Disabled Person’s Trust
When leaving assets in a will to family members or other beneficiaries who may be disabled, it is important that good advice is sought. At Heritage Will Writing, we offer specialist advice in the establishment of discretionary trusts and trusts for disabled persons in order to ensure what is left to them does not face unnecessary tax, can continue to be administered without the appointment by the courts of a receiver and will not undermine their existing state benefits.
WHAT HAPPENS IF I DO MAKE SPECIAL PROVISIONS FOR A DISABLED BENEFICIARY?
If you have someone who is registered disabled and is dependent on you for support, you should talk to us at Heritage Will Writing about ensuring you have the correct provisions in your will so that your estate goes to your intended beneficiary rather than to the State.
If you do not make the right provisions in your will, the person you care for may face:
- Entitlement to benefits from the Benefits Agency being stopped
- Entitlement to Local Authority funding being stopped
- A Receiver from the Court of Protection having to be appointed to manage the affairs of the family members, which may result in unnecessary delays and fees that could be expensive
- Where reasonable provision is not made in a Will for a dependant family member who is receiving local authority funding, a claim may be made upon the estate of the deceased under the Inheritance (Provision for Family and Dependants) Act 1975. The costs of such actions come directly out of the estate
- The estate being subject to a much harsher tax treatment
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Including a Disabled Persons Trust or a Discretionary Trust in your Will can ensure that you protect the benefit entitlement of your family member, and thereby guarantee continuity and security of care. The way the trust is structured may mean the difference between seeing all of the assets devoured by the relevant Local Authority within a few years or making a long lasting difference to the quality of life of the beneficiary. Including a Disabled Persons Trust or a Discretionary Trust in your will can ensure that you make provision for “extras” that you want your family member to have. These can include things like holidays and particular equipment to enhance someone’s quality of life.
By setting up a trust in your will, the future security of a family member who is unable to manage their own affairs can be protected.
WHAT IS A TRUST?
A Trust is an arrangement whereby persons (the trustees) hold and administer property or money for the benefit of others (the beneficiaries). The Trustees become the legal “owners” of the Trust property.
WHAT IS A DISCRETIONARY TRUST?
A Discretionary Trust is one in which the beneficiaries do not have the legal right to demand payment of Trust income or capital (unlike beneficiaries of other types of trusts). Payment is wholly within the discretion of the Trustees, as are the amounts and frequency of the payments. The Trustees’ powers are defined by the creator of the Trust in the Trust Instrument. When Heritage Will Writing drafts your will, it becomes the trust instrument.
WHY IS A DISCRETIONARY TRUST APPROPRIATE FOR A DISABLED PERSON?
Many social security benefits are means-tested. Many services and facilities offered by social services are also subject to means testing. The capital (or the legal right to capital) of a disabled beneficiary from a simple trust will be taken into account as if they held the money themselves, leading to a reduction in or a complete loss of the benefit or service. The capital in a discretionary trust will be disregarded.
WHAT ABOUT A DISABLED PERSONS TRUST
There is the option of making an alternative type of trust provision for a disabled person through a will. As a consequence of the Finance Act 2006, substantial changes took place regarding trusts. The majority of trusts now all have the same tax regime but those which benefit a disabled person are an exception to the rule and may attract favourable tax treatment. Therefore, any trust which is established for a disabled beneficiary could take advantage of the inheritance tax, income tax and capital gains tax reliefs available if the trust meets certain prescribed conditions.
WHO IS ELIGIBLE TO QUALIFY FOR A DISABLED PERSONS TRUST?
A disabled person means a person who is:
- By reason of mental disorder, within the meaning of the Mental Health Act 1983, incapable of administering their own property or managing their own affairs; or
- In receipt of Attendance Allowance (“AA”) under section 64 Social Security Contributions and Benefits Act 1992; or in receipt of Disability Living Allowance (DLA) under s71 Social Security Contributions and Benefits Act 1992 by virtue of entitlement to the care component at the highest or middle rate.
HOW DOES A DISABLED PERSONS TRUST WORK?
The key principle is that when writing a trust for a disabled person in a will, the person who is to be the principal beneficiary must be a disabled person at the time the trust is established.
This type of trust is also a discretionary trust arrangement (as previous) where the disabled person has no interest in possession (IIP). This means that there is no right for the disabled person to receive the income from the trust.
This version of discretionary trust differs from the straightforward Discretionary Trust outlined previously in that in these types of trust at least 50% of the capital of the trust must be applied for the benefit of the disabled person during his lifetime.
The income can be held in unrestricted discretionary trusts throughout the lifetime of the disabled person. Whilst in the majority of cases, both the income and the capital will be preserved in the trust or applied for the benefit of the disabled person, there may be circumstances where it would be desirable to appoint up to half of the capital to, or for the benefit of, other beneficiaries.
For inheritance tax purposes, the disabled person would be treated as having an IIP which means that the value of the trust would be treated as forming part of the estate of the disabled person on their death. As in the description of the straightforward Discretionary Trust above, this type of arrangement would not affect means-tested benefits as it does allow for income to be accumulated.
A Disabled Person Trust may also have other Taxable Benefits.
The trust may have a full Capital Gains Tax (CGT) allowance as opposed to the half CGT allowance which is normally available to trusts. To qualify for this, the trust must secure that the disabled person must be entitled to at least half of the income of the trust or there needs to be a right that no other beneficiary can receive the income.
VULNERABLE BENEFICIARY ELECTION
The trustees and the disabled person could make an irrevocable vulnerable person election and then the trustees could make an annual claim for a tax rebate. The effect of this election would be that the trustees would pay tax at the rate applicable if the income had arisen directly to the disabled person. For income tax purposes, the trustees would pay the same rate of tax as the disabled person would have paid.
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The information provided here is intended to address the types of questions that people are often concerned about.
To see an outline of what we do and how we deliver services for our clients, please visit the Our Services page. You will find information on the key aspects of creating your will including:
Personal Reviews, Will Writing, Estate Planning & Tax Management, Lasting Power of Attorney, Discretionary Trusts, Special Provisions & Assurance (disabled beneficiaries), Severance of Tenancy, Secure Document Storage.
If you have a specific question, want more detailed information or want your will professionally prepared, then please just get in touch.