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Putting in place a Disabled Person’s Trust, which some people may refer to as a disability trust, can be confusing for a lot of people. Parents are often concerned about putting the right plans in place and whether using these special trusts for disabled beneficiaries is relevant for them, this article will answer your questions.

The majority of parents are worried about what would happen if they die, especially if their children are under the age of 18. Often this question is more concerning for parents and carers of disabled people; and this worry can continue throughout the individual’s lifetime, not just up to the age of 18; questioning “What happens when I die?” takes on a whole new meaning.

What do you need to consider?

Without you in their life a vulnerable or disabled person will be more dependent on others to manage their finances, including any means tested benefits and support they are entitled to; they can become even more vulnerable and this is what you need to protect.

The best thing/option to consider is a Trust. This allows you to have peace of mind that the disabled or vulnerable person you leave behind can be financially provided for throughout their lifetime.

A Trust means any of your assets (be it your home, savings or investments) are held by trusted individuals (known as Trustees) for the benefit of others, in this case a disabled or vulnerable person (known as the beneficiary or beneficiaries). It is the Trustees who decide how to use the assets for the benefit of the beneficiaries and they are directed by a Trust document and a Letter of Wishes; the guidance you provide ahead of time.

Trusts for disabled beneficiaries

There are two types of Trusts to consider: a Disabled Person’s Trust, which some refer to as a disability trust or disabilities trust and a Discretionary Trust. Both work slightly differently and the Trust you may require largely depends on your personal circumstances, the individual you wish to protect, the flexibility needed and the value and type of assets you have.

In this article, we are going to look at a Disabled Person’s Trust in more detail, and explore a Discretionary Trust separately next month.

What is a Disabled Person’s Trust?

A Disabled Person’s Trust or DPT, is created to specifically benefit a ‘disabled person’. The Trustees, that you appoint, are in control of how the Trust is administered.

In order to qualify for this type of Trust, a disabled person is defined as a person who:

• by reason of mental disorder, within the meaning of the Mental Health Act 1983, incapable of administering their own property or managing their own affairs; or
• in receipt of Attendance Allowance; or
• in receipt of Disability Living Allowance (DLA) by virtue of entitlement to the care component at the higher or middle rate; or,
• in receipt of Personal Independence Payment (PIP) at the standard or enhanced rate for ‘daily living activities’.

With a Disabled Person’s Trust, Trustees can use the capital or income for the benefit of the disabled person and it is at their discretion as to how this is done. Guidance should be provided to your Trustees in the form of a Letter of Wishes which means you can set out how you would like them to provide for the disabled person. The Trustees have flexibility in how they make provision for the beneficiary which means that plans can be tailored to meet their needs.

A Disabled Person’s Trust works to your advantage if you need to consider taxes such as Inheritance Tax, Income Tax and Capital Gains Tax. The tax rules do need some thought but typically the tax paid is minimal or in some cases no tax needs to be paid.
Nevertheless, you do need to be aware that to qualify for this favourable tax treatment, the Trust must be set up in a way that the income and capital is wholly applied for the disabled person’s benefit. It can get complicated as this is subject to a minor exception. The lesser of £3,000 or 3% of the value of the Trust fund can be applied to another beneficiary of the Trust in each tax year.
If these conditions are met, the Trust doesn’t incur any ten yearly charges to Inheritance Tax or charges when payments are made from the Trust. For Income Tax and Capital Gains Tax, the Trustees have to make an annual election to HM Revenue & Customs for favourable tax treatment. The effect of this is to have the income and gains are taxed as if the trust fund belongs to the disabled person.

Is a Disabled Trust the right one to choose?

You need to consider the age of the disabled person and the nature and long-term prognosis of their disability. You must also consider any benefits and funding they receive, the needs of other dependents and the value of your assets.

How can we help?

Whilst there is a lot to consider we are here to help. We can discuss your specific circumstances and advise on how to set up the Trust, when to do this and how to appoint your Trustees. We can explain why writing a Letter of Wishes can be of benefit and how to incorporate a Trust into the terms of your Will.

We can help you meet your individual circumstances, the needs of your family and those of the disabled person you are protecting for the future.

Please do not hesitate to contact us to discuss your specific circumstances in more detail.