Is it possible to draft an effective declaration of trust stating that an asset beneficially belongs to spouse A, but that upon the loss of A’s mental capacity the beneficial ownership transfers to spouse B? I appreciate that advice would need to be given about the deprivation of assets rules, but the concern here is to ensure that assets owned by spouse A (who has more capital assets) could be used for spouse B’s benefit (rather than solely for spouse A’s benefit, or customary gifts by spouse A) if A loses capacity, without equalising their estates whilst they both have capacity (as spouse A pays tax at a lower rate than spouse B).
Might not such an arrangement be self-defeating – if it could be argued that the gift to B is not effective until A has lost capacity, at which time A is incapable. However, provided A and B are both in their first marriage and that there is no doubt it will endure, there might be no one to take this point.
If it is considered the arrangement would work in principle, as “capacity” is decision specific it will be necessary to define the point in time at which A’s beneficial interest ceases and, perhaps, the nature of the evidence required to validate that.
If A’s name is on the legal title of any of the assets in question, there will need to be an LPA, or deputyship, in place at the relevant time in order to be able to deal with those assets. If a deputyship order is required, that might cause the Court of Protection to scrutinise the arrangement.
Leaving aside the question of deprivation, one of the biggest hurdles could be IHT, as the declaration of trust, if effective, would create a lifetime chargeable transfer to which the spouse exemption rules would not apply (although the spouse’s interest could be a transitional serial interest). The trust would be within the relevant property regime and subject to both periodic and exit charges.
Spouse A can bind himself (by deed) to make a future payment or transfer to spouse B. The covenant will be enforceable against A notwithstanding A’s lack of capacity if he had capacity at the date he made the covenant. A covenant to pay or transfer property to B upon A losing capacity might be difficult to word with certainty, but apart from that I don’t see why there should be an objection to it.
You could combine the covenant with a transfer of the relevant property from A to B (holding on trust for A) and give B a right to take the property once A is obliged to give it to her under the covenant.
That would appear to approximate to what you have in mind.