Vulnerable Person Discretionary Trusts
The following information is also available as a leaflet that can be downloaded.
A Trust is a way of protecting assets whilst, at the same time, making some or all of those assets available for the benefit of one or more person. The person setting up the Trust can control who makes decisions about the assets, who is going to benefit and to what extent and when, and that control lasts for the lifetime of the Trust , even if you, the person who set it up, is no longer around.
Trusts are either Express – i.e. you do something to create them by either including them in your Will or creating a settlement, or are implied. Implied Trusts come in to being because of the circumstances.
Express Trusts are either made during your lifetime – called Lifetime Trusts - or are created in a Will– called Testamentary Trusts - or created automatically by law in certain circumstances – called Statutory Trusts.
Trusts fall into two main types – Fixed Interest and Discretionary. Under a Fixed Interest trust the beneficiaries interest is set down, for example they benefit from the income of the trust or from a certain percentage. Any such determined interest is included in any means assessment the beneficiary is subject to.
With a Discretionary Trust you have a group of beneficiaries who can all potentially benefit from the trust but only do so at the discretion of the Trustees. As each beneficiary is not guaranteed to receive anything at all, the fact that they are beneficiaries under the trust cannot be taken into accounts in any means assessment.
A discretionary Trust is therefore a very good way of ensuring that assets are protected for the benefit of a vulnerable person. However these types of trusts are penalised with a strict tax regime.
For Income Tax they are charges at 50%, for Capital Gains Tax they are charged at 28% and there is potential for Inheritance Tax being charged when the trust is set up, on every ten year anniversary thereafter and on distributions made from the trust.
A normal discretionary trust also has the disadvantage of requiring that distributions are made to the beneficiaries or their parents or guardians, which maybe inappropriate for an adult vulnerable person. In addition a person’s entitlement to the trust dies with them so the funds cannot be used for their testamentary expenses.
The Vulnerable Person Discretionary Trust
This type of trust provides the protection of a standard Discretionary Trust but combines an advantageous taxation regime and allows the Trustees to use the Trust fund to pay for any needs that the vulnerable person may have. There are very wide powers included in the trust, including the ability to pay money to a charity supporting the vulnerable person.
Who Is A Vulnerable Person?
A vulnerable person is either:
- A person who is mentally or physically disabled (called a disabled person)
- Someone who is under 18 years and who had lost a parent through death (called a relevant minor)
A disabled person is a beneficiary who is either:
- A person unable to administer his or her property or manage his or her affairs because of a mental disorder within the meaning of the Mental Health Act 1983, or
- A person in receipt (or entitled to be in receipt of) of either Attendance Allowance or Disability Living Allowance, by virtue of entitlement to the care component at the highest or middle rate.
Who Is The Settlor?
The Settlor is the person who created the Trust and gave the assets into the same – that can either be during their lifetime or in their Will. If made during the Settlor’s lifetime it is often possible to add additional funds to the Trust at a later date. If a third party gave additional funds to the Trust then they too would become a Settlor of the Trust.
Who Are The Trustees?
Trustees are people who manage the financial affairs of the trust and have the authority to make decision about who will benefit from the trust funds, when and by how much. They can also be beneficiaries of the trust but they must be able to step back and not let their own circumstances sway their judgements. There should generally be at least two but no more than four Trustees appointed.
How does the trust differ from a standard discretionary trust?
The Trust fund has to be seen as made up of two elements – Capital and Income.
The Trustees have discretion to pay or to not pay Income to, or for the benefit of, the Vulnerable Person but they are not allowed to pay income for the benefit of any other beneficiaries.
With Capital, the Trustees have discretion to make payment of capital to any of the beneficiaries. However, of the capital that is distributed at least half must be to, or for the benefit of the Vulnerable Person.
The Trustees are allowed to make payment to people or organisations around the Vulnerable Person for his or her use or benefit. They are also allowed to make distributions that will indirectly benefit the Vulnerable Person, i.e. paying the costs for a carer to go on holiday with him or her.
Finally, when the Vulnerable Person passes away, the Trustees can use the Trust Fund to pay for their funeral and other testamentary expenses.