Westfield WILLS
Vulnerable Person’s Trust Protecting Disabled Children and Adults in your Will
John has Downs Syndrome. His parents want to make Wills but are not sure what to do. What option would you choose?
Option 1
Make a Will and leave it all to John’s sister.
John’s parents are relying on his sister to look after John for the whole of his life.
What if…
- She gets into debt
- Spends the money
- Gets divorced
- Dies or becomes incapacitated
This has several risks
Option 2
Leave it equally to John and his sister.
John receives his share but can’t manage his money.
John is at risk of being exploited by others.
Means-tested benefits and care funding will be stopped if they exceed personal allowances.
Personal support that is relied upon may be stopped.
A court order will be needed to manage John’s money.
Inheriting money directly can cause major problems for vulnerable beneficiaries
Option 3
Include a Vulnerable Person’s Trust in their Wills
John’s parents choose people they trust to act as Trustees.
Trustees will protect the Trust Fund and decide how to use it.
John’s benefits and support can continue. Money held on Trust is not included in means- testing assessments.
The need for a court order may be avoided as Trustees will look after the trust fund.
A Vulnerable Person’s Trust offers many safeguards that can give you peace of mind.
Your Title Goes Here
Your content goes here. Edit or remove this text inline or in the module Content settings. You can also style every aspect of this content in the module Design settings and even apply custom CSS to this text in the module Advanced settings.
What are the tax advantages of a Vulnerable Person’s Trust?
Inheritance Tax: No ten-year anniversary or exit charges during the lifetime of the vulnerable person.
Income Tax and Capital Gains Tax: Trustees canclaim a reduction in the tax paid by the Trust.
Who can benefit from a Vulnerable Person’s Trust?
To qualify for special tax treatment, the main
beneficiary must be:
1. Incapable of managing property or finances due to mental disorder (Mental Health Act 1983)
or
2. In receipt of any of the following benefits:
- Attendance Allowance,
- Disability Living Allowance (higher or middle rate of care component),
- Personal Independence Payment (standard or enhanced rate for ‘daily living activities’),
- Constant Attendance Allowance,
- Armed Forces Independence Payment or
- Increased Disablement Pension
HMRC include people with Autistic Spectrum Disorders, learning disabilities (such as Downs Syndrome), Schizophrenia, Bi-Polar Disorder and Dementia.
Who can I choose to act as Trustees?
Your trustees can be family or friends who are willing to take on this responsibility and act together. Alternatively, you may prefer to appoint a professional trustee for their neutrality and expertise.
What can the Trust Fund be used to pay for?
Your Trustees have flexibility to make decisions at the time about how the trust funds are used and invested. Examples include paying for additional support, home improvements, holidays and hobbies as well as expenses for professional advice that may arise when managing the trust.
You can guide your trustees by providing a letter of wishes to express any views you may have.
Can anyone else benefit from the Trust?
The primary beneficiary of the trust will be the Vulnerable Person but you will also need to name at least one other person or group of people (e.g. my grandchildren) or charity who can potentially benefit from the trust. The trustees will use their discretion based on needs at the time.
For the special tax treatment to apply, there are limits on how much others can benefit annually.
Vulnerable Persons Trust
Tax Overview
This guide is to help you understand the key points of how trusts for disabled persons are taxed.
This is based on the current 2021/22 tax year rules and therefore could be subject to change.
Your trustees should check with HMRC the current requirements when the trust begins and keep under review until the trust comes to an end.
This guide applies to a person who is incapable of managing their finance and property due to a mental health condition (as per the Mental Health Act 1983) or is in receipt of specified benefits.
Your Title Goes Here
Your content goes here. Edit or remove this text inline or in the module Content settings. You can also style every aspect of this content in the module Design settings and even apply custom CSS to this text in the module Advanced settings.
Inheritance Tax (IHT)
Trusts for vulnerable beneficiaries get special Inheritance Tax (IHT) treatment during the lifetime of the vulnerable beneficiary.
- During the trust there are no ten year periodic or exit charges.
- Payments made by the trustees to or for the benefit of the disabled person during their lifetime are not subject to an IHT charge.
- Distributions of capital and / or income to persons other than the beneficiary may be made so long as they do not exceed the annual limit (currently the lower of £3,000 or 3% of the maximum value of the trust property).
- When the principal beneficiary (i.e. vulnerable person) dies, any assets held in the trust on their behalf are treated as part of their estate and therefore IHT may be charged.
Capital Gains Tax (CGT)
CGT is payable by trustees. They can claim a relief in a similar way to income tax relief:
- The trustees calculate the CGT as if there was no reduction.
- The trustees then calculate the CGT that the vulnerable person would have been subject to if the gains arose directly against them.
- The trustees can then claim the difference betweenthe two amounts as a reduction.
- The special treatment does not apply in the tax year when the vulnerable person dies. On death of the vulnerable person, there is a taxfree uplift of trust funds to Probate value.
Income Tax
Where a trust has a vulnerable beneficiary, the trustees are entitled to a deduction of tax against the amount
they would otherwise pay.
- The trustees calculate their income tax liability on the normal basis.
- The tax rate for this type of trust is 7.5% for dividends and 20% for other income.
- The trustees then calculate the income tax that the vulnerable beneficiary would have been subject to if the trust income had been paid directly to them as an individual.
- The trustees then claim the difference between the two amounts, as a deduction from their own income tax liability.