A common feature of discussions in recent weeks, be it with clients themselves or through their children seeking the best advice for their, often, vulnerable parents, is as to what can be done to minimise the effect of a need for long term residential or nursing care in later life on the value of a person’s estate.
The most common questions – or probably more correctly complaints – are ‘How am I going to afford £600-plus per week to pay the cost of my care?’ and ‘Everything I have will be spent in fees!’. So – just what, if anything, can be done about it?
I shall use a theoretical client, for our purposes we will call her Mrs Greaves, to illustrate a common case. She is a widow, who was left the matrimonial assets entirely on the death of her husband 10 years ago. She has a property worth £200,000, and savings in the region of £50,000. She has a modest state pension, and has her own personal pension and a couple of widow’s pensions which bring her income up to approximately £400 per week. She has recently been suffering from memory issues and she and her two daughters are concerned to protect her assets from unnecessary liability to care fees.
Clients’ suggestions are often ill-informed, but at times not uninventive. What they do however usually bring to the table (almost as standard) is a proposal to make a gift of an asset (usually the family home but occasionally other assets) to try and reduce the extent of their assets for any potential future assessment as to their means should residential care be necessary.
This is not a course of an action that should be considered lightly. After all, if the asset being given is the family home, the client is often considering giving up the place in which they live, and potentially without any protection of their right to live there for the remainder of their days.
Let us for a moment consider the reasons behind such a suggestion. A common misconception is that ‘Social Services will take all my money’. This is quite simply incorrect, as they will not be involved until a resident’s capital reaches £23,250. A person is free to utilise their capital and income as they see fit, to help meet the cost of care.
Another reason – which is suited to this illustrative case – is that ‘the fees are £600 per week, that’s over £30,000 a year. If my Mum lives in care for 8 years it will all be gone!’. However, this is simply not the case, and a few simple matters are often overlooked in the emotion of the conundrum faced by the family.
Firstly, what clients and their loved ones often forget is that, despite the very high cost of care fees, their income continues to be paid to them. This could be in the form of state pension, private or personal pension, widow’s pension and other annuity income. In addition, a resident would continue to receive the income from their savings and investments, and with appropriate financial advice, could maximise the income they yield to help meet the cost of care. In Mrs Greaves example here, she would need her savings and investments, together with other state benefits she may be entitled to, to generate £200 per week to meet the shortfall in the cost of her care. This equates to approximately £10,000 per year.
Secondly, a person funding the cost of their care is likely to be entitled to additional state benefits. Attendance Allowance is usually payable at the highest rate, on a non-means tested basis, for all residents in care homes. This could top up the existing monthly income by over £300.
Thirdly, in many cases, the family home is the most significant asset that a person owns. If there is no reason to retain the property when the person moves into residential care, it can either be let to produce a rental income, or it can be sold and the proceeds can be invested along with the other savings and investments to help top up the person’s monthly income.
Therefore, what many of my client’s find is that, when considering their position in relation to potential care fee liability, retaining the house and being able to use the capital to produce an additional income to top up the shortfall in meeting the cost of care is likely to leave them in a better position overall than if they had made a gift of the home and not had that asset available to generate an additional income.
Mrs Greaves has a decision to make at this point; she can retain the family home, and in the event that she was to require residential care hope that she can invest the £250,000 in an appropriate manner way which (together with additional state benefits she may be entitled to) will meet the shortfall in funding her care of £200 per week. Even if she was not entitled to additional benefits, if her savings and investments were invested appropriately and generated a 4% return after tax, the effect of her stay in residential care would be neutral to the overall value of her estate, and on her death she would be able to leave the full amount to her daughters as is her intentions.
If however she was to make a gift of her home now, she would only have £50,000 to invest on entering a care home, which would need a 20% return which is practically impossible. This act when coupled with the potential for the house to be sold and for her daughters to then be asked to contribute towards the cost of her care, may result in there being nothing left on the death of the person in care, not even sufficient to pay for the funeral.
To summarise, it is imperative that no gift should be made without a thorough consideration of the effect and nature of such a gift, but more importantly it should not be entered into without a full consideration of the client’s financial position, particularly in relation to their capital and income.
Advice such as this is contained in our free Wills and Estate Planning report service which we offer to all our clients. For more information please contact firstname.lastname@example.org or call 01254 884422.