Trusts for vulnerable or disabled people
Trusts for the vulnerable and disabled or mentally handicapped are a traditional means of providing for those who may not be capable of managing their own property and affairs.
They are also an effective way of ring fencing and preserving property for those in receipt of means tested benefits.
Trusts for vulnerable, disabled and mentally handicapped people are very complex. Please take the time to read our guide to the issue. Download the PDF or read the FAQs below.
A guide to trusts for vulnerable and disabled people
It is often impractical if not impossible to transfer large amounts of cash or property to an individual who is not able to manage it. Trusts have been a traditional means of providing for a mentally handicapped or vulnerable person. Assuming that person does not have the capacity to manage the funds himself, and lacks the capacity to appoint an attorney, a trust is often preferable to the cost and expense of a court appointed deputy to manage funds for him. One could simply transfer the money instead to a responsible person to look after the vulnerable person, but he may not want the responsibility that involves, even if he can be trusted.
Generally yes. Gifts (beyond a small amount) to any person claiming means tested benefits will compromise those benefits, but if cash or property remains in a trust it is usually disregarded on a means test and welfare benefits should not be compromised. If the trust produces income it is better that the trust gives the trustees power to accumulate it and choose when to pay it to the beneficiary, because the benefit system will not penalise someone who has to rely on the trustees’ discretion to pay it over. Conversely, if the beneficiary is entitled to trust income as it arises (and the trustees have no choice) then his welfare benefits could be withdrawn.
You transfer money and property to the persons you want to handle it (the trustees), of whom you may be one. They are bound by the terms of the trust to look after the beneficiary financially and to act in his best interests.
The creation and administration of trusts is complex. All new lifetime trusts, apart from disabled persons’ trusts, are “relevant property” trusts for inheritance tax purposes. It means that the cash or value of property transferred to the trust affects how your estate will be treated for inheritance tax purposes after the transfer. If you are transferring more than the value of your unused nil rate band (currently £325,000), there is a potential inheritance tax (IHT) charge of 20% on the surplus. The value of trust property is subject to ten year anniversary charges and charges on property leaving the trust. Trust income is subject to income tax (rates of income tax are determined by the type of trust) and there may be capital gains tax consequences.
It is possible to avoid the IHT charges if the trust qualifies as a disabled person’s trust. It may also enable the trustees to pay income tax and capital gains tax at the rates payable by the vulnerable beneficiary, rather than the rates applicable to trusts.
You can also make exempt transfers of unlimited amounts of cash or property to a qualifying disabled person’s trust, and it will be treated for IHT purposes in the same way as a gift to an individual, provided you survive the gift by 7 years. If you do not, then the value of the gift is aggregated with your estate on your death, possibly increasing the amount of inheritance tax payable by your estate. One could seek insurance against the risk of death within 7 years. The cost is usually quite cheap in most cases, depending on the state of health of the settlor (the person making the gift).
Generally speaking, qualifying beneficiaries include those without mental capacity and those on attendance or disability living allowance. There are in fact seven categories of disabled person in the Inheritance Tax Act, but the foregoing is a general guideline.
No. Where sums involved are within the IHT nil rate band (currently £325,000 or twice that if a husband and wife are making gifts to trustees), then a discretionary trust is a good alternative. In fact a discretionary trust usually gives the trustees more flexibility than a qualifying disabled person’s trust, which by its nature is strictly defined by statute and limits the trustees’ powers to benefit anyone other than the disabled beneficiary during his lifetime. If the priority is to keep trust property outside the beneficiary’s estate for IHT purposes, so that it is not taxed on his death, then a trust other than a disabled person’s trust is the better option.
Choosing provisions for disabled beneficiaries
The legislation for disabled beneficiaries of a trust can be incredibly complex. If you are considering any form of trust you and your adviser will need to take into account:
- whether means tested benefits are a primary consideration
- whether it is preferable to leave matters to another individual, to look after the vulnerable person’s affairs, or in trust
- whether a trust is preferable to the cost and expense of a court appointed deputy
- whether property in the trust is to be treated as part of the vulnerable person’s estate for Inheritance Tax (IHT) purposes, possibly triggering a 40% charge on the death of the vulnerable person, or whether the property in trust is to be treated as outside the vulnerable person’s estate subject to the anniversary and exit charges if funds are substantial (considerably more than the nil rate band)
- income tax and Capital Gains Tax (CGT) transparency – whether a vulnerable person election ought to be made, and the restrictions on the trust generally if the election is made
- the CGT conditions; whether it is intended to obtain the full (rather than one-half) annual CGT relief, and the possible restrictions on the flexibility of the trust if the full annual exemption is sought, and whether the CGT free uplift on death is important
- whether payments to others from the trust, apart from the vulnerable person, is envisaged
- the purpose of the trust - its purpose should always be the priority, only then one looks at its tax efficiency
How can Linder Myers help?
We advise that you contact Linder Myers as soon as you become aware that you require a trust for a vulnerable, disabled or mentally handicapped individual.
At Linder Myers we have experience in drafting these trusts and helping our clients negotiate this complex area of law.