Whilst it’s lovely that someone has chosen to remember your child in their Will, this situation can cause a real headache for families if the child who is receiving the inheritance has a disability, as the inheritance can compromise the child’s means-tested benefits.
In this blog we take a closer look at this and how various factors may determine how you can best manage the receipt of the inheritance.
Implications of receiving an inheritance
If your child inherits, this may affect any means-tested benefits they are receiving or are due to claim in the future. Examples of means-tested benefits include Universal Credit and Housing Benefit. Even if your child inherits as little as £6,000, their eligibility for means-tested benefits could be compromised. The result is that your child may need to spend their inheritance on things which means-tested benefits would otherwise have paid for. If the inheritance was, instead, directed to a Trust, it could have been used to enrich your child’s life, perhaps by paying for holidays and allowing them to pursue hobbies and interests.
In addition to the financial implications, the receipt of an inheritance can cause practical problems in your child’s life. Even if your child has financial capacity, they might still be vulnerable to predatory third parties. In an effort to safeguard their inheritance, you will need to re-double any efforts to teach your child about the danger posed by others when it comes to money.
What are the options?
Unfortunately, there’s not one easy solution to this problem. There are some options to try and make it better and these will depend on your child’s capacity to make financial decisions. These are set out below.
My child is over 18 and has capacity to make decisions about their own finances
In this scenario, your child is able to give their inheritance into a Trust for their benefit by using a legal document known as a Deed of Variation. A Deed of Variation is a legal document that changes how assets in an Estate are distributed. For tax purposes the money will be treated as having been gifted into Trust by the Will of the person who has died.
My child does not have capacity to make financial decisions
If your child does not have financial capacity, nothing can be done with the money unless you ask the Court of Protection to authorise you to gift the inheritance into Trust. This process is complicated and expensive. Whilst the Court may agree to the gift, it will almost certainly have negative consequences, as discussed below.
Effect of putting my child’s inheritance into Trust
Moving the inheritance into a Trust will protect your child’s inheritance from the danger posed by others. The Trust manages the inheritance for your child, so there is a ‘check’ in place in case your child comes under financial pressure from others taking advantage of them. However, whether or not your child has capacity, and by whatever method the inheritance is redirected into Trust, a gift into Trust will likely be treated as a deliberate deprivation of assets for means-tested benefits. This means that, although your child no longer has the inheritance, they will be treated as still having it for the purpose of their means-tested benefits calculation.
Some families have recently asked the Court of Protection for permission to move an inheritance into Trust Our previous commentary on these cases can be found in my earlier blog here. In summary, although the Court of Protection agreed to doing this in one case, it would not stop the inheritance being taken into account for means-tested benefits purposes under the deliberate deprivation of assets rules.
How can I avoid this happening?
All these problems can be avoided by setting up a Trust for your child in your lifetime. You can name yourself as the initial Trustees, so that you will be the ones making the decisions in the best interests of your child. The Trust can start life with a token £10 and nothing needs to be done with it until such time as it receives assets either as an inheritance or as a gift from someone during their lifetime.
You should then advise any friends and family (who you suspect might intend to leave money to your child at any point in the future) about the existence of the Trust. There are various subtle and un-subtle ways to do this, but the important thing is that they are aware of the Trust and understand the benefits of gifting direct to a Trust. They may be grateful that you have mentioned this to them, as it might give them an incentive to update their Wills, which people often need a reminder to do.
It’s often necessary to update your Will at the same time as setting up the Trust. Your Will can leave your disabled child’s share of your estate into the newly created Trust, so that you can be confident there will be money for your child after you are gone, held in a secure place, and that you have preserved your child’s means-tested benefits.
How can we help?
Our team of experts specialise in Trusts for disabled people and can assist you in choosing the Trust that’s right for you in your circumstances.
If you would like to discuss your own Trust or have a question regarding inheritance and means-tested benefits for your disabled child, please get in touch and speak to one of our specialists on 01273 610 611 or email us at email@example.com