Trusts

Expert advice is essential to create the right type of trust for a vulnerable person.

A trust is a legal arrangement where one party (the settlor) gives assets to another party (the trustees) to look after for the benefit of a third party (the beneficiary).

Sometimes a person might struggle to manage money and look after their financial affairs. They might be vulnerable to financial exploitation, or be prone to making unwise decisions. As such, it can sometimes be necessary to create a trust for that person’s benefit. Also known as disabled persons trusts, vulnerable persons trusts are created for the benefit of vulnerable individuals who meet strict legal criteria. The beneficiary must either be incapable of managing their affairs due to a mental disorder under the Mental Health Act 1983, or receive or be eligible for the following benefits:

Attendance Allowance
Disability Living Allowance at a high or middle rate
Personal Independence Payment
Adult/Child Disability Payment
Industrial Injuries Disablement Benefit

Where these rules are satisfied, the tax on income and capital gains will be calculated as if the trust assets belonged to the beneficiary and that is quite often much lower than the rates of tax that trustees generally pay. Furthermore, the “ten yearly charge” to inheritance tax will not apply, but instead, the trust will be assessed for inheritance tax as if the beneficiary had owned the assets personally.

The chosen trustees control the trust and exercise discretionary powers to distribute income and/or capital to the beneficiary. A letter of wishes can be used to guide them on how to distribute funds during the beneficiary’s lifetime and after they have died. Vulnerable persons trusts are particularly useful where tax is likely to be a major issue and where there are no other family members who have financial needs. If a trust fails to qualify, it will continue to exist but be taxed under the standard tax rules/rates that are applied to discretionary trusts.

Discretionary trusts have a group of potential beneficiaries who can benefit from the trust fund. The trustees have the discretion to decide who should benefit from the trust fund, when they should benefit, how much they should receive and whether any payments are made from trust income or capital. All payments out of the trust fund are made at the discretion of the trustees. The trustees can prioritise the welfare of the beneficiary you identify during their lifetime and the trust fund can be brought to an end and distributed (guided by any wishes you leave) after they have died.

These trusts are often used where families may wish other beneficiaries to be able to access the trust fund while the principal beneficiary is alive, where tax implications are not likely to be a major consideration or where the legal criteria for a vulnerable persons trust cannot be met.

In Practice

  • It was important to the clients that their daughter continued to receive housing benefit

    T and J wished to provide a fit for purpose, safe home for their vulnerable daughter. It was important to the clients that their daughter continued to receive housing benefit. At the same time, the clients had a desire to reduce their inheritance tax exposure and consolidate existing trusts provided by life assurance companies. We structured a trust around inter trust loans, appointments from one trust to another and outright gifts from the clients.

    With T and J’s grandchildren being the beneficiaries of the trust, given their non-tax payer status, the grandchildren have been able to reclaim the income tax suffered by the trust each year.

Our experts are on hand

Steven Howells
Having majored in the trust space for over thirty years, Steve accumulated a deep and extensive knowledge of trust formation and restructuring. Focussing more on the group as a whole, Steve is responsible for day to day operational matters and Arcadia's long term strategic direction.
Susie Rycroft
Susie Rycroft
Director | Solicitor
Susie qualified as a solicitor in 2005 and has specialised in private client ever since. Susie's expert knowledge of trust law and her pragmatic, client-centered approach is welcomed by trustees, executors and beneficiaries alike.
Rachel Wallace
Rachel's focus is tax compliance. With 25 years of experience, she deals with annual tax returns for individuals and trusts, capital gains tax returns and IHT forms.
Layla Ambersley-Broadbent
Layla Ambersley-Broadbent
Legal Assistant
Focused and organised, Layla's approach to the management of administrative tasks and progression of legal cases makes her a valued legal assistant to the group.
Alyssa Martin
Alyssa deals with the drafting of wills, trust documents and powers of attorney. A recent graduate with a Masters in Law, her technical knowledge lends itself perfectly to the varied needs of Arcadia's legal team.