Should you do something to protect your estate against future care fees?
When I am discussing Wills and Estate Planning with clients, it often becomes clear that my clients are worried they will lose everything if they go into care. In many cases, after looking at their finances and analysing the existing care fee scheme, I am able to show to the clients that their fears are unfounded or, at least, way out of proportion with the actual risk.
There are a lot of companies who are set up to use this fear to sell care fee planning products to people, often including a trust over the family home. Sometimes these products can save people money in the long run but, I would expect, only a small percentage result in a significant net saving after deducting the set up and administration costs.
When marketing the "family trusts" the suggestion is that everyone should do it to protect themselves from future care fees. I would strongly disagree with this and although there are circumstances where there will be a financial benefit to doing some form of care fee planning or property protection, it should only ever be done after a full analysis of the individual's circumstances.
The aim of this article is to challenge a couple of the main assumptions made about the cost of care and to go through some of the factors I discuss with my clients when considering the various options.
What are you trying to achieve? Should it all be about reducing what you pay in care fees?
In my experience, many of my clients, quite understandably, hate the idea of the assets they have spent a lifetime accumulating being used up in payment of their care fees. They want to leave a legacy for their loved ones and they become so focused on this that they don't look at the bigger picture.
It should never be forgotten that, if the measure of success is that you have been able to reduce the care fees you have to pay yourself, you will only succeed if you put yourself in a position where you cannot afford to pay for your own care. If you cannot pay for your own care, you will not have a lot of choice over which care home you live in.
Another thing to think about is, if you do go down the route of transferring your house to a trust or to family member, you no longer own the house and therefore have lost legal control of your main asset. This may make the ownership of the house more complex and moving or selling the house will be more complicated. Your future financial options will also be restricted (for example, you will be unable to release equity from the house).
Before you embark on big changes to your affairs to cater for possible future care fees, you should ask yourself whether it should all be about saving money and reducing the care fees. Ask yourself, is leaving a legacy important enough that you risk your own comfort and freedom in later life, or risk losing control of your main asset, or risk making your affairs very complicated and much more difficult to administer. I would also ask yourself whether the loved ones you are trying to benefit would want you to sacrifice and compromise your own present and future so that they get more when you die.
Are you realistic about the cost of care and the risk of going into care?
Some of my clients talk to me as if it is guaranteed that they will need residential care in the future and also have a firm belief that, when they go into care, they will lose their house and all their savings.
The first thing to say is it is definitely not guaranteed that you will need residential care. The most recent government census* concluded that, in England and Wales, only 3.2% of all people over the age of 65 were in residential care. The percentage of people aged 85 and above was 13.7%, slightly larger but still a small proportion.
The second point is that, if you do need care, this does not mean you will lose everything. It is not a case of, when you step foot into a care home, someone flicks a switch and all of your assets are transferred over to the care home. The reality is that, if you are paying for your own care, in most cases your income will not be sufficient to meet the care fees in full and there will be a gradual erosion of your capital (your savings first and then, if the savings have been used up, some of the equity in your property).
The main two factors in determining how much of your assets will be used to fund your care are:
- The shortfall between your income and the care costs; and
- The length of time you need residential care.
It is impossible to know how long you may need to be in care but, a report by the Personal Social Services Report Unit** concluded that the average length of stay in residential care was 26 months and that half of the people who needed residential care had stays of less than a year and a quarter. Two very sad statistics that put the cost of care into some context.
There is a danger with statistics because there are always outliers and there will be people who have a very lengthy stay in a care home. However, I set out below a simplistic worked through example of someone who has an average length of stay in a care home in my locality (Grantham – East Midlands) to try to shed some light on the actual care costs an individual may incur.
The average amount self-funders pay for a residential care home under my local council, Lincolnshire County Council, is £710***. The cost over 26 months would be roughly £80,000. Fairly eye watering.
However, to assess the actual impact on your capital, you need to take into account income you receive during the time in care including State Pension (£9,110.40 per year), Attendance Allowance (which at higher rate is £89.15 per week or £4,635.80 per year), any private or occupational pension and any other income.
If you own your own home, as you are no longer living there, it could be rented out or it could be sold and the proceeds could be invested.
A typical two bedroom bungalow in the Barrowby Gate or Manthorpe area in my locality of Grantham, might be worth in the region of £200,000 - £250,000, depending on condition and the typical rent for that kind of property, again depending on condition, might be £700 - £750 per calendar month (£8,400 to £9,000 per year).
Even in the current climate, a long term investment of £200,000 - £250,000 may achieve as much as £8,000 per annum.
The above is a very rough and simplistic sketch of someone's financial situation that I have set out to illustrate my point but, taking account of State Pension, Attendance Allowance and
**Commissioned by BUPA following the last government census in 2011
*** "Fees paid by self-funders: LaingBusson surveys of care homes 2018-19
income from the main home, and ignoring any private pension income or tax, in this example, the income over 26 months may be in the region of £48,000.
Whilst in care, in most cases, the only outgoings are the care fees so, using the example above, over 26 months the cost of care may be £80,000 and the income £48,000 leaving capital erosion of in the region of £32,000.
Still a significant amount of money, but, again, in this example where the person owns a property of in the region of £200,000 - £250,000, the care costs are only a relatively small proportion of their estate and far from the doomsday scenario of the whole estate being used up to pay for care.
I am not trying to say that there is nothing to worry about with care fees or that there is no point in care fee planning. On the contrary, if you are worried about care fees, any other future costs such as inheritance tax, or you are unsure whether there is anything else you should be doing to get your affairs in order, I would urge you to take proper advice as soon as possible.
Future care costs, in particular, need full and detailed analysis and what is the right advice for one person is not necessarily going to be right for another. It may be that your concerns about care fees have outgrown the reality of the situation or it may be that there are measures you should be taking now to protect your assets and plan for later life.
Either way, our advice will be balanced rather than slanted to play on your fears about care fees in order to sell you products and services you do not need. Our advice will be catered to your individual circumstances, it will take account of all the relevant factors and centred on what is best for you and for your family.
If you need legal advice in relation to Wills and Estate Planning, please contact our specialist Wills, Trusts & Probate team at Chattertons.