The term “Disabled Persons Trust” is one that was created within the legal system. It is a term in no way endorsed by TRF Wills and we refer to it reservedly and solely because it is currently widely used and recognized within the Wills and Trusts industry.
When someone wishes to provide in their Will (a Testator) for a Beneficiary who is “disabled” or particularly vulnerable in health and welfare matters, the Testator may want to leave assets for that person using a “Disabled Persons Trust”. The reason for this could be that the Testator does not believe that the beneficiary will ever be capable of managing a large sum of money because of their lack of mental capacity to do so. Therefore, rather than appoint a professional person to manage the financial affairs of that “disabled person”, which is likely to be a long and costly process, the assets can be contained within a protective Trust and be managed by custodians of the Testator’s choice (otherwise known as Trustees).
As a “Disabled Persons Trust” is discretionary in nature, there must be more than one Beneficiary. However, you can select the “disabled” beneficiary as the PRIMARY beneficiary alongside other beneficiaries (such as other children).
Another benefit of leaving assets in this type of trust is that any means-tested state benefits which the primary beneficiary receives shall not be affected in any way. If a primary beneficiary receives a large inheritance outright, a Local Authority will reconsider any existing benefits already being received by that “disabled” beneficiary and review these accordingly. This could be to the detriment of the primary beneficiary as a result.
Placing funds in a “Disabled Person’s Trust” also means that the Trustees can manage the Trust fund so that the primary beneficiary continues to receive those pre-existing means-tested state benefits.
The “disabled” beneficiary is treated as the primary beneficiary for the purposes of the Trust. This means that whilst they are alive, the Trustees are required to apply any income and capital in the Trust fund for the benefit of that primary beneficiary and as they (the Trustees) consider most appropriate.
As this Trust is discretionary, the Trustees do have complete discretion over the Trust funds and are under no obligation to distribute anything to the primary or other beneficiaries. However, anything that is distributed by the Trustees must be for the sole benefit of the primary beneficiary. It is advisable for the person creating their Will (the Testator) to create an accompanying “letter of wishes”, which provides some guidance to the Trustees in how the Trust assets should be distributed. It is important to note that a letter of wishes is not legally binding, however the Trustees are always required to be able to demonstrate that any decisions they make, one way or another, are clearly in the best interests of a beneficiary.
To qualify as a “Disabled Person’s Trust”, the primary beneficiary must meet the definition of “disabled” as follows:
- Be incapable of administering their property or managing their affairs by reason of mental disorder within the meaning of the Mental Health Act 1983; and/or
- Be in receipt of Attendance Allowance; and/or
- Be in receipt of a Disability Living Allowance by virtue of entitlement to the care component at the highest or middle rate; and/or
- Be in receipt of Personal Independence Payment by virtue of entitlement to the Daily Living component; and/or
- Be in receipt of an Increased Disablement Pension; and/or
- Be in receipt of Constant Attendance Allowance; and/or
- Be in receipt of Armed Forces Independence payment.
Where a Testator has more than one “disabled” child, a separate Trust must be created for each child.
Upon the death of the primary beneficiary, the Trust will continue as a standard Discretionary Trust unless it is dissolved. In which case, the Trust assets shall be distributed to remaining default beneficiaries.
Inheritance Tax (IHT)
A “Disabled Person’s Trust” receives favourable tax treatment providing that it satisfies the requirements set out above.
Whist the primary beneficiary is alive, the Trust is treated as an “Interest in Possession” trust. This means that it avoids certain tax charges which standard “Discretionary” trusts do not. Upon the death of the primary beneficiary, the Trust fund is revalued and treated as part of their estate for IHT purposes.
If a share in a main residence forms part of a “Disabled Person’s Trust” and the primary beneficiary is a direct descendant of the Testator, then it will qualify for an additional IHT allowance.
For further details WITHOUT fear of consultation fees or obligation, please visit TRFWills.
TRF Wills (TRF) was created by Michael Cotterill in 2005. He is a member of the Society of Will Writers and registered with the Information Commissioner’s Office.