Ian Dyall, estate planning expert at Towry answers the sensitive question of balancing the costs of elderly care with the rewards of family inheritance.
A high priority for many people is to try to help their family financially, perhaps by paying off university loans, or helping grandchildren with purchasing their first home. The real dilemma is "what is affordable?", particularly when future financial needs are unknown.
The most significant unknown cost is the cost of long-term care. With the average care home costing around £30,000 a year and the average stay just over two years long, even a relatively short period in care may require significant savings to fund.
The risk of being in a care home rises to nearly 16% for adults aged 85 and over, and for these reasons many people are reluctant to gift money that they may potentially need.
Unfortunately, this hesitance to spend some of their savings could result in a larger estate on death and therefore a higher Inheritance Tax (IHT) liability. Every £100,000 that a person retains to pay for care fees could add £40,000 to their IHT bill.
As people get older, the amount of money they require to maintain their lifestyle becomes more predictable, and the impact of inheritance tax becomes more imminent, so people become more willing to gift. However, there is a danger in leaving things too long.
Significant gifts (generally those over £3,000) usually take 7 years to become effective in reducing the liability to IHT, and if an individual loses mental capacity before they start gifting, their attorneys (if they have any) are not able to make significant gifts without approval of the court. This means it is important to gift early wherever possible.
The solution to elderly care versus family inheritance is in planning early.
The main aim of IHT planning is to balance the desire to save tax against the need to retain sufficient funds to maintain financial security in later life. The optimum balance will differ for different individuals.
Creating trusts during someone’s life or through their Will certainly benefit children and grandchildren. Trusts do not increase their taxable estate and can help future generations mitigate the issue of tax, so planning across generations is usually the best approach.
However, where that is not possible, cash flow planning can also help the current generation identify how much of their own estate they need to retain access to, and how much they can safely afford to spend helping their family.