Trusts for disabled & vulnerable people

A disability trust places the vulnerable individual’s assets such as property, cash, and investments, under the control of trusted ‘trustees’ who will manage them on their behalf and decide how to use them for the benefit of the beneficiary or beneficiaries in the future.

Although there are a few different types of trusts that can be used to provide for the support of a disabled or vulnerable person, the most common ones are discretionary trusts and disabled person’s trusts.

Discretionary trusts

A discretionary trust enables you to appoint trustees to manage assets on behalf of others. Those trustees will then be able to decide at their discretion how and when your assets will be distributed and to which of your chosen beneficiaries.

Discretionary trusts are an effective and flexible method of providing for disabled or vulnerable people and protecting your family wealth for future generations. They are particularly useful as they allow the trustees to adapt the amounts of capital or income for each beneficiary depending on their individual needs at the time. The trust will continue to be effective for up to 125 years; however usually, it will be ‘wound up’ or closed with any remaining assets passed to the other beneficiaries upon the death of the disabled or vulnerable person.

Although discretionary trusts are extremely useful, they require expert legal and tax knowledge to ensure that you are fully aware of the implications and that your wishes are carried out.

Disabled person’s trust

A disabled person’s trust (DPT) is similar to a discretionary trust in that the trustees will be responsible for the distribution of your assets. However, a DPT is specifically designed to benefit a disabled person, providing more favourable tax treatment and excluding them from incurring inheritance tax charges that would otherwise have to be paid.

To be able to take advantage of a DPT, one or more of the following must apply to the ‘disabled’ person:

• They are incapable of administering their own property or managing their own affairs due to mental disorder within the meaning of the Mental Health Act 1983.
• They are receiving one of the following benefits:
  • Attendance allowance;
  • Disability living allowance (DLA) based on entitlement to the care component at the highest or middle rate, or the mobility component at the higher rate; or
  • Personal independence payment (PIP).
• They would be entitled to receive one of the above benefits if they could satisfy prescribed conditions as to residence or presence in the UK.
• They would be entitled to receive one of the above benefits, unless they are in a state-funded institution, for example a care home or hospital.

Which trust should I use?

Each type of trust has its benefits, however, the deciding factors that need to be taken into consideration usually include:

• The age of the disabled or vulnerable person;
• The nature and long-term prognosis;
• The value of the trust;
• The long-term needs of the disabled person, for example, where they are likely to live, who will care for them and the needs of other family members; and
• The needs of any other named beneficiary.

Appointing the trustees

It is vital to appoint individuals that you completely trust to provide the appropriate provision for the disabled or vulnerable person.

As the trustees named in a discretionary trust have total control over the distribution of the trust’s assets, careful consideration needs to be given to ensure that future conflicts are avoided. If the trust fund is of high value or is complex, it is advisable to appoint an independent trustee with no personal interest, such as a solicitor.

Letter of wishes

Whether you decide to set up a discretionary trust or a disable person’s trust, many people also write a ‘letter of wishes’ to clearly explain the reasons for setting up the trust and to provide guidance as to how the trust fund should be used.

It also allows you to state how the assets should be distributed between the other beneficiaries upon the death of the disabled or vulnerable person.

Our specialists are highly experienced in setting up trusts to protect disabled and vulnerable individuals. A number of the team are members of the Society of Trust and Estate Practitioners (STEP) which is international recognition of their knowledge and experience of helping families plan for their futures.

Our Wills, Probate, Tax & Trusts team can also help you with:

• Will writing & updating
• Probate services
• Powers of attorney
• Court of Protection applications
• Care for the elderly
• Inheritance tax planning
• Trusts