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Trusts for Disabled or Vulnerable People

Trusts for Disabled or Vulnerable People

A trust can be a powerful mechanism to provide for a disabled or vulnerable person during their lifetime. Trusts for vulnerable and trusts for vulnerable beneficiaries are specifically designed to protect the interests of vulnerable people and disabled people, ensuring their needs are met. These trusts can also help preserve eligibility for government benefits by managing assets in a way that does not affect means-tested support. In addition, trusts for vulnerable people and disabled people may qualify for special tax treatment under certain conditions. The best structure depends on your circumstances, the flexibility you desire, and the value and nature of the assets involved.

Types of Trusts

Two main types of trusts are commonly used for this purpose:

  1. Discretionary Trust
  2. Disabled Person’s Trust (DPT) – a specific type of trust set up for the benefit of a disabled person.

To qualify for favorable tax treatment, these trusts must meet certain criteria to be considered a qualifying trust.

The trust fund in each type of trust is managed for the benefit of the intended beneficiaries.

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    Discretionary Trust

    A Discretionary Trust is a trust in which trustees have the power to decide if, when, and how much each beneficiary receives. For a trust to be considered fully discretionary, it must have more than one beneficiary, allowing flexibility in distributing assets among various individuals, such as family members, charities, or vulnerable and disabled beneficiaries. Beneficiaries do not have a fixed right to distributions; they only have the possibility of benefiting.

    Discretionary trusts are generally subject to normal trust rules unless special elections are made for vulnerable beneficiaries.

    Why Use One?

    • Protects vulnerability — It shields the trust assets from direct claim by the beneficiary, ensuring that assets held in the trust are safeguarded from creditors or other direct claims.
    • Preserves means-tested benefits — Since the beneficiary has no guaranteed entitlement, the assets held within the trust are typically not counted when assessing eligibility for means-tested benefits or support.
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    Disabled Person’s Trust (DPT)

    A DPT is a more specialised trust intended solely for a “disabled person.” It is a type of vulnerable beneficiary trust that benefits from special rules and special tax treatment. While it is discretionary in nature, it has specific conditions that allow it favorable tax treatment. These trusts may also qualify for special income tax treatment and other special treatment if the trust qualifies under the relevant criteria.

    Who Qualifies as “Disabled”?

    A person is treated as disabled for these purposes if any of the following apply:

    • The trust is for disabled persons who are unable to manage their own affairs due to a mental disorder (as defined in the Mental Health Act 1983).
    • They receive any of the following benefits:
    • Attendance Allowance
    • Disability Living Allowance (care component at the middle rate or highest or middle rate, or mobility component at the higher rate)
    • Personal Independence Payment (PIP)
    • Armed Forces Independence Payment
    • They would qualify for the above benefits if they met residence or presence conditions.
    • They would qualify but are institutionalised (e.g. in a care home or hospital) under state-funded provision.

    When the disabled beneficiary dies, the trust assets may be included in their estate for inheritance tax purposes.

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    Why Use a DPT?

    • It offers favourable tax treatment for IHT, income tax, and capital gains tax—provided certain rules are followed, and the trustees claim special tax treatment by making a vulnerable person election.
    • The trust must ensure that, during the lifetime of the disabled person, all income and capital are used for their benefit (with a limited exception).
    • Up to £3,000 (or 3% of the maximum value of the trust’s value, whichever is less) can be diverted annually to other beneficiaries.
    • To claim special treatment, a separate form must be completed and signed for each vulnerable beneficiary, and submitted to HMRC. If structured correctly, no IHT is imposed on payments from the trust, and the usual ten-year IHT charges on discretionary trusts are avoided.
    • For income tax and CGT, the trustees may elect that gains and trust income are treated as though they belong to the disabled person, resulting in more favourable taxation.

    Maintaining proper trust accounts and registering the trust with the trust registration service are essential for compliance and effective trust administration.

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    Choosing Between Discretionary Trust vs. DPT for Vulnerable Beneficiaries

    Deciding which type to use depends on several factors:

    • The age of the disabled or vulnerable person
    • The nature and prognosis of their disability
    • The size and type of assets
    • The likely place of residence, care arrangements, and compensation for carers
    • The needs and entitlements of other potential beneficiaries

    The choice between trust types also depends on the specific tax rules and tax purposes that apply to the beneficiaries, as different trusts may be subject to different regulations for inheritance tax, income tax, and capital gains tax.

    Each family’s circumstances differ, and professional guidance is often essential.

    When to Establish the Trust

    Both forms of trust can be created:

    • During your lifetime, via a formal trust deed
    • On your death, via provisions in your will

    Timing and method depend on many variables, and this decision should be made with expert advice.

    Who Should Be Trustees?

    Selecting trustworthy, capable trustees is vital. Consider:

    • Family members, friends, professionals, or trust companies
    • The complexity and value of the trust may warrant including an independent trustee (e.g., a solicitor)
    • A trustee may be named as a beneficiary, but care must be taken to prevent conflicts of interest

    Letter of Wishes

    A Letter of Wishes provides guidance to trustees about how you hope the trust’s funds will be used. Key points:

    • It explains your motivations and provides context
    • It should be reviewed regularly (for example, annually)
    • It can describe how residual assets should be distributed when the disabled beneficiary passes away
    • Though not legally binding, trustees often heed its guidance

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