Making provision in your Will for a vulnerable beneficiary
There are various issues to consider when leaving a gift to a vulnerable beneficiary, such as a child or grandchild with a learning disability, in your Will.
The problems with leaving an outright gift (e.g. a cash legacy)
It is crucial to have in mind the type of person who you are seeking to protect and, above all, you would not want to leave them in a more vulnerable position than what they might otherwise be. For instance, you need to consider whether they would have the capacity to be able to manage a direct inheritance or even give a good receipt for the same. Might they be exploited by others seeking to take advantage of their vulnerability?
It is also the case that leaving a direct sum of money could have an adverse impact upon any benefits and/or support package in place. Some benefits and local authority support is means-tested and the amounts that can be claimed could be reduced or lost completely depending on the value of the inheritance received. For instance, leaving a cash legacy above £16,000 would defeat a claim for universal credit.
The issues with leaving a gift to another individual to manage on the vulnerable beneficiary’s behalf
Another option you might consider is leaving a legacy or share of your estate to a relative and then trusting them to make provision for the vulnerable individual in question. However, unwise choices and unsuitable arrangements may be made and this can also be risky as assets could be lost upon divorce, bankruptcy or the relative’s own death.
On the other hand, a lack of financial provision, either entirely or by way of an amount that might be deemed unreasonable by the Court, could result in a claim being brought on the vulnerable person’s behalf under Inheritance (Provision for Family and Dependants) Act 1975.
But what can you do instead?
Incorporating a trust in your Will
As opposed to leaving an outright gift then a trust arrangement could be incorporated into your Will. A trust structure allows for the formal transfer of assets, whether this be property, cash or shares, to individuals (known as trustees) who hold the trust fund for the benefit of others. There are different types of trust and they vary depending upon how the trust fund is to be distributed.
Lifetime interest trusts
An interest in possession trust is also known as a life interest and provides the beneficiary of the trust, known as the life tenant, with a present right to the present enjoyment of income or assets. However, the capital comprising the trust fund is protected for other beneficiaries. This type of trust is more commonly used for married couples upon the first death, perhaps if there are children from previous relationships.
As far as providing for a disabled beneficiary is concerned, the same problems highlighted above may be a concern, particularly the prejudice of means-tested benefits. However, if the trust fund is small and the beneficiary has capacity then this option can be suitable in some circumstances.
Often seen as better options are the discretionary trust and the disabled person’s trust.
With this type of trust, a class of potential beneficiaries is named with default beneficiaries specified. The trustees then have full discretion over income and capital with regards to how much, if anything, each beneficiary should receive and when. No beneficiary is able to claim trust property as of right and this type of arrangement allows for maximum flexibility, with the ability to last up to 125 years.
The benefits of a discretionary trust include the fact that assets comprising the trust fund are disregarded for assessing claims for means-tested benefits. The trust fund is not aggregated with the disabled beneficiary’s estate upon their death for inheritance tax purposes and the trustees can make decisions to meet changing requirements for all the potential beneficiaries during their lifetime with discretion to use any amounts of income and capital to meet their needs.
However, careful thought should be given to the value of the trust fund as there can be adverse inheritance tax implications if the trust fund is greater than £325,000.
Disabled persons’ trusts
A disabled person’s trust operates in a similar way to a discretionary trust. Trustees again have the flexibility to advance income and capital to the beneficiaries although they are more restricted. The primary beneficiary must be deemed ‘disabled’ and an individual will qualify if they are eligible for (even if they do not receive) any of a defined list of benefits or if they are incapable of administering their property or managing their affairs by reason of a mental disorder within the meaning of the Mental Health Act 1983.
One drawback is that any other beneficiaries of the trust are limited to being able to receive the lower of £3,000 per tax year or 3% of the maximum value of the trust fund. What should also be borne in mind is that when the disabled beneficiary dies, the value of the trust fund is aggregated with their other assets for inheritance tax purposes. This can cause problems particularly in situations where the disabled beneficiary is also being provided for by other relatives. However, these must be weighed up with the advantages of no inheritance tax charges during the lifetime of the trust as there can be with discretionary trusts.
Which type of trust should I go for?
There is no one size fits all in deciding which of these trust structures is best and various factors need to be taken into consideration, including age, the nature of the disability, the needs of the disabled person and other beneficiaries, and potential tax liability.
As a general rule, a discretionary trust may be more suitable where the trust fund is below the inheritance tax nil rate band allowance of £325,000 and there is a desire to benefit multiple beneficiaries. On the other hand, a disabled person’s trust may be more appropriate where tax liability is likely to be a significant problem and where there is no great need to benefit others during the lifetime of the disabled beneficiary.
There are other situations in which it may be appropriate to incorporate a lifetime interest trust or discretionary trust into your Will. Lifetime ‘pilot’ trusts can also be suitable in some situations. If you would like to discuss your own circumstances to find out whether incorporating a trust into your Will or setting one up during your lifetime might be appropriate for you then please contact a member of the Tax and Estate Planning team today.