VULNERABLE / DISABLED PERSONS TRUSTProtecting Inheritance
Why use a Disabled Persons Trust?
If you plan on leaving an inheritance to a vulnerable or disabled beneficiary a trust can provide financial stability whilst also protecting them and their inheritance. The type of trust employed will depend on the individual who needs to be protected, the flexibility required, and the value of assets involved. In many situations a specific form of discretionary trust, often called a ‘Disabled Persons Trust’ is chosen as it has a more favourable tax treatment than a simple discretionary trust (provided certain conditions are met).
Although trusts have many benefits, this particular trust ensures that where the beneficiary is entitled to means-tested benefits, the entitlement is maintained. Additionally, control of the trust fund can be handed to trustees who then act in the best interests of the disabled / vulnerable beneficiary, this is essential where the beneficiary is incapable of managing the trust assets themselves.
What are the benefits?
STATE BENEFITS
The trust will protect the disabled person’s entitlement to means-tested benefits, and will therefore ring-fence their inheritance whilst they continue to receive benefits (this is because assets in a Trust aren’t assessed).
CONTROL
These specialist trusts allow an inheritance to be looked after by Trustees, on behalf of the disabled/vulnerable beneficiary. This is crucial if the disabled person would struggle to manage the inheritance and offers protection if they are at risk of financial abuse.
TAX
Assets held in a qualifying Disabled Persons Trust, for a qualifying disabled beneficiary, are treated more favourably by HMRC with regards to Inheritance Tax, Capital Gains Tax, and Income Tax purposes. This means that more money is available to the trust beneficiaries, a significant advantage over a standard Discretionary Trust.
SUCCESSION
Where assets are inherited directly by a person, you cannot then dictate to whom they will pass when that person later passes away. However, by using a trust, when the disabled beneficiary passes away, any remaining funds will be passed to the right people in line with your wishes, this my be other children or grandchildren for example.
SIMPLICITY
This type of trust requires little administration and is simple to create / manage.
Frequently Asked Questions
A trust is an arrangement that allows assets such as property and cash to be held by trustees on behalf of a beneficiary or several beneficiaries. The assets are looked after by trustees who manage the assets and decide how to use them for the benefit of the beneficiaries.
A disabled/vulnerable person is classed as disabled if they are incapable of administering property or managing his or her affairs because of a disorder within the meaning of the Mental Health Act 1983 (i.e. any disorder or disability of the mind) or if they are receiving any of the following: Attendance allowance, Disability living allowance with an entitlement to the care component at the higher or middle rate, or the mobility component at the higher rate, Personal independence payment with an entitlement to the daily living component, Increased disablement pension, Constant attendance allowance, Armed forces independence payment.
Trusts are managed by trustees. It is very common for clients to choose their spouse or partner to be named as a trustee as well as other close family or friends. Your trustees are responsible for assets and will decided how they are managed and spent, so it is important that the people you appoint are trustworthy and reliable, especially when dealing with the needs of disabled/vulnerable beneficiaries as they will decide when and to what extent the trust fund will be used for their benefit.
When the trust is drafted you will be asked to decide who should benefit when the main disabled beneficiary passes. The trustees then have 5 years to distribute any remaining funds to the other named beneficiaries. Once all the funds are distributed, the trust comes to an end.
If you leave assets directly to the disabled beneficiary, it will create problems for them, especially if they are receiving means-tested benefits (the inheritance could mean that benefits are withdrawn). If the beneficiary has learning difficulties or is vulnerable, they may be subject to financial abuse, or they may simply be unable to use the inheritance for the best. In most situations a trust is necessary to properly safeguard the funds and the individual.
Although leaving money to a family member in the hope that they would look after the disabled person in the future may seem like a good idea, sometimes people’s circumstances may change. For example, they may come under financial pressure, go bankrupt or get divorced. The could therefore be lost and would then not benefit the disabled person.
