Solicitors regularly receive requests from adults with elderly parents or from parents themselves who wish to settle properties in trust, in such a way that the parents retain occupancy rights whilst saving possible future care home fees. However, many firms of solicitors have taken a decision not to act in such cases and clients are understandably surprised why their request has been declined.

One of my professional colleagues, Michael O’Brien of Setfords, explains why it is that some solicitors are shying away from this type of work. He sheds light on what can be a legal minefield if the proper advice is not obtained before any action is taken.

It needs to be recognised that it is the parent — and not the child — who would be the solicitors’ client, although the children would be the intended trustees of any arrangement. Solicitors have to ensure that the client has appropriate legal (i.e. mental) capacity and is not being coerced into taking steps that they don’t really want to take.

Furthermore, such arrangements are vulnerable to challenge by the Local Authority. It is also necessary to first consider what the appropriate Local Authority’s rules are on contributions to care home fees. Currently, these state: A resident may be treated as possessing actual capital of which he/she has deprived himself/herself for the purposes of decreasing the amount that may be payable for his/her accommodation. In other words, the client may well no longer legally own his or her property, but if the Local Authority has grounds to suspect that the action was taken deliberately to avoid care home fees there could be a challenge by the local authority.

Guidance for local authorities on how to interpret the regulations states: There may be more than one purpose for disposing of a capital asset only one of which is to avoid a charge for accommodation. Avoiding the charge may not be the resident’s main motive but it must be a significant one.

As well as the possible challenge by a local authority, following an asset disposal prior to the client becoming a care home resident, there are many other factors to consider. In England and Wales the Land Registry holds the details of all property transactions and local authorites can easily obtain details of any property transfer by the client, as can any member of the public. If the client is fit and healthy, and of sound mind at the time of gifting the property, the local authority may be less likely to argue that there has been deliberate deprivation.

However, regulations state: The timing of the disposal should be taken into account when considering the purpose of the disposal. It would be unreasonable to decide that a resident had disposed of an asset in order to reduce his charge for accommodation when the disposal took place at a time when he was fit and healthy, and could not have foreseen the need for a move to residential accommodation.

Additionally, the client also should consider follwoing:

  • If the property is gifted to a trust, the court may set the transaction aside as being one at an undervalue, which may be the case if the amount paid for the property that was gifted into trust was significantly below the prevailing market rate.
  • Frequently, the gift into trust is covered by the main residence relief but there can be future consequences once the property is in the hands of the trustees.
  • The gift into trust is a chargeable transfer and if it is not within the zero rate applicable at the time, there can be a 20% charge on the taxable amount. Furthermore, such a gift would constitute a reservation of benefit (if the gifting parent continues to reside therein without paying a commercial rent) and the property would be revalued at the client’s death and included as part of the taxable estate of the client, even if by now the property was owned by the trustees.

Clearly, there are far more factors to consider before a property is transferred into a trust, but does this mean that nothing can be done to help reduce care home fees?

The sooner action is taken the more options there are for both the client and the prospective trustees; leaving things to the last minute is never a good idea and can prove to be very costly. However, even several years after a property has been put into trust local authorities can, and will, challenge the action in a bid to claw-back fees that they would argue should have been paid for by the client who becomes the care home resident. The longer the period between the asset being put into trust and the resident going into care the less likely it is.

As government cutbacks continue to take effect, it is increasingly likely that care home residents will come under considerable scrutiny, especially when care home fees are hundreds of pounds a week. In the final analysis we can’t predict how a local authority is going to treat such action, but the reality is that this is one area of life where sticking your head in the sand is not an option.

So what can be done? Don’t leave things to the last minute before taking advice from independent legal and financial advisers. Last minute action  can prove to be very costly and emotionally draining, especially as any steps taken may be ineffective from a legal point of view.

This really is an area in which those who fail to plan, plan to fail!