What is Disregarded Capital?
In years past, it was believed that you could either sell off most of your assets, or gift them to loved ones, so that they would not be included in your means test when trying to get assistance paying for long term care. Therefore, many consumers, and their families believed that they could pass off their assets well ahead of their means test and those assets wouldn’t be included in the assessment by the Local Authority. The idea behind these actions was to do everything possible to hopefully get the local authority to pick up the tab on long term care, allowing the consumer to receive free care. This is knows as disregarded capital or deliberate deprivation of assets. Disregarded capital was a way to help offset the cost of long term care.
However, local authorities do have the ability to investigate where the assets of the elderly have gone and the underlying reason for disposal of the assets. This removal of the assets right before the means test, or deliberate deprivation of assets, is illegal when it is determined that the assets were removed solely to avoid paying for long term care. However, there are some loopholes to this deliberate deprivation. Some elderly consumers really do just wish to give their assets away to family or friends and they choose to do so for legitimate reasons. For example, one of these legitimate reasons is to mitigate their inheritance tax liability for their beneficiaries. In this particular instance, the consumer would need to prove that this was the reason for the transfer of the property. In order to prove such a thing, the consumer would be seen to earn a market rate of income if they were to stay in the property after the ownership had been transferred.
Examples of Deliberate Deprivation
There are several examples of deliberate deprivation of assets, or deprivation of capital, that can be used leading up to the means test performed by the Local Authority. Here are a few examples of deliberate deprivation:
- Large lump sum payments, such as gifts to family members or friends
- Transferring the title deeds of property
- Reducing capital or savings through large purchases
- Exchanging large sums of cash for other things that cannot be used in a means test such as investment bonds
- Selling an asset for less than it is worth
- Putting cash into a trust
The timing of one of these transfers could be crucial to determining whether or not it can be considered deliberate deprivation. If the consumer was fit and healthy when one of these transfers took place, the exchange might not be deemed deliberate deprivation. It is usually last minute exchanges, when the consumer knows that they will need long term care, that look most like deliberate deprivation.
The Repercussions of Deliberate Deprivation
There are repercussions for those consumers who engage in deliberate deprivation. The Local Authority can recover any costs that it has had to contribute to the consumer’s care costs from the person to which the asset was transferred. This can occur if the deliberate deprivation occurred within 6 months of the consumer approaching their Local Authority for financial assistance with long term care. This six month limit is only applicable to this exact type of recovery. There is no real set time limit beyond which any Local Authority is forced to ignore the transfer of assets or capital.
It is always best for the consumer to consult with a financial professional before any action is taken in trying to get assistance paying for long term care. This professional could be an estate planner or solicitor. They can help determine the best course of action when trying to attain help with long term care fees and can also ensure that everything that takes place is legal and acceptable.