Are you an extraordinary family?

We love to meet client families whose life stories are not just ordinary narratives. Many of our clients share their extraordinary tales of resilience, love, and dedication. Among them are the inspiring parents raising children with disabilities. We applaud these amazing humans who face their unique challenges with unwavering strength and determination.

A Vulnerable Person’s Discretionary Trusts

In this blog, we delve into the importance of protecting children who, for whatever reason, may find it difficult to be independent adults. We look at the favourable tax treatment of a Vulnerable Person Discretionary Trust and vital strategies that can safeguard a child’s future and ensure their well-being despite uncertainties.

Read on as we explore what it truly means to be an extraordinary family. Estate planning allows parents to continue advocating for their differently-able child, and keep them safe and secure for life.

Making a Will

If you haven’t already, an obvious first step is to make a Will.

Making a Will is critical as it lets you decide who gets what when you die. If you die without one, you won’t have a say in who inherits your wealth. Instead, the intestacy rules will determine who inherits your wealth.

While nothing stops you from writing a Will yourself, getting advice is a good idea. That way, you can ensure it’s legally binding and that your wishes will be followed.

You can also make sure you maximise the benefits of any tax reliefs that your estate might be entitled to. It’s sensible to start thinking about broader estate planning that can maximise the value of assets you can leave behind. Ask family and friends for a referral to their trusted Will specialist.

Trusts for Disabled & Vulnerable People

A Trust can be a useful tool to provide financial provision for a disabled or vulnerable person throughout their lifetime. The type of Trust required depends on your personal circumstances, the flexibility needed and the value and type of assets involved.

The two options available are a Discretionary Trust and a Disabled Person’s Trust.

What is a Discretionary Trust?

A Discretionary Trust is a type of Trust used where more than one person may benefit, and it’s for the Trustees to decide how and when those people will benefit.

In a Discretionary Trust the Trustees have complete flexibility in deciding how they use the income and capital in the Trust fund for the beneficiaries.

Why do I need a Trust?

• To protect a vulnerable person

• To protect means tested benefits and state funded support

The beneficiaries of a discretionary trust do not have any fixed entitlement to receive money from the Trust. They only have a potential right to receive a benefit.

For the Trust to be completely ‘discretionary’ there has to be more than one beneficiary. Along with your disabled or vulnerable child, the beneficiaries might include other children, grandchildren and, possibly a charity.

What are the advantages of a discretionary trust?

The advantage of a Discretionary Trust is that the Trustees can make decisions to meet the changing requirements of any of the beneficiaries, including the disabled or vulnerable person. The Trustees can use their discretion to use any capital or income for the beneficiaries depending on their needs.

The law allows for a Discretionary Trust to last up to 125 years. What usually happens is that on the death of the disabled or vulnerable person, the Trust is ‘wound up’ or closed and any assets left are paid to the other beneficiaries of the Trust.

Although a Discretionary Trust is very useful, the tax treatment is not favourable and needs to be carefully considered.

If the value of the Trust exceeds the Inheritance Tax threshold (£325,000 in 2024) there will be an Inheritance Tax charge when the Trust is set up. There will also be an Inheritance Tax charge every ten years and then whenever a payment is made from the Trust. Income tax is charged at 37.5% on dividend income and at 45% on all other income. Capital Gains tax will be charged at 28% for disposals of residential property and 20% for other disposals with the Trustees only being entitled to one half of the annual exemptions.

How is a trust helpful if a vulnerable person receives state benefits?

As the beneficiaries are not ‘entitled’ to receive anything from the Trust, the Trust assets held by the Trustees should not be taken into account when assessing any of the beneficiary’s entitlement to means-tested benefits or support.

Where a beneficiary is receiving means-tested benefits or support, the Trustees need to be careful how they use the assets. The assets should not be used in a way which endangers any future claim for means-tested benefits or support. For example, paying for a holiday for the beneficiary is fine but giving them a lump sum may not be.

What is a Vulnerable Person’s Trust (VPT)?

A Vulnerable Person’s Trust is one set up to specifically benefit a ‘disabled person’ and is largely discretionary. This means the Trustees are in control of how the Trust will be administered. A person is defined as disabled if one or more of the following apply:

• They are incapable of administering their own property or managing their own affairs due to mental disorder within the meaning of the Mental Health Act 1983.

• They are receiving one of the following benefits:

– Attendance Allowance

– Disability Living Allowance (DLA) based on entitlement to the care component at the highest or middle rate, or the mobility component at the higher rate

– Personal Independence Payment (PIP)

• They would be entitled to receive one of the above benefits if they could satisfy prescribed conditions as to residence or presence in the UK.

• They would be entitled to receive one of the above benefits but for being in a state-funded institution, e.g. a care home or hospital.

Is a Vulnerable Person’s Trust better than an ordinary Discretionary Trust?

The main advantage of a VPT over a standard Discretionary Trust is the favourable tax treatment it receives for Inheritance Tax, Income Tax and Capital Gains Tax.

In order to qualify for the favourable tax treatment, the Trust must state that during the disabled person’s life, the income and capital will be entirely used for the benefit of the disabled person. There is a small exception that we won’t include here, but we can explain if you get in touch.

If these conditions regarding capital and income are met, the Trust will not incur any charges to Inheritance Tax when payments are made from the Trust and the ten yearly Inheritance Tax charges incurred by a Discretionary Trust will not apply.

For Income Tax and Capital Gains Tax, the Trustees have to make an election to HM Revenue & Customs for favourable tax treatment. This means the income and gains are effectively taxed as if the trust fund belongs to the disabled person.

When should the trust be set up?

A Discretionary Trust and a Vulnerable Person Trust can be set up by any person during their lifetime by creating a Trust Deed, or on death, under the terms of their Will. This decision needs to be discussed as it will depend on a number of factors.

Carisma Wills can refer you to a specialist trust lawyer for lifetime trusts if needed.

Who should the Trustees be?

The appointment of suitable Trustees will ensure that the Trust can run smoothly and provide the appropriate protection for the disabled or vulnerable person.

The Trustees under a Discretionary Trust have wide powers, so it is important to carefully consider who will be responsible. If the Trust Fund is of high value or is complex it may be sensible to appoint an independent professional as a Trustee.

Trustees can be family members, friends or professionals, or a mixture of these.

Why is a Letter of Wishes needed?

A Letter of Wishes is your opportunity to explain to the Trustees the reasons for setting up the Trust. You use it to give guidance on how the Trust fund should be used. As your wishes and the needs of the disabled or vulnerable person will continually change, the Letter of Wishes will need to be flexible and reviewed regularly.

Any Letter of Wishes should also make clear how the assets should be distributed to the other beneficiaries on the death of the disabled or vulnerable beneficiary of the Trust. Whilst a Letter of Wishes is not legally binding on Trustees, it can be referred to as guidance.

We have a blog that explains how to write a letter of wishes. We also provide a FREE Template Letter of Wishes.

Take action today

A little preparation will help your loved ones. The most important thing to do now is to start a conversation.

Call us today to find out how we can help you.