What type of trust will you choose for your disabled or vulnerable beneficiary?
It is natural to have concerns about a beneficiary having direct access to a large sum of money, disabled or not, it could see the money wasted or used against your wishes, rather than actually provide for the individual during their lifetime.
Conversely, leaving nothing to a disabled beneficiary and more to other family members on the basis that they’ll look after the disabled person will be fraught with risk, it is a dangerous option and could put the disabled person at risk even more. The non-provision could lead to a contested Will on behalf of the disabled beneficiary under the Inheritance (Provision for Family & Dependents) Act 1975, and with the money belonging to others who could die, get divorced, have money problems of their own, the outcome of this option looks a far less attractive one.
Special trusts for the disabled arise under s89 of the ITA1984 and FA2013, and effectively give the disabled beneficiary a life interest in the trust fund which benefits from some special tax advantages that may, or may not be of interest to you. Your own financial situation will have a bearing on this.
Families may very well wish to set aside a fund to look after a disabled person, but on the basis that, if the disabled person does not need the money, it can be made available to the rest of the family. Unfortunately keeping records to make sure the s89 trust is complied with could then be quite a chore. Many families simply go for a straightforward discretionary trust and accept that, as a result there could be some tax consequences, but this is the exception rather than the norm.
What is clear is that plans should be put in place as soon as possible because there’s no telling how long we may have on this planet. You can either use a specialist provider you trust or has been recommended to you, or an organisation like the Mencap Trust Company who will set up and manage your trust for a fee. You have choices and this article is intended to help you make them.
The first difficulty arising with a s89 trust is that the disabled persons disability must fall within the Acts strict definitions, ITA1984(4) . It is worth noting that not all people considered to be disabled or vulnerable will qualify for a s89 trust, such as having an addiction or violence problem. In such circumstances a standard discretionary trust is by far the best solution.
In a s89 trust the capital and income must be applied for the use or benefit of the disabled person, the only exception to this is the annual limit which is the lesser of 3,000 or 3% of the fund value that can be applied for the benefit of another beneficiary each tax year. This is quite restrictive if you have other beneficiaries to consider.
Where such a disabled beneficiary is in receipt of means tested benefits, it is arguable that reserving money in a s89 trust, means the funds are effectively earmarked for that person, potentially this could have implications in the future when being reassessed for means tested benefits.
As an alternative, a standard discretionary trust is a well-used, tried and tested option and works for whatever problem or situation has been identified. The key is having trustees in place that will manage the fund to your instructions.
Family or friends can act as trustees and will sympathetically understand the family’s circumstances. They should seek professional legal advice and help with tax returns and keeping administrative records. This can place a cost burden on the trust fund let alone the personal time investment.
You can either set up a trust in your lifetime (and its done) or put it in your Will so that it is set up on your death. With a lifetime trust, most of the cost is paid now. A Will trust will incur cost now to set up the Will, and later to put the trust in place.
A Will trust will have to go through probate and is likely to take 12 months or more, during this time the estate will be frozen, which is not helpful. The cost is likely to be substantial. The Solicitors Regulatory Authority guidance on probate costs is 2.5% on the first 200,000, then 1% on the balance, plus Vat and Disbursements. So, a 300,000 estate would cost in the region of 7,500 on second death. Don’t forget that you may well have to provide for some probate costs on first death as well.
Okay, so if you were able to pay a fixed fee to set up a discretionary trust in your lifetime, and you can then transfer any amount up to £325,000 of assets into it. If you are a couple, it would be twice this amount. You can transfer your house in and some investments and cash and retain everything else in your own name(s). Whilst you are alive you keep control of the trust(s) as the main trustees. Nothing else changes, life carries on as it is. If you need to move to a new house, you can. If you need access to the capital or income from the trust, you can.
So, you have decided to set this up for yourselves, for your benefit, to protect your estate from day one, regardless of what problems may arise going forwards, and there are many (see next paragraph). By protecting your main assets in trust, there is a much better chance they will still be there on your demise for your chosen beneficiaries.
Probate costs, death and remarriage of the surviving spouse can see your children’s inheritance go to the new wife or husband, children inheriting at the wrong time (divorce, bankruptcy, not good with money, drugs or alcohol to name a few), saving the children from paying Inheritance Tax, Claims on the estate are all risks to your assets.
A trust helps greatly with generational inheritance planning and will be there to help all of your family’s future generations, disable or not. There is no probate to pay on the trust assets where your house has been transferred in mortgage free. If you suddenly die or lose capacity in old age, the trust fund is automatically in place ready for the next generations use, no time delays, no cost, so the financial provision is seamless and immediate.
Your trustees will manage the trust fund at your direction whilst you are alive and in charge, and after your death they will use their discretion to make sure only the right things happen based on your personal letter of wishes to guide them as to how they should act going forwards.
The cost of putting this in place is usually a lot less than your estate would suffer in probate fees, so definitely worth thinking about.
With a discretionary trust already in the background, what is certain is that if the State is already paying out means tested benefits, they will simply continue as before unaffected.
Setting up a trust whilst you are alive may also be worthwhile for Inheritance Tax planning reasons provided you survive the 7-year gifting rules. Alternatively, a whole of life insurance policy with the proceeds payable into a s89 trust or discretionary trust may be particularly advantageous for the less well off, in terms of speed and in some cases Inheritance Tax.
So, to recap, your own circumstances will help to narrow down your options, so too will your attitude to risk and desire to put plans in place. Nine out of ten families with a disabled beneficiary leave it too late.
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