Becoming entitled to an inheritance is, for most, a fortunate place to occupy, albeit of course that it arises in most unfortunate circumstances. For more vulnerable individuals in receipt of means-tested benefits and/or other financial support which is predicated upon limited financial means, an inheritance can pose concern and uncertainty as to how and when the support that they have known may continue, and indeed whether it may continue at all.
The case of Re LMS (FSS v LMS)  provides an example of how the Court of Protection sought to successfully navigate this concern. However, the somewhat thorny reasoning upon which the court’s decision was based emphasises the importance of not only considering each case on its individual merits, but also how imperative it is that, when preparing a will, the testator may have available to them as much information as possible about their beneficiaries’ own circumstances so that they may be advised as comprehensively as possible.
Background to the case
The case of Re LMS concerns an application made to the Court of Protection by the mother of LMS, a protected party who, at the time the case was heard, was 21 years old. LMS had Sotos Syndrome, learning disabilities and autism and she was assessed as lacking capacity to manage her financial affairs.
LMS’s mother had previously been appointed as her daughter’s attorney under a lasting power of attorney (LPA) for property and financial affairs. In her capacity as attorney,
LMS’s mother brought the application after LMS had been left a 30% share of her late grandfather’s estate under his will, conditional on her reaching the age of 25, at which time LMS would have been entitled to receive the funds, which amounted to £170,000, outright.
LMS’s financial circumstances were such that she was entitled to and was receiving the state benefit Employment and Support Allowance (ESA), as well as financial assistance from the local authority towards the cost of her care at a specialist residential placement. Both forms of financial help were means-tested. Receiving her inheritance outright at the age of 25 would have increased LMS’s level of capital to the extent that her entitlement to both ESA and local authority financial support would have been extinguished, until such time as her capital had again fallen to the threshold which would have gone towards establishing her eligibility once more.
LMS’s mother appreciated the financial impact of her daughter receiving her inheritance outright, and her application requested authority from the court to enter into a deed of variation on behalf of LMS, so that the inheritance due to her daughter may actually be transferred into a disabled person’s trust. The judgment confirmed that, when executing his will, LMS’s grandfather had communicated his wish that LMS should benefit financially from his will. It is to be noted, of course, that had the will been prepared differently in connection with LMS’s share, so as to incorporate a trust for her benefit at that stage, this issue would not have come before the court.
When considering the background to this case, it is also helpful to note that of course capacity is assessed on a decision and time specific basis, and while LMS had been considered to have capacity to create an LPA at an earlier stage, she was not considered to have capacity to enter into a deed of variation herself.
LMS’s mother made various arguments to support transferring the funds into trust, but it also appears quite clear that her understanding was that, if the funds were held in trust, they would be disregarded for the purposes of calculating means-tested state benefits and local authority financial support. This seems to have been at least a part of the motivation in bringing the application to court at all.
Deliberate deprivation of capital argument and best interests
The Official Solicitor, representing LMS, objected to the application, being concerned that the act of placing the funds in trust would fail to benefit LMS, bearing in mind the rules surrounding the deliberate deprivation of capital. The Official Solicitor’s stance was that varying the will to create a trust would be motivated by an intention to retain or maximise
LMS’s entitlement to state benefits and care fee funding support. As a result, putting the funds in trust would amount to a deliberate deprivation of capital which would require,
under a financial assessment, that LMS still be treated as owning that capital – it would be considered ‘nominal capital’. Her entitlement to means-tested financial support would fall away, as it would have done had the inheritance simply been passed to LMS in the manner provided for under the will.
District Judge John Beckley therefore had to weigh up whether the creation of a trust by virtue of a deed of variation would have the effect intended by the applicant, in that it would preserve LMS’s entitlement to the state’s financial support that she had been receiving. Indeed, the judge agreed with the Official Solicitor that unless the proposed deed did have this effect, it could not be thought of as being in LMS’s best interests.
When the local authority is reflecting upon whether an individual has brought about a deliberate deprivation of capital, there is a three-part test under the Care Act 2014 and the supporting Care and Support Statutory Guidance (the Statutory Guidance) that they must apply, encompassing:
a) whether avoiding paying for care fees was a significant motivating factor in making the transfer;
b) whether the need for care was foreseeable at the time of the transfer; and
c) whether the need to pay for that care was foreseeable at the time of the transfer.
Similar rules in connection with the deliberate deprivation of capital apply in the relevant regulations for means-tested benefits.
Intention behind transfer of funds and significant operative purpose
The Statutory Guidance summarises what is meant by deprivation of assets at Annex E, para 6:
Deprivation of assets means where a person has intentionally deprived or decreased their overall assets in order to reduce the amount they are charged towards their care. This means that they must have known that they needed care and support and have reduced their assets in order to reduce the contribution they are asked to make towards the cost of that care and support.
An individual’s intention to maximise their entitlement to benefits, or reduce their liability to contribute towards their costs, need not be the only intention behind the transfer of funds in order for a deliberate deprivation of capital finding to be made. This is reflected upon in Re LMS at para 21 when considering past case law (specifically, the case of R(H)1/06 which refers to the Commissioner’s comments in the case of R(SB) 40/85) (emphasis added):
It is not necessary that the purpose of securing, or increasing the amount of, supplementary benefit shall be the sole purpose, though it must be a significant operative purpose.
In line with point (a) of the three-part test referred to above and considering the motivation behind the proposed deed of variation in this case, the court reflected on whether reducing liability for the payment of care fees and retaining eligibility for means-tested benefits would be a ‘significant operative purpose’ in authorising the proposed deed. District Judge Beckley considered this was not the significant operative purpose which was at play here. Instead, it was held that the proposed deed could be approved on the basis that the deed of variation would give effect to the testator’s, LMS’s grandfather’s, intention to benefit financially his granddaughter by her inheritance. The court’s understanding of the testator’s intention was established from review of his will file.
At para 36 of the judgment reference is made to the will file and the Official Solicitor’s argument that the file is not especially helpful, stating that the Official Solicitor considers
… does not support any intention on [the testator’s] part other than that LMS should receive her inheritance outright. His decision appears to have been taken in the knowledge that it may affect LMS’s future entitlement to meanstested benefits.
At para 42 of the judgment District Judge Beckley goes on to summarise that: [The testator’s] will was drafted poorly such that his intention will be defeated by the effects of LMS’s inheritance on her entitlement to means-tested benefits. His clear intention to benefit LMS will fail unless the proposed deed is authorised.
Weight is attributed to the understanding that LMS’s grandfather discussed the possible effect of LMS’s inheritance on her entitlement to benefits; that he attempted to establish with LMS’s mother what that effect would be; and that, this information not having been provided, he decided to leave his will ‘as it was’ (para 45 of the judgment), ie as it was already drafted, because he was not aware that LMS’s entitlement to benefits would be lost as a result of the inheritance.
District Judge Beckley determined that LMS’s grandfather: … would have altered his will had he received information confirming an adverse effect on LMS’s benefits as the will was initially drafted.
The judge was persuaded that it was in LMS’s best interests to authorise the proposed deed in order better to effect the testator’s intention to financially benefit her. It follows that channelling funds that would have been received outright by LMS into paying for those costs which were previously covered by benefit income and local authority financial assistance, would not amount to allowing her ‘financial benefit’. LMS would need to experience advantage beyond the meeting of these expenses in order for financial benefit to be felt.
P’s comfort and welfare
In reaching this conclusion regard was had to, and a comparison drawn with, the Northern Irish decision arrived at in the case of In the Matter of the Will Trusts of Sarah McCullagh (deceased) . While this decision is non-binding in England and Wales it was noted that, in that case, a variation to a will trust was approved which facilitated the protection of means-tested benefits for Sarah McCullagh’s son.
The ‘significant operative purpose’ in that case was considered to be the late Sarah McCullagh’s desire to provide for her son’s comfort and welfare which, it was held, could be achieved by virtue of the funds administered by the trustees. The significant operative purpose was understood not to be to preserve his entitlement to means-tested benefits, and to deprive him of income, through the vehicle of the trust. In reaching the conclusion thatdeliberate deprivation of capital would not occur in this matter, it was understood that public policy would not be offended. The 2007 benefits tribunal case CIS/1775/2007 is an example of where it has been agreed that an individual is not necessarily obliged to spend money that has been inherited purely on living expenses which had previously been met by way of benefit income. Rather, it can be considered reasonable for an individual to use funds received in this way, to borrow the same wording referred to in McCullagh (deceased), for their ‘comfort and welfare’.
This tribunal case concerned the claimant’s receipt of income support and other meanstested benefits, from the end of 1999 to 2005. The claimant had continued to receive means-tested benefits while also receiving payments from her late mother’s estate, carefully staggered by the executor. Her inheritance totalled over £43,000, but for the most part of the period under review the balance in her bank account did not exceed £3,000. The claimant made a fresh application for income support later on in 2005, stating at that time that her capital level was just below £3,000 and explaining that she had spent the entirety of her inheritance. She was asked to account for how she had spent the inherited funds. Money had been spent by the claimant on household items, holiday cruises, bingo, new clothes, paying off her daughter’s debts and gifts.
The decision-maker for the benefits agency considered that the claimant had been aware of the capital rules for entitlement to income support and had deliberately deprived herself of capital in order to retain entitlement to benefits. She was therefore treated as still holding the most part of her inheritance – this was brought into account as notional capital.
A tribunal reached the same conclusion as the decision-maker but, on appeal, which was allowed, the Deputy Commissioner concluded that it could be ‘perfectly reasonable’ for the claimant to use funds in the way she had. It was noted at the conclusion of the case that: the decision of the decision maker… appears to be that a claimant is to be expected to spend all of an inheritance purely in paying for living expenses which had previously been covered by income support, housing benefit and council tax benefit.
While a beneficiary under a will must not spend the money on the basis that if it is kept entitlement to income support will be lost or reduced, all the facts, and the reasons for the various items of expenditure have to be examined to see what, if anything, was spent in circumstances in which the forbidden purpose was a significant operative purpose… and what would have been spent anyway on receipt of a windfall by somebody who had previously lived in relatively straightened circumstances.
Therefore, the thought process around maintaining an entitlement to state benefits must inform decisions about how funds are spent or transferred by an individual in order for there to be any prospect of identifying that a deliberate deprivation of capital has occurred.
It does appear clear that this desire to retain entitlement to state benefits on behalf of LMS was one that held weight in the case, even though the court concluded that deliberate deprivation of capital would not occur.
District Judge Beckley noted in Re LMS, when reflecting upon McCullagh (deceased), that the latter case did not go so far as to ‘create any general rule’ and that ‘the determination of whether a disposal is made with the statutory purpose is highly fact sensitive’.
Paragraph 46 of the judgment in Re LMS also makes clear that the decision of the court cannot guarantee the way in which transferring funds into trust would be considered either by the local authority or by the Department for Work and Pensions, stating that: although the Court of Protection does not have jurisdiction to determine whether LMS will be entitled to means-tested benefits and funding, it is able to discern and record its own intention in authorising the deed on behalf of LMS. It is therefore not certain whether the relevant benefits agency would be persuaded or otherwise by the court’s own decision in this case.
Indeed it would be very helpful for us to know how the benefits agency and local authority have gone on to assess LMS’s capital and whether they have been content to disregard her inherited capital held in trust. Unless there is scope to report the decision in the future, perhaps as a result of the benefits agency or local authority actually not adopting the same viewpoint as the court and this decision being the subject of appeal, it seems there would be little opportunity for our curiosity to be satisfied. Decisions reached by the benefits agency can also be somewhat inconsistent in their approach, and we are very much reminded that cases centring on this subject must turn on their own facts.
Uncertainty as to how far the decision reached in this case may be relied upon in practical terms is underlined by the conflict at its centre. It feels very much at odds that retaining
LMS’s entitlement to means-tested benefits should not be considered by the court as a significant operative purpose in authorising, in LMS’s best interests, execution of the proposed deed, when it is also expressly stated that, unless the deed can enable this very retention of benefits, it would not be in LMS’s best interests to proceed. Notwithstanding the desire that LMS should experience some financial benefit, that is, some ‘comfort’, as referred to above, from the funds left to her, it is difficult to reconcile how retaining her benefits entitlement, if not the only reason behind authorisation of the deed, can be regarded as anything other than one of the significant motivations in approving that funds may be transferred out of her hands by way of the deed of variation.
Finally, it is also worth returning to note that District Judge Beckley was critical of the way in which LMS’s grandfather’s will had been prepared, commenting that it had been ‘poorly drafted’. If the attorney for LMS was to encounter any further obstacle in connection with her daughter’s inherited funds and entitlement to means-tested financial support, an alternative avenue that she may consider exploring, in her daughter’s best interests, could be the possibility of bringing a claim against the will drafter, bearing in mind the testator’s intention to benefit financially his granddaughter and the will drafter’s duty to the testator in that respect.
This article first appeared in Trusts and Estates Law & Tax Journal May 2021.