SAVE THOUSANDS OF POUNDS?
DETAILED THOUGHTS ON POWERS OF ATTORNEY, CARE HOME FEES, TRUSTS AND SPECIAL DESTINATIONS!
This is a long and rather dry look at topics that seem to be of real interest to individual clients. The topics themselves are complicated and we don't apologise for giving you detailed thoughts. There seems to be a few misunderstandings around and regrettably we also encounter clients who are being recommended by others to follow particular directions that may not achieve their intended purpose. We hope that if you read this to the end that you will be better and more honestly informed and, who knows, you might save yourself a few pounds!
- Powers of Attorney
Many clients are familiar with the concept of a Power of Attorney but have not fully appreciated one particularly powerful aspect of a Power of Attorney that could assist in saving some thousands of pounds at a future date.
So long as someone is mentally capable of understanding what they are doing they can grant a Power of Attorney authorising, for example, a spouse or other relative to manage the affairs of the granter of the Power. The Power of Attorney can cover financial aspects such as operating bank accounts and dealing with investments or other assets and it can also cover "welfare" aspects so that when someone is not capable of looking after their own welfare the Attorney can make decisions for them on matters such as where to stay and can consent to medical treatment on their behalf.
Living longer brings with it the risk of mental or physical incapacity and while a Power of Attorney may sit on the shelf and may never need to be used, when the need arises a Power of Attorney is a very useful tool indeed and we strongly recommend that those aged from late middle age onwards should take out a Power of Attorney.
There is an aspect of a Power of Attorney that is not fully appreciated by many clients and it is to this aspect that we want to draw your attention. To understand it we have to first explain the procedures that are sometimes necessary when somebody dies.
Scots Law says that the only person who has the right to deal with the estate of a dead person is a "confirmed" Executor. By this is meant not just an Executor named in a Will but an Executor who has been confirmed in office by the Sheriff using the process that is called Confirmation. Confirmation is a court process and also results in a document which is, perhaps confusingly, also called a Confirmation. If someone, such as a Bank or Building Society is holding funds that belonged to a dead person they should only pay them out to a confirmed Executor. For example, only a confirmed Executor can sell shares in the name of the dead person; also, in our experience ISA Fund Managers will only pay out to a confirmed Executor. While there are some occasions, due to the low value or the nature of the assets, where Confirmation can be avoided, the reality is that in certain estates where, for example, the dead person owned a property or shares or an interest in an ISA, Confirmation cannot be avoided.
So far so good, but clients who have not been involved in the process of Confirmation for a deceased relative may be surprised to know that the legal costs of obtaining Confirmation can be many thousands of pounds. In fact it would be rare for any Executry estate, where Confirmation has to be obtained, to come in at a fee cost of less than £3,000 to £4,000 and where there are for example, a number of bank or building society accounts or a number of shareholdings or a number of life assurance policies/assets it is not unusual for the fees payable to obtain Confirmation to come in at £5,000 to £10,000 and even more. The cost of the process does surprise clients. Our firm in fact does not fix our own fee for the process of obtaining Confirmation. In most situations we submit our file for the fee to be fixed by an independent third party. This is to give clients confidence that the fee is a fair fee but we also do it because we know that clients will often be surprised by the size of the fee and we want them to feel re-assured that we are not fixing it for ourselves.
So there are many situations where, when someone dies, Confirmation will have to be obtained and the estate will suffer what may be regarded as a significant cost.
It is obvious however that if someone dies without owning any assets then there is no need to obtain Confirmation. Confirmation is only necessary to give someone the legal authority to ingather the assets of a dead person, encash or dispose of them and distribute to beneficiaries. If there are no assets then there is no purpose in Confirmation.
Quite simply therefore, (and we apologise for approaching what might be regarded as a morbid subject), if a family holding a Power of Attorney is able to predict that the death of a loved one is impending then if a Power of Attorney exists, the Power of Attorney can be used, for example, to transfer title to a house, to encash ISAs, to convert shares into cash and generally to move assets out of the ownership of the person who is imminently to die, all quite properly and all with the effect that that person may die owning no assets.
Sometimes clients are surprised when this is explained to them but there is absolutely nothing wrong with this course of action. People are generally entitled to regulate their own affairs to best advantage therefore, in appropriate circumstances, use of a Power of Attorney, in good faith and not to the detriment of those would have inherited, and in order to can avoid formality in winding up an Executry estate, the cost of winding up an Executry estate and also what can often be a delay in an Executry estate before funds are available for the beneficiaries, can be a very cost effective thing.
If the Power of Attorney is being used to transfer title then there would be fees associated with that work but they would be nowhere near the fees associated with obtaining Confirmation. The uplifting of Bank accounts, sale of shares and encashment of ISAs will have very limited associated cost.
Where the value of assets transferred before death exceed the level at which Inheritance Tax would otherwise have been paid on death then the matter is not quite so straightforward since HM Revenue & Customs would have to become involved at the point of death. There are perhaps other reasons why transfers of assets should only be made when death is reasonably imminent and of course legal advice should always be taken at the appropriate time, but with the cost of obtaining Confirmation seemingly increasing all the time we think it is helpful to draw this potential use of Powers of Attorney to the attention of clients. Powers of Attorney are useful things in themselves but this potential use is one that may be overlooked but could represent a real advantage in certain circumstances. We strongly recommend Powers of Attorney.
- Asset Protection Trusts
We look now at the concept of what is sometimes called an asset protection trust. There is a lot of press and internet comment about these. They appear under a number of different names but they all involve transferring assets into a Trust. The motivation for this that seems to be expressed most often is to take the assets away from the ambit of the means test that may come into play when someone moves into care. This is a complex subject but is an area that seems to be of growing interest and concern to clients.
At the outset it is important to recognise that at the moment it is actually only a small proportion of the elderly population who require long term residential care. We think that something of an industry has grown up to exploit concerns that people have about this and our impression is that many people are playing on this concern for their own financial benefit by encouraging people to take steps that may not be effective and where the other risks are not fully discussed and emphasised.
What we want to do therefore is to try to give you a balanced perspective on the pros and cons of the use of such Trusts.
Trusts may be used for many purposes but there is no doubt that the increase in discussion about Trusts is centred around the care home means test. If would be foolish to ignore this and therefore the following comments relate to both areas.
First of all it is absolutely clear law that if someone voluntarily disposes of an asset with any intention to avoid the means test then the Local Authority is entitled to treat them, for the purposes of the means test, as still owning the asset. Broadly speaking the Local Authority can only do this if they can show that at the time of the transaction it was likely that you would be making a subsequent claim for care. It follows from this that if a transfer is made when someone is in reasonable health at the time of the transfer then over the course of time the risk of the Local Authority taking this view will fade. It also follows that if it can be shown that the transfer was wholly for other motives then the Local Authority would not be able to take this approach.
It should be made very clear however, and we think that this is not sufficiently emphasised by some others when discussing this issue, that if the Local Authority can show that any part of the motivation behind voluntarily disposing of an asset is to avoid the means test then the donor will still be treated, for the purposes of the means test as owning the asset (although of course, legally, it may now be owned by somebody else). If therefore assets are put into a Trust by someone who is already very elderly or infirm the chances are that the means test will still "sweep up" those assets because there will be a strong case for saying that an intention behind the disposal is to avoid the means test. If of course there is a genuine other reason such as inheritance tax planning then that would be of assistance.
We also believe that it is insufficiently stressed that gifting your house (whether into Trust or to a relative) potentially limits your future courses of action. If you gift your house to a relative and reserve a right to stay in the house for the rest of your life and you subsequently want to "downsize" or release capital from the house then those options are not available to you without the co-operation of the person to whom you have gifted the house. Also, for example, if you gift your house to your married daughter and she unfortunately dies before you, then the ownership of your house may pass to the son-in-law who may remarry and who may be less co-operative with your needs than your daughter herself would have been. The world is unpredictable and giving away your main asset can sometimes give rise to unforeseen and unintended consequences.
A simple gift of a house to a relative can also have disadvantageous tax consequences in that the very important Capital Gains Tax exemption applicable to principal private residencies will not be available when the relative comes to sell the property and there may be a taxable gain that would not have arisen had the title stayed with you.
These are important factors to bear in mind.
Some of these factors, but not all of them, can be mitigated in appropriate circumstances by the use of a Trust hence the increasing focus on these.
Trusts are a familiar legal concept. A Trust involves the establishment of a legal entity called a Trust by the signing of a Trust Deed which sets out the purposes of the Trust and the powers of the Trustees. Then the ownership of an asset or assets is passed to the Trust by the person who is then called the Settlor. The Trust Deed will have established the identity of a number of Trustees who will have the responsibility for the administration of the Trust. Usually there will be two or three or more Trustees. The Settlor can be among the Trustees. The net effect is that ownership of the property has moved from the Settlor into the Trust and will be held in name of the Trustees for the benefit of the beneficiaries of the Trust. The identity of the beneficiaries will have been established in the Trust Deed. They do not need to be named and they can simply be a class of persons such as the Settlor's spouse, children and remoter issue with the Trustees having discretion who among them to benefit and in what proportions. Trust Deeds and Trusts are in fact very flexible things and can be shaped according to the circumstances for which the Trust is being created.
Typically reasons for/benefits of a Trust may are said to be any one or more of:-
1. Getting round the legal rules that apply to the succession of a dead person such as children's legal rights. If assets have been put into trust then they do not form part of the Settlor's estate on death and cannot be subject to legal rights claims.
2. Avoiding the expense of Confirmation on an estate. Again if all assets have been passed into a Trust then you own nothing at the date of death and there is no need to obtain Confirmation. The position may be complicated however if inheritance tax could arise on the estate.
3. Assets in a Trust can be more quickly realised after the Settlor's death than would be the case if Confirmation was required.
4. If required, it avoids the need to decide who will "inherit" your estate and in what proportions. The Trustees can be given the discretion to make this decision at some time in the future and some family circumstances are such that people might prefer to "wait and see" who is deserving of the succession rather than have to make that decision at the point of their death in a Will.
5. It is possible, if the Trust is established before someone is very elderly or infirm that a by product of the Trust will be that assets are not means tested if the Settlor goes into care.
One crucial point to bear in mind is that if the ownership of a house is passed into a Trust it is nevertheless possible to reserve the right to continue to reside in the house during your lifetime and if other assets are put into a Trust it is possible to reserve the right to use the income from those assets during your lifetime. This aspect is particularly important since certain types of Trusts mean that the Capital Gains Tax relief on the sale of the principal private residence will still be available to the Trustees when they sell the property to the same extent as it would have been available to you if you had sold your property and in this respect a Trust is much more favourable than an outright gift of your house to a relative.
Put simply therefore it is possible to transfer ownership of your house and any other assets that you choose, into a Trust while reserving the right to stay in the house during your lifetime and the right to receive any interest received on the other assets and to provide in the Trust Deed that on your death the assets pass to whoever you want them to pass to and in whatever proportions you may direct..
Because you no longer own the asset it cannot be means tested unless, as indicated previously the Local Authority can establish that one of the purpose behind the disposal of the assets was to avoid the means test. If the underlying reason for creating the Trust was nothing to do with this, which can most easily be shown if the Trust was created while someone was still fit and healthy, then the Local Authority are unlikely to succeed.
There are however disadvantages of a Trust. For example if your house is subject to a mortgage then the title simply cannot be passed into the Trust. Further it is not so easy for a Trust to take out an equity release loan using the house as security so a certain amount of flexibility is lost. The Trust is an entity for tax purposes and will need to keep records of all receipts and payments relating to the Trust. The Trust will have to be registered with HM Revenue & Customs and if the Trust does have income that exceeds its expenses then a Tax Return needs to be made. If a house is placed in trust then the buildings insurance must be transferred tin name of Trustees. If an individual gives assets worth more than, currently, £325,000 into the Trust then Inheritance Tax considerations have to be very carefully considered (although if a husband and wife or those in Civil Partnership jointly own a house worth up to £650,000 then the £325,000 limit can be used by each of them).
Thinking this through therefore the usual structure for a Family Trust is that the home of the person creating the Trust is the asset that goes into Trust and the beneficiaries are usually the person or persons creating the Trust and their children and remoter issue. The property generally remains in the Trust for the duration of the life or lives of the persons that have created the Trust. During your lifetime you can remain living in your home. The home can be sold if you need to move with the sale proceeds being re-invested in another property for you. Alternatively the sale proceeds can be invested to generate an income for you if necessary.
The Trust must be registered with HMRC. If there is no income being generated by the Trust a yearly tax return will not need to be completed. If the value of your interest in your home is below the current level of £325,000 then there would be no immediate Inheritance Tax charge.
When the property is transferred into the Trust there will be no Capital Gains Tax charge.
While you live in the property you will not pay a rent for the right to reside in the property.
If the Trust is established in a particular way there will be no Capital Gains Tax charge if the Trustees sell the house immediately following your death.
Subject therefore to understanding that the simple act of putting the title to a house into a Trust does not of itself avoid the means test there are potential advantages in the use of a Trust so long as you fully understand that the control of the asset would then be in the hands of the Trustees. That word means exactly what it says. You must only appoint Trustees whom you trust absolutely "to do the right thing".
There are however costs involved in establishing a Trust and in the transfer of, for example, the title to the house into a Trust. It is impossible to specify these costs precisely since different families' transactions may involve a different amount of time being spent but broadly speaking it is likely that drafting and agreeing the terms of the Trust Deed with you, conveying the house title into the Trust and registering the Trust with HMRC would not come under £2000 plus VAT and in addition the Land Register will charge a fee for registering the transfer of the title based on the value of the house. Currently the Land Register fee for transferring title to a house worth, say, £250,000 is £480.
- Destinations in titles
The final topic we want to cover again relates to Wills and houses and to what lawyers call "destinations". Much advice is given to readers of the financial pages of newspapers but unfortunately we tend to find that that advice is given against the background of English Law and we frequently see, and have discussed with us, newspapers writing about avoiding the Care Home means test by talking about the distinction between tenants in common and joint tenants. These are very much concepts of English Law that have no meaning in Scots Law so clients are often confused by this. Nevertheless there is an aspect of this discussion that is relevant to Scots Law.
When a couple who are married or in a Civil Partnership buy a house they have a choice whether to take the title "equally" (which is broadly equivalent to the English tenants in common) or "equally and to the survivor". There is a simple difference between these two. If the title to a house is taken "equally and to the survivor" then if one owner dies their share of the house automatically passes at the moment of death to the survivor. If the title to the house is taken "equally" then this is not the case and the share of the house of the person who died will pass in terms of any Will that they have made or in accordance with the Scots Law of intestacy. For most couples the preferred choice in the past has been to take title "equally and to the survivor" since that made it easier for ownership of the house to pass at the point of death. However if you die and your half share in your house passes to your spouse or civil partner and if your spouse or civil partner then needs to go into residential care the whole value of the house will be taken into account in the means test.
An alternative, if the title to the house is taken "equally", is that in your Will you leave your share of the house, not to your spouse, but to your children or indeed into a Trust, but with your spouse having a liferent to occupy the house during his or her lifetime. It follows from this that if the surviving partner then requires residential care and becomes subject to the means test then only his or her one half of the house can be taken into account. In England there is an argument that the value of the survivors one half share would be zero for the means test but unfortunately that is not the case in Scotland. Nevertheless one half would have gone and avoided any question of means testing.
Clearly other factors have to be considered. The surviving partner does lose a certain amount of flexibility and unless a special type of Trust is utilised, the sale in due course by the Trustees of their share of the house is potentially subject to Capital Gains Tax on the gain made between your date of death and the date of the sale (but only the gain related to your one half of the house and there is a small annual Capital Gains Tax relief available to Trustees). However many families are now considering changing the destination in their title to "equally" if it is currently "equally and to the survivor"
We wanted to share with you therefore some thoughts on these areas of very current interest. These, particularly the use of a Trust are complex and it is important to understand that any particular course of action, while having particular benefits, may also have some disadvantages. Every client's character, motivations and circumstances are different and ultimately our job is to give clients information to enable them to make their decision on what course of action suits their circumstances and concerns best. Clients must balance advantages and the disadvantages and, certainly in matters relating to the Care Homes means test, they have to fully understand that not every course of action that seems to be being recommended in the market place will have the intended outcome.
We hope that you will have found this note to be stimulating and informative. These are important areas and are areas where you need the advice of a knowledgeable lawyer whom you trust. If you would like to discuss any aspect with us please contact us to arrange a convenient appointment. The outlay of time and expertise on this means that unfortunately we cannot offer a free interview. We would charge £150 plus VAT for our initial meeting but would be delighted to cover as much ground as you want to cover and if you then instruct further work we would be happy to apply that fee already paid by you as a payment to account of the fee for that other work.