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Trusts for Disabled People Explained – Disabled Person’s Trust

Putting in place a Disabled Person’s Trust, which is often referred to as a Disability Trust or a Vulnerable Person’s Trust, can be daunting. Parents are understandably concerned about putting the right plans in place and whether using these special Trusts for disabled beneficiaries is relevant for them. We hope that this piece will answer your questions.

Of course, many parents are worried about what will happen when they die, especially if their children are under the age of 18. For parents of disabled or vulnerable children, often this worry is more acute and does not ease once their child reaches 18. For them, questioning “What happens when I die?” takes on a whole new meaning. Without the right advice, planning for the future to protect a disabled or vulnerable loved one can be overwhelming.

What do you need to consider?

Without a parent or carer in their life a vulnerable or disabled person will be more dependent on others to manage their finances, including any means tested benefits and support they are entitled to. They might then become even more vulnerable and this makes it very important that robust protection is in place for their future benefit.

A Trust is often the perfect solution. A Trust provides peace of mind that the disabled or vulnerable person left behind is financially provided for throughout their lifetime.

A Trust means any assets (be it a home or property, savings or investments) are held by trusted individuals (known as Trustees) for the benefit of others, in this case a disabled or vulnerable person (known as the beneficiary or beneficiaries). It is the Trustees who decide how to use the assets for the benefit of the beneficiaries and they are directed by a Trust document and a Letter of Wishes. A Trust contains the legal provisions, and the Letter of Wishes brings the Trust to life.

It is important to also think about whether the disabled or vulnerable person is claiming means tested benefits or is likely to do so in the future. If they are, a carefully worded Trust can ensure those means tested benefits are protected and can continue, even if they have inherited significant sums of money.

Trusts for disabled beneficiaries

There are two types of Trusts to consider: a Disabled Person’s Trust and a Discretionary Trust. The Trusts work differently and the Trust which is most suitable largely depends on a person’s personal circumstances, the individual that needs to be protected, the flexibility needed and the value and type of assets there are.

In this piece, we focus on a Disabled Person’s Trust in more detail. There is further information about Discretionary Trusts here.

What is a Disabled Person’s Trust?

A Disabled Person’s Trust is created to specifically benefit a ‘disabled person’. The Trustees, that you appoint, are in control of how the Trust is administered.

In order to qualify for this type of Trust, the beneficiary must fall into the definition of ‘disabled’. For these purposes, a disabled person is a person who is:

• in receipt of Disability Living Allowance (DLA) care component at the higher or middle rate or mobility component at the higher rate; or,
• in receipt of Personal Independence Payment (PIP); or
• in receipt of Attendance Allowance; or
• unable to manage their affairs by reason of mental disorder within the meaning of the Mental Health Act 1983.

With a Disabled Person’s Trust, Trustees can use the capital or income of the Trust for the benefit of the disabled person and it is at their discretion as to how this is done. Guidance should be provided to your Trustees in the form of a Letter of Wishes. A Letter of Wishes covers things like:

• Why the Trust has been set up;
• How the Trust should provide for a disabled or vulnerable beneficiary during their lifetime;
• Who should act as Trustee if your chosen Trustees can no longer act; and
• What should happen to the Trust after the disabled or vulnerable beneficiary has died.

The Trustees have flexibility in how they make provision for the beneficiary which means that plans can be tailored to meet their needs.

Whilst the taxation of Trusts can be very complicated, the position with a Disabled Person’s Trust is simpler because for Inheritance Tax, Capital Gains Tax and Income Tax purposes the assets within a Disabled Person’s Trust are treated as being owned by the disabled or vulnerable individual outright. This often means that a Disabled person’s Trust is very tax efficient.

An important point to note is that, to qualify for this favourable tax treatment, the Trust must be set up in a way that the income and capital is wholly applied for the disabled person’s benefit. With a minor exception, assets cannot be distributed to other beneficiaries while the disabled or vulnerable person is alive. For many families, this is exactly what they want; to be certain that any money left for their vulnerable or disabled child to only be used for them throughout their lifetime. However, some families prefer flexibility for the Trust to also benefit others (perhaps their other children) and if this is the case another type of Trust may be more appropriate.

Is a Disabled Person’s Trust the right one to choose?

You need to consider the age of the disabled person and the nature and long-term prognosis of their disability. You must also consider any benefits and funding they receive, the needs of other dependents and the value of your assets.

How can we help?

Whilst there is a lot to consider, we are here to help. We can discuss your specific circumstances and advise on how to set up the Trust, when to do this and how to appoint Trustees. We can explain why writing a Letter of Wishes is important and help prepare it, and also help you incorporate the Trust into the terms of your Will.

We can help you consider and protect the needs of your family and those of the disabled person you are protecting for the future.

We also run a programme of free webinars on the subject of Decision Making and Planning for the Future. Learn more about these events and register here.

Please do not hesitate to contact us to discuss your specific circumstances in more detail.