Trust: Also known as an Interest in Possession Trust, this trust grants a beneficiary (known as the life tenant) the right to receive income from the trust assets during their lifetime. Upon their death, the assets will pass to the remainder beneficiaries (11). This type of trust can offer some protection against means-testing, but it is important to note that the life tenant’s interest may still be considered an asset.
- Protective Trust: This trust is designed to protect a beneficiary’s interest in the trust assets, particularly if the beneficiary is financially vulnerable or at risk of losing their assets to creditors or social care costs. In a protective trust, the beneficiary has a life interest, but the trust includes provisions to convert the life interest into a discretionary trust if certain conditions are met, such as the beneficiary requiring social care (12).
- Disabled Trust: A disabled trust is specifically designed for beneficiaries who have a physical or mental disability and may be in need of social care. These trusts can be structured to ensure that the assets are not considered for means-testing purposes, while still providing for the beneficiary’s needs (13).
Relevant Cases and Precedents
While the use of trusts for asset protection against social care costs is not without controversy, several key cases in England and Wales have helped to clarify the legal landscape:
- DJL v CIC(14): In this case, the Court of Protection held that assets held in a discretionary trust could not be considered as the beneficiary’s capital for means-testing purposes.
- Re H (15): This case involved a local authority attempting to access trust assets to cover the cost of care for a disabled beneficiary. The Court of Protection ruled that the assets held in a discretionary trust could not be taken into account when assessing the beneficiary’s means.
- N v ACCG(16): In this case, the Supreme Court confirmed that assets held in a trust, even a discretionary one, may be considered when assessing a beneficiary’s means if the trustees have a history of making regular payments to the beneficiary.
Potential Risks and Considerations
While trusts can be an effective method of protecting assets from social care costs, there are potential risks and considerations to be aware of:
- Deliberate Deprivation of Assets: Transferring assets into a trust with the sole purpose of avoiding social care costs can be seen as a deliberate deprivation of assets. Local authorities have the power to investigate such transactions and may still include the assets in means-testing calculations if they believe the transfer was made to avoid paying for care (17).
- Inheritance Tax Implications: Depending on the type of trust and the value of the assets, there may be inheritance tax implications, such as the 10-year anniversary charge or exit charges, which can affect the overall tax efficiency of the trust (18).
- Trustee Responsibilities: Trustees have legal responsibilities and duties when managing trust assets, and failure to act in the best interests of the beneficiaries can result in legal consequences (19).
Trusts can be a valuable tool for protecting property and money from social care costs in England and Wales. However, it is essential to understand the relevant laws, legislation, and cases, as well as the potential risks and considerations. By carefully selecting the appropriate type of trust and working with professional advisors, individuals can maximise the benefits of trusts and preserve their assets for future generations.
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(1) LaingBuisson (2020). Care Cost Benchmarks. (2) gov.uk (2021). Means tests for help with care costs – how they work. (3) gov.wales (2021). Paying for care in a care home if you have a partner. (4) Law Commission (2011). Trust Law. (5) Hudson, A. (2017). Equity and Trusts. 9th ed. London: Routledge. (6) Trustee Act 1925. (7) Trustee Act 2000. (8) Inheritance Tax Act 1984. (9) Mental Capacity Act 2005. (10) Thomas, G. (2018). Trusts: A Practical Guide. 6th ed. Bristol: Jordans Publishing. (11) Trusts of Land and Appointment of Trustees Act 1996. (12) Hansford, T., & Bourke, J. (2016). Drafting Trusts and Will Trusts. 14th ed. London: Bloomsbury Professional. (13) gov.uk (2021). Trusts for disabled or vulnerable people. (14) DJL v CIC [2012] EWHC 3476 (COP). (15) Re H [2015] EWCOP 52. (16) N v ACCG [2017] UKSC 22. (17) gov.uk (2021). Deprivation of assets in the means test for care home provision. (18) HM Revenue & Customs (2021). Inheritance Tax on trusts. (19) Trustee Act 2000, s.1.