Disabled Person’s Trusts

Whilst assets are held within the trust for the benefit of the disabled beneficiary, they cannot be considered to belong to the beneficiary, so means tested benefits will be unaffected. However, if funds from the trust are made available for the beneficiary, such as a lump sum, those monies would then belong to the beneficiary, which might then jeopardise receipt of benefits. So it is important that funds are used carefully, for example to purchase certain items for the beneficiary such as household goods, clothing, and paying for recreation and holidays.

A discretionary trust, as the name suggests, means that the Trustees have complete discretion to decide how the funds are used and for whose benefit.  So a Discretionary Trust will have a range or ‘pool’ of beneficiaries who can potentially benefit from the trust assets, as the trustees decide.  This pool is referred to as a class of beneficiaries and is usually formed by the children, grandchildren and other descendants of the person who sets up the trust (known as the ‘settlor’), but it can include others such as nephews and nieces, siblings or even charities.

A Disabled Persons Trust is very similar to the Discretionary Trust, in that there will be included a range or class of beneficiaries whom can potentially benefit.  However the key difference is that a Disabled Persons Trust has to have a principal named beneficiary for who the trust fund is to be used, in the main, during that beneficiary’s lifetime.  The trustees still have a degree of discretion over the trust fund, in that they do not have to advance funds for the principal beneficiary on a regular basis, but they are limited as to how much money or assets can be applied for the benefit of the other beneficiaries during the principal beneficiary’s lifetime.   By law, this limitation is currently capped at the lower of £3000 or 3% of the trust fund value.  There is no such limitation as to how much money can be applied for the benefit of the principal beneficiary during their lifetime.

The other key difference between a Discretionary Trust and Disabled Persons Trust is the tax treatment.  The rate of Tax charged on income received into a Discretionary Trust is taxed at a higher rate.  This is because the Trustees of the Disabled Persons Trust can submit a claim to HMRC for the rate of tax to be aligned to that of the Principal Beneficiary, which is usually a nil rate or lower rate of tax.

A Letter of Wishes is a document signed by the settlor of the trust which is designed to give guidance to the trustees as to how and when trust monies should be transferred from the trust and for whom.  It is not legally binding, in that the trustees still have the freedom to decide these points, but in practice the trustees would tend to follow the terms of the Letter of Wishes.  Because it is not legally binding, you can change the terms of the Letter of Wishes at any time, if your wishes were to change, perhaps due to a change in family circumstances.

A Letter of Wishes should make it clear that the trustees have clear discretion over the trust fund and will go on to say that the wish is for the fund to be used for the benefit of the principal beneficiary during their lifetime, perhaps mentioning funds should not be paid out to the bank account of the principal beneficiary if it risks them losing state funded care.  It could also mention the types of situations where funds should be made available, such as for holidays for the beneficiary, to help with educational costs, or to help with needs which may not be covered by benefits.  The Letter of Wishes should also give guidance to the trustees on what should be done with the trust once the principal beneficiary has died, for example that it should be divided between remaining children or grandchildren in various proportions.

This will depend on your family circumstances, the value of assets which may be transferred to the trust in the future and the needs of the disabled person.  Many advisers tend to steer clients away from setting up a Disabled Persons Trust, citing the greater flexibility of the Discretionary Trust as the key factor.  However, given our wide experience in advising families who have a child with learning difficulties, our general view is that most families choose the Disabled Persons Trust route, once all of the advantages and issues to consider have been clearly explained to them.

You can appoint anyone you wish as a trustee, provided they are over 18 and are not suffering from any lack of mental capacity.  Do bear in mind however that the role of a trustee carries with it great power and responsibility, so your chosen trustee should be someone you trust implicitly and have confidence in to be able to take on the task.  This might be a member of your family, a close friend, or a trusted adviser such as your solicitor.

Trustees can hold a wide variety of assets in a trust, so you can transfer cash, investments, life policies, pension death benefits, property or even personal possessions into a trust.  If you are creating a lifetime Disabled Persons Trust, the trust has to be constituted and the usual method would be for the settlor to transfer a nominal sum of say ten pounds to the trustees.  Going forward, other family members such as grandparents of the Disabled beneficiary can transfer cash to the trust if they wish, or the settlor might decide to nominate the trust as a recipient for pension benefits.  On your death, if you wish for the Trust to receive a portion of your Estate, your Will would refer to the Trustees as a beneficiary so the Trustees would then hold that inheritance on the terms of the trust.