If you have a child, family member or loved one who is disabled or otherwise vulnerable, you may be concerned about how best to provide for them in your Will. You may wish to consider using a vulnerable beneficiary will trust.
A straightforward gift is not always the most suitable option. The vulnerable beneficiary may be unable to manage money themselves, may be receiving means-tested benefits or care, or may need long-term support after your death. In those circumstances, a Will trust can be a very useful way of making financial provision while giving your chosen trustees flexibility to look after the beneficiary’s needs long-term.
What is a vulnerable beneficiary will trust?
A vulnerable beneficiary will trust, often also called a disabled person’s trust, is a trust set up for someone who meets the relevant legal definition of disability or vulnerability for tax purposes.
In a Will, this usually means that instead of leaving assets directly to the vulnerable beneficiary, you would leave them to your chosen trustees. The trustees then manage those assets and use them for the beneficiary’s benefit, often for life.
This can be particularly helpful where the beneficiary:
- cannot manage money or property themselves;
- receives means-tested benefits or care funding;
- may be vulnerable to financial pressure or exploitation;
- needs flexible long-term support rather than a lump sum inheritance;
- would benefit from trustees making decisions on their behalf.
The trustees can use the trust fund to improve the beneficiary’s quality of life. For example, the trust might help pay for additional care, equipment, therapies, holidays, transport, activities, accommodation costs or other extras which support the beneficiary.
Why use a vulnerable beneficiary Will trust?
A vulnerable beneficiary will trust can provide reassurance that your loved one will be looked after without simply handing over capital outright.
The main advantages are:
Protection of the beneficiary
The trustees hold and manage the money. This can protect a beneficiary who is unable to deal with financial matters themselves or who might be vulnerable to pressure from others.
Flexibility
A vulnerable beneficiary trust gives the trustees flexibility. They can decide when and how to use the trust fund, depending on the beneficiary’s changing needs.
Means-tested benefits and care
Because the beneficiary does not own the trust fund outright, the capital in the trust is not normally treated as their own personal asset for means-tested benefits. The trustees still need to take care when making payments, because money paid directly to the beneficiary may then be taken into account.
Long-term provision
The trust can last for the beneficiary’s lifetime. Your Will would also set out what should happen to anything left in the trust after the beneficiary’s death.
How is the trust treated for inheritance tax?
Disabled person’s trusts receive special inheritance tax treatment if the trust and beneficiary meet the relevant conditions.
Where the trust qualifies, it is not taxed in the same way as an ordinary discretionary trust during the disabled beneficiary’s lifetime. The tax treatment is more lenient than that of a standard discretionary Will trust. In particular, the trust is not generally subject to the usual ten-year anniversary charges or exit charges which apply to ordinary discretionary trusts.
On the disabled beneficiary’s death, the trust fund is usually treated as part of their estate for inheritance tax purposes and is added to their own estate in order to calculate the inheritance tax charge.
Income tax and capital gains tax
A disabled person’s trust may also qualify as a vulnerable person’s trust for income tax and capital gains tax purposes.
The trustees and the vulnerable beneficiary can make a vulnerable person election with HMRC. If the election is made, the trustees can claim special tax treatment so that the trust is broadly taxed by reference to the vulnerable beneficiary’s personal tax position, i.e. as if the trust did not exist. This can reduce the tax payable by the trust, although the position depends on the trust income, gains and the beneficiary’s own tax circumstances.
Who qualifies?
The rules are technical, but a beneficiary may qualify if they meet the statutory definition of a disabled person.
This can include someone who:
- is incapable of managing their property or financial affairs because of a mental disorder;
- receives Attendance Allowance;
- receives Disability Living Allowance at the relevant care or mobility rate;
- receives Personal Independence Payment;
- receives an increased disablement pension;
- receives Constant Attendance Allowance;
- receives Armed Forces Independence Payment.
A person may also qualify in some circumstances where they would have been entitled to one of those benefits but for particular rules, such as residence conditions, hospital stays, care home funding or similar exceptions.
The definition of mental disorder can include conditions such as dementia, Alzheimer’s disease, learning disabilities, autism and other disorders or disabilities, where these affect the person’s ability to manage their own financial affairs.
Is a vulnerable beneficiary trust right for your Will?
These trusts can be extremely useful, but they need careful drafting. The Will must be clear about who the trust is intended to benefit, who the trustees are, what powers they have, and what should happen to any remaining funds after the vulnerable beneficiary’s death.
They are particularly worth considering if you want to provide for a disabled child, adult child, sibling or other loved one, but are worried about giving them an outright inheritance.
For advice on including a vulnerable beneficiary trust in your Will, please get in touch and Rebecca D’Arcy will be glad to provide a quote and to guide you through the process of making your Will, so that you will have peace of mind knowing that the vulnerable beneficiary whom you wish to benefit will be cared for financially in the long term.
