When planning your estate, it is important to consider the individual needs of the people who may inherit your assets. For families supporting a disabled or vulnerable relative, leaving an inheritance outright may not always be the most appropriate solution.
A substantial inheritance could affect eligibility for certain means-tested benefits, depending on the type of benefit, the beneficiary’s financial circumstances and how the inheritance is received. Some individuals may also need support managing money or making financial decisions.
A carefully structured trust may offer an alternative, allowing assets to be managed by trustees for a beneficiary’s benefit. However, the right arrangement depends on the individual’s circumstances, the trust’s terms and the relevant tax and benefits rules.
Understanding the available options can help families make informed decisions about providing long-term financial support.
When Should You Consider a Trust for a Vulnerable Beneficiary?
A trust may be worth exploring when you want to provide for someone who may need additional financial support or assistance managing their inheritance.
This could include a family member who:
Has a long-term physical or intellectual disability.
Has a condition that affects their ability to manage money independently.
Receives means-tested benefits and could be affected by an inheritance.
Needs ongoing care, specialist equipment or additional support with everyday living.
May be vulnerable to financial exploitation or find it difficult to manage a substantial sum of money.
Every situation is different. A diagnosis or disability does not automatically mean that someone lacks the capacity to manage their finances, and not every vulnerable person will need a trust.
The aim is to consider the person’s needs, preferences and existing support before deciding how an inheritance should be managed.
How Can a Trust Help Support a Vulnerable Family Member?
With an appropriately drafted trust, trustees hold and manage assets in accordance with the trust deed. Depending on the arrangement, they may be able to use funds to support the beneficiary’s needs over an extended period.
For example, the trust might help pay for specialist equipment, additional therapies, accessible transport, dental treatment, leisure activities or supplementary care.
This can give families a way to plan for expenses that improve a relative’s comfort, independence and quality of life.
However, a trust does not automatically prevent an inheritance from affecting means-tested benefits. The treatment of trust assets, income and payments depends on the specific benefit rules and the legal structure of the arrangement. Specialist advice should be obtained before relying on a trust to preserve benefit entitlement.
Types of Trust to Consider
Different trust structures can serve different purposes. Two options that may be relevant are a disabled person’s trust and a discretionary trust for a vulnerable beneficiary.
1. Disabled Person’s Trusts
Certain trusts for disabled beneficiaries can qualify for special tax treatment under UK legislation, including section 89 of the Inheritance Tax Act 1984 where the statutory conditions are met.
Eligibility is based on specific legal criteria. These can include qualifying incapacity or receipt of certain disability benefits, subject to the applicable definitions and requirements.
The trust must also satisfy the relevant conditions governing how its assets and income can be used for the beneficiary.
Qualifying trusts can receive more favourable Inheritance Tax treatment than many standard discretionary trusts. In particular, the usual ten-year and exit charges under the relevant property regime may not apply while the assets qualify for the special treatment.
There can also be special provisions affecting Capital Gains Tax and Income Tax.
These arrangements require careful drafting. The beneficiary’s eligibility, the trust terms and the proposed use of the assets must all be considered before assuming that the special tax treatment will apply.
2. Discretionary Trusts for Vulnerable Beneficiaries
A discretionary trust may be an alternative when a beneficiary needs support but the family’s circumstances or objectives call for a different arrangement.
Under this type of trust, trustees can decide which eligible beneficiaries receive payments, how much they receive and when, in accordance with the trust deed and their legal duties.
This flexibility can be useful when a beneficiary’s needs may change over time or when trustees need to consider different circumstances before making distributions.
However, a standard discretionary trust does not automatically qualify for the special tax treatment available to certain disabled person’s trusts. Inheritance Tax charges, including ten-year and exit charges, may apply. Income Tax and Capital Gains Tax must also be considered.
A discretionary trust should not be assumed to protect means-tested benefits simply because the beneficiary cannot directly access all the trust assets. The relevant benefit rules and the practical effect of any payments must be assessed.
Why a Bare Trust May Not Be Suitable
A bare trust generally gives the beneficiary an absolute entitlement to the trust assets. In England and Wales, an adult beneficiary who is absolutely entitled can generally require the assets to be transferred to them, subject to the applicable legal requirements.
This may not provide the ongoing control a family wants when planning for someone who needs long-term financial support.
Once the assets are treated as the beneficiary’s own, they may affect eligibility for means-tested benefits or other financial assistance.
A bare trust may still be appropriate for some circumstances, but it should not be selected without considering the beneficiary’s needs, legal rights and financial position
Working with Attorneys, Deputies and Support Professionals
Some vulnerable beneficiaries already have support in place to help them manage their affairs.
For example, a registered lasting power of attorney may authorise an attorney to make certain financial decisions on someone’s behalf. In other cases, a deputy appointed by the Court of Protection may have authority to manage specified aspects of a person’s property and financial affairs.
These roles have different legal powers and responsibilities. Establishing a trust should take account of any existing arrangements and the beneficiary’s own rights and wishes.
Where appropriate, coordination with family members, care professionals, social workers and other advisers can help ensure that estate planning reflects the person’s day-to-day needs.
The beneficiary should be involved in decisions as far as appropriate, with their preferences, dignity and independence remaining central to the planning process.
Choosing Trustees for Long-Term Support
A trust may need to operate for many years, making the choice of trustees an important consideration.
When selecting trustees, families should consider:
Knowledge of the beneficiary: A trusted family member may understand their preferences, needs and circumstances.
Financial judgement: Trustees need to manage assets responsibly and make decisions in accordance with the trust deed.
Continuity: Appointing suitable replacement trustees can help avoid difficulties if an existing trustee can no longer act.
Impartiality: Trustees must act in accordance with their legal duties and consider the interests of the relevant beneficiaries.
Depending on the complexity of the arrangement, professional advice or professional trustees may be appropriate. Their services, responsibilities and fees should be understood before any appointment is made.
Planning for Your Family’s Future
Providing for a vulnerable or disabled family member involves more than deciding how much money to leave them. It also means considering how their needs may change, who will manage the assets and how financial support can be delivered appropriately.
A suitable trust may form part of that plan, but the right structure depends on the beneficiary’s circumstances, eligibility for any special tax treatment, the benefits they receive and the family’s wider estate-planning objectives.
At Viva Planning, careful consideration of your family’s circumstances and long-term wishes can help you explore estate-planning options and understand the questions that need to be addressed before making a decision.
This article provides general information about estate planning in England and Wales and is not individual legal, tax or benefits advice. Trusts do not automatically preserve means-tested benefits, and tax treatment depends on the circumstances and applicable legislation. Seek specialist advice before establishing a trust or transferring assets.
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