If you have a partner, child or other family member who is vulnerable, you may not want to leave them a direct inheritance. Vulnerabilities can come in all forms but common circumstances include an individual who struggles to manage money due to disability, learning difficulties, mental health conditions, addiction or complex life circumstances.
A Vulnerable Person’s Trust is a powerful estate planning tool that is a practical and caring way to protect an individual’s future. These types of trust allow you to provide financial support while protecting eligibility for benefits and shielding the individual from financial risk.
There is no one-size-fits-all trust for a vulnerable individual; that person’s needs and circumstances will dictate what type of trust is chosen, and professional advice is vital to getting that decision right.
What is a vulnerable person’s trust?
There are a variety of different trust vehicles that can be used to help protect vulnerable beneficiaries depending on their needs and circumstances.
Vulnerable Person’s Trusts
A Vulnerable Person’s Trust is a legal arrangement established to manage assets and provide financial security for individuals who are unable to do so themselves. Trusted individuals will be appointed at the ‘Trustees’ of the trust and they will be responsible for managing the trust assets. The trust assets can consist of cash, property, investments or a mixture of all three.
A Vulnerable Person’s Trust is specifically designed to benefit someone who has a disability or cannot manage their own affairs due to a condition affecting their mind or memory. These trusts are carefully structured to ensure that the beneficiary continues to qualify for government means tested benefits, for example, Income Support, Employment and Support Allowance (ESA), and Housing Benefit.
A Vulnerable Person’s Trust is not taxed under the Relevant Property Trust Tax Regime and has a different tax treatment which is usually favourable.
Discretionary Trusts
A Discretionary Trust is a more generalised type of trust, but it is often used for vulnerable people, especially if the vulnerable individual does not meet the qualifying criteria for a Vulnerable Person’s Trust.
Similarly, assets or money are placed in the trust for the benefit of a group of ‘discretionary beneficiaries’, and trustees are selected to manage these funds. Trustees have the authority to decide how and when the trust’s funds and assets are distributed; this flexibility allows the trustees to respond to the changing needs of the beneficiary. However, Discretionary Trusts are taxed under the Relevant Property Trust Tax Regime and so there can be ongoing tax charges.
Who can benefit from a vulnerable person’s trust?
As a Vulnerable Person’s Trust has a favourable tax treatment, there are specific criteria that have to be met in order for the trust to qualify.
The first requirement is that there must be a “disabled beneficiary”. A disabled beneficiary is a person who by reason of mental disorder as defined under the Mental Health Act 1983 is incapable of administering their property or managing their affairs, or a person who is in receipt of social security benefits relating to disability. The relevant social security benefits are:
- Attendance allowance
- Disability living allowance for adults or children (but the person must be entitled to the care component at the highest or middle rate or the mobility component at the higher rate)
- Personal independence payment
- Increased disablement pension
- Child Disability Payment
- Adult Disability Payment
- Industrial Injuries Disablement Benefit
- Constant attendance allowance
- Armed forces independence payment.
In addition to the beneficiary meeting the criteria above, the trust itself must be a “qualifying trust”. This means that during the disabled beneficiary’s lifetime any capital leaving the trust must be used for the benefit of the disabled person and the disabled person must either be entitled to the trust income, or, if the trustees have discretion as to if and when the income is paid out, then any income payments must be for the benefit of the disabled person during their lifetime.
Other people can be named as potential beneficiaries, but the trustees are limited to how much the other beneficiaries can receive, currently being the lower of £3,000 per tax year or 3% of the maximum value of the trust fund.
Provided these conditions are met, the trust will be treated more favourably than other types of trust in respect of Income tax, Capital Gains Tax and Inheritance Tax.
How the trust protects your child’s future
Protecting means tested benefits
By leaving assets into a Vulnerable Person’s Trust, you can protect against the beneficiary’s entitlement to means tested benefits. For example, imagine you want to leave a sum to your disabled daughter who was in receipt of universal credit or housing benefits. If you left the money to her directly, she would likely lose these means tested benefits and be expected to fund her own care and housing until the money runs out. She would then need to reapply once the funds have depleted which can in some circumstances cause difficulty, especially if the eligibility criteria charges. However, if you place the same amount in a Vulnerable Person’s Trust, she would keep her benefits while the trustees of the Vulnerable Person’s Trust can use the money to enhance her quality of life – funding things like specialist equipment, therapy sessions, adapted holidays or respite care that benefits wouldn’t cover.
Ensuring money is used appropriately
A Vulnerable Person’s Trust ensures money is used appropriately by placing assets under the control of appointed trustees rather than the beneficiary, protecting funds from mismanagement and exploitation. The Trustees are responsible for ensuring that the funds are always spent in the best interest of the vulnerable person.
Long term financial stability
A Vulnerable Person’s Trust will be able to provide long term financial stability for the vulnerable individual even after the parents or carers are not around. The Trustees will have regular meetings to manage the funds and asset the vulnerable persons needs and resources to ensure they are well provided for.
Why leaving money directly can be harmful
For individuals living with disabilities or vulnerabilities that affect their ability to manage finances, a sudden inheritance can unintentionally lead to:
- Loss of means-tested benefits
- Difficulty managing large sums of money
- Exposure to financial abuse
- Increased Risk of mismanagement or exploitation
- Impact on local authority support
- Spending that doesn’t reflect your wishes or their best interests
In some cases, such as a history of substance misuse or mental health instability an inheritance can do more harm than good, potentially enabling destructive behaviours or placing your loved one at further risk.
When can you set up a vulnerable person’s trust?
Setting up a trust in your lifetime
You can establish a Vulnerable Person’s Trust while you are alive. This will allow you to actively manage the trust, provide immediate support to your beneficiary while you are alive and it can also be a very useful tool as part of a wider IHT planning strategy.
Including a trust in your will
Alternatively, and more commonly, you can create a Vulnerable Person’s Trust by including the trust in your will. The Trust will then only come into effect on your death. This can be useful as you may need resources to fund your future but you want to ensure that whatever is left over is passed on in a controlled and protective manner.
What makes a vulnerable person’s trust different?
The key difference is the specific tax regime for the trust and the benefit of this to support the vulnerable beneficiary.
Below is an overview of the tax treatment. This is a complicated area of law and this area only covers the key points. Further advice can be provided if required.
Inheritance Tax (IHT)
Most trusts are liable to pay IHT on creation, every ten years and whenever assets leave the trust. Vulnerable Person’s Trust are not subject to these charges. However, the value of the trust will aggregate with the vulnerable person’s own assets for IHT purposes on their death, whereas a discretionary trust would not. If the trust is set up by will, IHT will potentially be payable on the testator’s death , and again on the vulnerable beneficiary’s death if the combined value of the trust and their own assets is over the available nil rate band at the time.
Capital Gains Tax (CGT)
CGT is payable if there is a disposal of assets in the trust. CGT is payable by the trustees, and is only due if the assets have increased in value above the ‘annual exempt amount’. For most trusts, only half of this exemption is available. However, Vulnerable Person’s Trust are taxed as if the disposal was made by the vulnerable beneficiary and therefore the full annual allowance is available.
Income Tax
Discretionary trusts normally pay income tax at the rate of 45%. However, Vulnerable Person’s Trust are taxed as if the income belonged to the vulnerable beneficiary. This allows the trust to take into account the beneficiary’s personal allowances and means that income tax will likely be charged at the vulnerable beneficiary’s marginal rate of tax.
Choosing the right trustees
Family members as trustees
In the context of trusts for vulnerable individuals, selecting the right trustee is especially important since the trustee will manage the trust’s assets and ensure they are used to support the beneficiary’s needs. Often, family members or close friends are the obvious choice to become a trustee, since they may have a deeper understanding of the beneficiary’s needs and have an emotional understanding.
Professional trustees
Alternatively, solicitors with experience in trust law and special needs planning can be appointed as trustees, bringing legal expertise to ensure that the trust is managed following the law. Goughs have a dedicated Trust Corporation that is able to assist.
How Goughs can help
Whether you are considering setting up a Vulnerable Person’s Trust or need legal guidance on how it works, we are here to help. Our experienced solicitors can advise you on how to protect the interests of a vulnerable beneficiary and ensure their long-term financial security. You can call, email, or visit one of our seven offices to speak with a member of our team.
