Understanding how to safeguard one’s assets from care home fees is a concern for many individuals, especially those approaching retirement or those with elderly family members. The increasing cost of residential care has made it critical for families to explore viable strategies that can help preserve wealth for future generations. Among these strategies, the use of trusts has emerged as a prominent solution. However, this area involves complex legal and financial considerations. In this article, we examine how trusts operate as a mechanism for planning against care home fees, the implications of such planning, and the steps individuals should take to ensure decisions are informed and compliant with current legislation.
The financial burden of long-term residential care is a growing challenge in the United Kingdom. With an increasing ageing population and a care system under pressure, individuals now must give careful thought to how care arrangements will be funded if needed. The cost of staying in a care home can range from £30,000 to over £50,000 annually, depending on the location and level of care required. For many, these fees can quickly erode savings, including the value of the family home, potentially reducing the inheritance passed on to loved ones.
The government calculates how much an individual should contribute to their care costs based on a means test, which includes both income and capital. If your capital exceeds a certain threshold (currently £23,250 in England), you are expected to self-fund your care. Those with capital below this threshold may receive partial or full support, but options for care could be more limited.
Many families are alarmed to learn that the main residence can be counted as part of their capital once a person enters permanent care, particular if no qualifying dependant remains in the property. As such, careful planning is not only prudent but vital for those seeking to protect their assets and maintain some level of financial autonomy and dignity in older age.
Trusts are legal arrangements where one party (the settlor) transfers ownership of assets to another party (the trustee) to be held for the benefit of a third party (the beneficiary). In the context of estate and care fee planning, trusts can be a powerful tool. They enable individuals to ring-fence assets and remove them from the scope of future means testing—under certain conditions.
There are various types of trusts, each with different structures, benefits, and implications. When it comes to care fee planning, the most commonly used include life interest trusts, discretionary trusts, and property protection trusts. These structures can help ensure that capital—especially the main residence or significant sums of money—is preserved and managed in accordance with the individual’s wishes.
However, it is crucial to note that any attempt to divest oneself of assets with the sole intention of avoiding care fees may be considered deprivation of assets by local authorities. This can lead to the trust assets still being included in the financial assessment, negating the protective effect.
Under current legislation, local authorities are required to carry out a financial assessment to determine a person’s ability to contribute to their care costs. This means test evaluates income and capital, with key considerations including state benefits, pensions, savings, and the value of property. If the total capital exceeds the upper threshold, self-funding applies until the person’s assets fall below the lower threshold.
A property might not immediately be counted if certain dependants live there, including a spouse, civil partner, or a relative over the age of 60. Once these circumstances no longer apply, however, the property can be included in the person’s capital.
This is where trusts may play a role. If assets have been placed in a trust long before the need for care arises, and without the deliberate intention to avoid fees, they may not be considered part of the means-tested estate. However, the local authority has the right to assess each case individually and can still treat the assets as notional capital if it deems that deprivation has occurred.
The deprivation of assets rule allows local authorities to investigate whether an individual has intentionally reduced their assets to avoid paying care fees. This rule applies under the Care Act 2014, which gives councils the discretion to include transferred or gifted assets in financial assessments if they believe the action was taken deliberately to reduce potential care costs.
Timing and intention are critical. If a person places assets into a trust shortly before needing care, or at a point where it is reasonably foreseeable that they may need care, the local authority can argue that the act was deliberate deprivation. Vague or insufficient evidence of alternate motivations, such as tax planning or future inheritance management, may not suffice.
To avoid falling foul of deprivation rules, assets should be settled into trusts at a time when there is no foreseeable need for residential care. This can be many years in advance and should be part of longer-term estate and financial planning rather than a reactive measure.
Setting up a trust is not a one-size-fits-all process. Various trusts offer distinct mechanisms and levels of protection. Understanding these options, along with their respective pros and cons, can help individuals and families make the right choice.
A life interest trust (also known as an interest in possession trust) grants a person the right to receive income or benefit from an asset during their lifetime, but without owning it outright. Most notably used within wills to protect a surviving spouse while safeguarding capital for children, this trust can also play a role in care fee planning when assets are placed into the trust on death.
Property protection trusts are frequently used in conjunction with will planning. They allow one spouse, upon death, to place their share of the family home into a trust for the benefit of the surviving partner, while ring-fencing the capital for eventual distribution to children. This can shield part of the home’s value from future care assessments if the surviving spouse later enters care.
Discretionary trusts, on the other hand, offer the most control and flexibility. Trustees have the discretion to distribute income and capital among a wide range of beneficiaries. Because no individual has an absolute right to the trust’s assets, it can be more difficult for local authorities to argue that the assets form part of the means-tested capital of any one person—though this is never a guarantee.
While trusts may offer protection against care fees in some circumstances, the legal and tax ramifications of establishing a trust must be thoroughly considered. Trusts are complex structures and involve formal documentation, compliance with relevant laws, and ongoing administrative responsibilities. In addition, trusts are subject to specific tax treatment under UK law which can impact income tax, capital gains tax, and inheritance tax (IHT).
For instance, discretionary trusts may face higher income tax rates on undistributed income, and periodic charges every ten years (known as the ‘ten-year charge’) under inheritance tax rules. Life interest trusts, depending on how they are structured and funded, may be treated differently for tax purposes and might offer more predictable tax outcomes.
It is critical to seek professional advice from wealth planners, solicitors, and accountants specialising in trust law. A well-advised strategy will weigh the benefits of asset protection against potential tax costs and legal complexity.
The effectiveness of a trust as a tool for care fee planning depends largely on the timing and purpose behind creating it. Ideally, trusts should be arranged as part of comprehensive estate and wealth planning, preferably while the individual is in good health with no imminent expectation of requiring care.
Careful documentation of the reasoning behind creating the trust is essential. If the trust is set up for multiple purposes—such as succession planning, tax optimisation, and asset protection—this should be clearly evidenced. The more legitimate, long-term, and multi-dimensional the trust’s purposes are, the harder it is for a local authority to claim deliberate deprivation of assets.
Additionally, working with experienced professionals is essential to ensure the trust is correctly drafted, executed, and registered, especially considering recent legislative developments such as the Trust Registration Service (TRS) requirements under anti-money laundering directives.
While trusts are a useful planning instrument, they are not a silver bullet. Other complementary options should be considered as part of a holistic approach to future care funding. These can include:
– Long-term care insurance: Though less common in the UK, some insurers offer plans to cover future care costs, typically taken out while the individual is still healthy.
– Equity release schemes: Releasing capital from the value of one’s home can provide liquidity to fund care without selling the property outright.
– Asset structuring: Joint ownership arrangements and gifts within allowed thresholds can also provide some level of protection when managed prudently.
– Will planning: Carefully drafted wills with trust language can help preserve assets for future generations while still allowing for flexibility should the surviving spouse require care.
Each of these options has distinct features and is best explored with the guidance of financial advisers, solicitors, and care specialists.
It’s essential to reflect upon the broader implications of planning that aims to exclude assets from care fee assessments. The care system in the UK relies on a means-tested approach partly to ensure those who can pay do so and free up limited resources for those who genuinely cannot.
There is a growing public debate around the fairness of using trusts to shield wealth from care costs. Some see it as responsible planning; others view it as undermining the social care model. This ethical dimension should be considered by those evaluating such planning techniques, particularly as future governments may change legislation in response to shifting public sentiment.
The landscape of adult social care in the UK continues to evolve, influenced by fiscal constraints, demographic shifts, and political priorities. While the use of trusts for asset protection remains a legitimate avenue when used correctly, its effectiveness is subject to both legislative frameworks and individual circumstances. There is no fixed guarantee that a trust will shield assets from care fees, especially if local authorities interpret the arrangement as a deliberate attempt to avoid contributing to care costs.
For this reason, proactive, informed, and ethically sound planning is key. Families should not rely on hearsay or generic advice but instead consult with experienced legal and financial professionals who specialise in elder law and estate planning. A well-considered trust, when established for the right reasons and with full awareness of its limitations, can form part of a broader strategy to preserve wealth, maintain personal dignity, and ensure loved ones are cared for.
Ultimately, planning for care costs is about more than safeguarding assets—it’s about securing peace of mind in later life. By making thoughtful, transparent decisions today, individuals can approach the future with greater confidence, knowing they’ve prepared both responsibly and respectfully.
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