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The growing cost of care and support services during retirement, and the prospect of tax diluting the value of the estate after death are real fears for many of us in or approaching retirement.
But there are ways to help minimise the exposure of one's assets for care costs. Susan Mendelssohn, senior associate in private client and property services at McKay Norwell in Edinburgh, offers her top ten tips on asset protection for the family.
1 What is asset protection?
It isn't a product like an insurance policy, but more of a "wrapper" within which several facets of advice and services all combine to protect the wealth of people as they become older.
2 Principal aims
These are to ensure that individuals and/or couples maintain as much as possible of their assets right up to the end of their lives, and for these to be passed on to their chosen beneficiaries after death, free of as much tax liability as is legally and practically possible.
3 Main challenges
The biggest threats to these aims are the cost of nursing care (both residential and non-residential), and liability to inheritance tax (IHT). Steps need to be taken to avoid a situation where assets built up over many years are eroded by nursing or care home fees if people are no longer able to look after themselves independently, and to minimise IHT liability. Each case will require a separate strategy dependent on matters such as the value of heritable and moveable assets, level of income, family relationships, age and state of health.
4 Care snare
In the case of married couples, it is common for one spouse to require nursing care while the other retains the ability to live independently.
In such circumstances, with proper planning and advice in relation to investments and the drafting of wills, it should be possible to ensure that the assets of the party not requiring care are protected and that these remain under their personal control to use as they see fit, and not as dictated by the state.
5 Widening net
It is a misconception that asset protection is only for wealthy families. House price inflation and the availability of financial investment products such as ISAs have increased vulnerability to the IHT threshold, as have changing social mores. For example, if a husband bequeaths all his assets to his wife, then the first £650,000 of the estate is free of IHT. However, in the case of second marriages and extended families, a wife may no longer be the only or main beneficiary in a will, in which case IHT of 40 per cent is chargeable after £325,000.
6 Timing
In practical terms, most people start to think about asset protection from their early fifties onward. By that stage in life they will be mostly settled, are unlikely to have any more children and will have a fair idea of the extent of their assets and income levels, both at the present time and in the foreseeable future.
7 Get the wheels in motion
Essential to asset protection is writing a will and, preferably at the same time, granting a power of attorney to a close relative or friend, or to a trusted adviser. Depending on its specific powers and whether it is a continuing and/or a welfare power of attorney, powers of attorney are designed to ensure that a person's wishes regarding their personal financial matters and their welfare are carried out if he or she should become physically or mentally incapacitated at any time during their lifetime.
8 The process
Ideally, powers of attorney and wills should be signed simultaneously. Prior to signing a power of attorney, the individual(s) involved will need a certificate signed by a practising lawyer or doctor stating that they have the mental capacity to grant the power of attorney and understand its terms and the powers being granted.
9 And the cost?
This will vary depending on the complexity of the casework involved, but in most cases the legal expenses will be relatively small in comparison to the potential savings.
10 The right thing
Asset protection is as much about fairness as saving money. Perhaps more than any other sector of society, older people consider it their "duty" to pay for public services – indeed even in retirement many are still doing so, such as through income tax on pension and investment income. Consequently, it is only fair that they should be able to make provision to ring-fence those parts of their hard-earned possessions to which the state is not entitled.
If you need advice on how to protect your assets, contact Susan Mendelssohn or Robert Forman on 0131 222 8000.
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