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.
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Layla Ambersley-Broadbent
Legal Assistant
