Disabled Person’s Trusts
A Disabled Persons Trust is a trust which is usually set up for the benefit of a family member who has a disability or learning difficulties. Like any type of trust, funds are set aside by the person who makes the trust (known as the settlor) and are transferred to the trustees, who then look after the trust assets and ensure they are used for the benefit of the person who has the disability, who is referred to as the Principal Beneficiary. Unlike trusts such as a discretionary trust, a Disabled Person Trust can be advantageous from a tax point of view.
Why might I want to set up a Disabled Persons Trust?
If you have a child or family member who has learning difficulties, you should consider how their financial needs will be looked after in the event of your death, whilst making sure that any means tested benefits they currently receive are not at risk of being stopped. By setting up a Disabled Persons Trust now, you can ensure that your child or family member’s future needs are protected in a tax efficient way. It is imperative that you make sure your Will is also up to date as this often links to the trust by ensuring some of your estate can be allocated to the trust when you die.
How do I set up a trust for as a disabled person?
You can set up a Disabled Persons Trust in your Will (in which case the trust comes into effect on your death) or in your lifetime. We usually recommend setting up the trust in your lifetime, because not only can your estate pass into the trust on your death via your Will, but you can also transfer assets into the trust during lifetime, such as making transfers of pension benefits or other investments into the trust.
As previously mentioned, it is essential that your Will is updated if you set up a lifetime disabled persons trust, so that you can allocate some, or all of your estate, into the trust on your death, depending on your family circumstances.
How can Ellis Jones help with Disabled Persons Trusts?
Our Wills, Trusts and Probate team have vast experience in advising clients on trust matters, and one of our Partners, Chris Pemberton, has particular expertise in advising families on setting up Disabled Persons Trusts, being an expert panel member for two prominent national charities who provide valuable support to families in this area. You can therefore be assured of getting the best, practical advice from an expert who understands the concerns you will have and the help that you need.
Does a Disabled Person Trust affect means tested state benefits?
Whilst assets are held within the trust for the benefit of the disabled beneficiary, they cannot be considered to belong to the beneficiary, so means tested benefits will be unaffected. However, if funds from the trust are made available for the beneficiary, such as a lump sum, those monies would then belong to the beneficiary, which might then jeopardise receipt of benefits. So it is important that funds are used carefully, for example to purchase certain items for the beneficiary such as household goods, clothing, and paying for recreation and holidays.
What is the difference between a Disabled Persons Trust and a Discretionary Trust?
A discretionary trust, as the name suggests, means that the Trustees have complete discretion to decide how the funds are used and for whose benefit. So a Discretionary Trust will have a range or ‘pool’ of beneficiaries who can potentially benefit from the trust assets, as the trustees decide. This pool is referred to as a class of beneficiaries and is usually formed by the children, grandchildren and other descendants of the person who sets up the trust (known as the ‘settlor’), but it can include others such as nephews and nieces, siblings or even charities.
A Disabled Persons Trust is very similar to the Discretionary Trust, in that there will be included a range or class of beneficiaries whom can potentially benefit. However the key difference is that a Disabled Persons Trust has to have a principal named beneficiary for who the trust fund is to be used, in the main, during that beneficiary’s lifetime. The trustees still have a degree of discretion over the trust fund, in that they do not have to advance funds for the principal beneficiary on a regular basis, but they are limited as to how much money or assets can be applied for the benefit of the other beneficiaries during the principal beneficiary’s lifetime. By law, this limitation is currently capped at the lower of £3000 or 3% of the trust fund value. There is no such limitation as to how much money can be applied for the benefit of the principal beneficiary during their lifetime.
The other key difference between a Discretionary Trust and Disabled Persons Trust is the tax treatment. The rate of Tax charged on income received into a Discretionary Trust is taxed at a higher rate. This is because the Trustees of the Disabled Persons Trust can submit a claim to HMRC for the rate of tax to be aligned to that of the Principal Beneficiary, which is usually a nil rate or lower rate of tax.
What is a Letter of Wishes?
A Letter of Wishes is a document signed by the settlor of the trust which is designed to give guidance to the trustees as to how and when trust monies should be transferred from the trust and for whom. It is not legally binding, in that the trustees still have the freedom to decide these points, but in practice the trustees would tend to follow the terms of the Letter of Wishes. Because it is not legally binding, you can change the terms of the Letter of Wishes at any time, if your wishes were to change, perhaps due to a change in family circumstances.
What details to include in a Letter of Wishes?
A Letter of Wishes should make it clear that the trustees have clear discretion over the trust fund and will go on to say that the wish is for the fund to be used for the benefit of the principal beneficiary during their lifetime, perhaps mentioning funds should not be paid out to the bank account of the principal beneficiary if it risks them losing state funded care. It could also mention the types of situations where funds should be made available, such as for holidays for the beneficiary, to help with educational costs, or to help with needs which may not be covered by benefits. The Letter of Wishes should also give guidance to the trustees on what should be done with the trust once the principal beneficiary has died, for example that it should be divided between remaining children or grandchildren in various proportions.
Which is best-Disabled Persons Trust or Discretionary Trust?
This will depend on your family circumstances, the value of assets which may be transferred to the trust in the future and the needs of the disabled person. Many advisers tend to steer clients away from setting up a Disabled Persons Trust, citing the greater flexibility of the Discretionary Trust as the key factor. However, given our wide experience in advising families who have a child with learning difficulties, our general view is that most families choose the Disabled Persons Trust route, once all of the advantages and issues to consider have been clearly explained to them.
Who should I choose as my Trustees?
You can appoint anyone you wish as a trustee, provided they are over 18 and are not suffering from any lack of mental capacity. Do bear in mind however that the role of a trustee carries with it great power and responsibility, so your chosen trustee should be someone you trust implicitly and have confidence in to be able to take on the task. This might be a member of your family, a close friend, or a trusted adviser such as your solicitor.
What assets can I put into a Disabled Persons Trust?
Trustees can hold a wide variety of assets in a trust, so you can transfer cash, investments, life policies, pension death benefits, property or even personal possessions into a trust. If you are creating a lifetime Disabled Persons Trust, the trust has to be constituted and the usual method would be for the settlor to transfer a nominal sum of say ten pounds to the trustees. Going forward, other family members such as grandparents of the Disabled beneficiary can transfer cash to the trust if they wish, or the settlor might decide to nominate the trust as a recipient for pension benefits. On your death, if you wish for the Trust to receive a portion of your Estate, your Will would refer to the Trustees as a beneficiary so the Trustees would then hold that inheritance on the terms of the trust.
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