Where a client wants to provide for a beneficiary who is disabled, they may want to leave assets in a vulnerable person’s trust. The reason for this could be because they do not think the beneficiary will be able to manage a large sum of money dependant on the type of disability the beneficiary has. So instead of the need to appoint a deputy to manage the financial affairs, which is likely to be a long and costly process, the assets can go into the trust where they will be managed by trustees.
As a vulnerable person’s trust is a type of discretionary trust, there must be more than one beneficiary. However, you can select the disabled beneficiary as the primary beneficiary alongside other beneficiaries.
Another benefit of leaving assets in this type of trust means the primary beneficiary’s means-tested benefits will not be affected in any way. If a primary beneficiary receives a large inheritance outright, the Local Authority will look to re-assess any benefits they are currently receiving and review these which will likely be to the detriment of the primary beneficiary. Placing the funds in a disabled person’s trust also means the Trustees can manage the trust fund so the primary beneficiary continues to receive those benefits.
The disabled beneficiary is treated as the primary beneficiary for the purposes of the trust. This means while they are alive, the Trustees are required to apply any income and capital in the trust for the benefit of the primary beneficiary as they see fit. This is in contrast to a basic discretionary trust where a primary beneficiary cannot be defined although a non-binding letter of wishes can request for someone to be treated as the main beneficiary.
As this trust is a type of discretionary trust, the trustees do have complete discretion over the trust funds and are under no obligation to distribute anything to the primary or surplus beneficiaries. However, anything that is distributed by the trustees must be for the benefit of the primary beneficiary. It is advisable for the testator to write a letter of wishes accompanying the Will which provides some guidance to the trustees in how they would like the assets to be distributed. It is important to note that a letter of wishes is not legally binding and therefore there is no obligation placed on the trustees to follow them.
To qualify for a vulnerable person’s trust, the primary beneficiary must meet the definition of ‘disabled’ as defined in section 89 of the Inheritance Tax Act as a person who is:
- by reason of mental disorder within the meaning of the Mental Health Act 1983, incapable of administering their property or managing their affairs;
- in receipt of attendance allowance;
- in receipt of a disability living allowance by virtue of entitlement to the care component at the highest or middle rate;
- in receipt of personal independence payment by virtue of entitlement to the daily living component;
- in receipt of an increased disablement pension;
- in receipt of constant attendance allowance; or
- in receipt of armed forces independence payment.
Since 17th July 2013, trustees can, at their discretion, apply income and capital to any of the beneficiaries of the trust but this must be no more than £3000 or 3% of the capital in the trust (whichever is lower in value) per annum. This amount will be shared between the other beneficiaries.
Where the client has more than one disabled child, a trust must be created for each child.
On the death of the primary beneficiary, the trust will continue but as a basic discretionary trust only unless the trust itself is dissolved in which case the assets in the trust will be distributed to the default beneficiaries.
This type of trust receives favourable tax treatment providing it satisfies the requirements of section 89 which we set out above.
While the primary beneficiary is alive, the trust is treated as an interest in possession trust even though the trust is similar to a discretionary trust. This means the trust is not subject to anniversary and exit charges.
On the death of the primary beneficiary, the trust fund is revalued and treated as part of their estate for IHT purposes.
If a share in the main residence forms part of a disabled person’s trust and the primary beneficiary is a direct descendant, it will qualify for RNRB purposes.