Making a Will with a disabled child requires plenty of thought. Often, the child’s parents or grandparents will be anxious to ensure that the child is well provided-for financially for the rest of their life, whilst on the other hand not wanting to prejudice their valuable entitlement to certain means-tested state benefits and care that they need. Typically, the child is also sadly not expected to be able to manage their own finances even as an adult. This means that instead of leaving them an outright gift in a Will, it is preferable to put the money into a trust ‘pot’ for their benefit in the long term.
What is a Disabled Persons Trust?
A ‘disabled persons trust’ is a special type of trust designed to benefit a disabled individual, governed by section 89 of the Inheritance Tax Act 1984. The trust is usually established by the disabled person’s family or guardians. It is also possible for someone who currently has mental capacity, but is suffering from a degenerative condition which means that they expect to become disabled in the future, to set up a disabled person’s trust for their own benefit.
The rules of a disabled persons trust are that (i) during the lifetime of the disabled person, there must be no entitlement to income, and (ii) if any of the capital or income in the trust is used during the lifetime of the disabled person, it must be used for their benefit. There is also usually very limited provision to use the trust funds for the benefit of other beneficiaries (such as the disabled person’s siblings etc), but only up to the lower of £3,000 per annum or 3% of the trust fund. This option can be used to provide a little additional support to a carer when making a Will with a disabled child.
Who counts as a Disabled Person?
The law says that it is only possible to set up a disabled person’s trust for certain categories of ‘vulnerable beneficiary’. This includes a disabled person who is eligible for any of the following benefits (even if they do not receive them):
- Attendance Allowance
- Disability Living Allowance (either the care component at the highest or middle rate, or the mobility component at the higher rate)
- Personal Independence Payment
- Increased disablement pension
- Constant Attendance Allowance or
- Armed Forces Independence Payment
A vulnerable beneficiary can also mean someone who is unable to administer their own affairs or manage their property because of a mental health condition. If relevant, it is important to check with a medical professional that the condition in question is covered by the Mental Health Act 1983. Relevant conditions would include Alzheimers, dementia, Down’s Syndrome, autism, schizophrenia and certain learning disabilities, but alcohol and drug dependency are expressly excluded.
How is a disabled persons trust taxed?
A trust for a vulnerable beneficiary is entitled to special, beneficial tax treatment. The transfer into the trust is a ‘potentially exempt transfer’ for inheritance tax purposes, so if the settlor survives the gift into the trust by 7 years then there is no inheritance tax to pay. There is no 10 yearly charge to inheritance tax due, unlike with most other types of trust. On the death of the disabled person, the assets in the trust are added to their personal assets and charged to inheritance tax at 40% in the usual way, subject to their tax free allowances.
What about the disabled child’s benefits?
The trust is a discretionary trust, which means that the disabled person is not entitled to the underlying trust income or capital. As a result, the existence of the trust should not affect the disabled person’s means-tested benefits, as long as the trustees avoid advancing large amounts of capital to them.
Making a Will with a disabled child – what happens on death?
When the disabled person themselves dies, usually the disabled persons trust comes to an end, and the remaining funds in the trust are passed out to the other beneficiaries chosen by the person who set up the trust originally. Typically, these are other close family members.
Chiltern Wills is a Will writing business run by former London solicitor, Rebecca D’Arcy, and based in Beaconsfield. If you would like to discuss establishing a trust for a disabled person in your Will, please call us on 01494 708688 or email info@chilternwills.com for a free initial discussion.
