If your child or grandchild has a disability then, whether they are young or an adult, you will understandably be concerned about making arrangements to protect them after you are no longer around. An appropriately drafted Trust in your Will can provide this protection.
Below, we have provided some guidance on Will Trusts and how one might be beneficial to you based on your circumstances.
What are Will Trusts?
A Trust is an arrangement whereby you have one set of people (the trustees) looking after assets (the Trust fund) that they hold on behalf of others (the beneficiaries). A Will Trust can be made and changed at any time during your lifetime by including it in your Will. It comes into effect on your death.
The Will names the trustees and the beneficiaries and sets out what assets are to pass into the Trust fund and the terms upon which this is to be held.
Potential issues
If you don’t make a Will or if your Will leaves your estate directly to your disabled child or grandchild, this may result in them no longer being entitled to the means-tested benefits they were receiving before they inherited. If your child or grandchild is vulnerable, they could be financially exploited.
Also, if your child or grandchild has difficulties with or is unable to manage their own financial affairs, then they would not be able to deal with their inheritance without the ongoing involvement of the Court of Protection.
You might be tempted to leave nothing to your disabled child or grandchild and perhaps instead leave what would have been their inheritance to other relatives on the understanding that they use this to look after them. However, this can lead to problems.
Your Will might be challenged either by your disabled child directly or by social services on their behalf. The relatives you have asked to use their inheritance to benefit your child or grandchild may simply not do this or may be unable to do this. For example, if they lose control of the inheritance as a result of their divorce, bankruptcy, mental incapacity or death.
How Will Trusts can resolve these issues
Often, therefore, the answer will be to include a suitable Trust arrangement for your disabled child or grandchild in your Will. This can provide protection for them and at the same time avoid these issues. The Trust will come into effect when you die.
The trustees who manage and control the Trust are chosen by you. They will have the power to decide whether to pay out anything from the Trust fund to your child or grandchild for their benefit.
Whilst the inheritance remains in the Trust, it does not belong to your child or grandchild. Therefore, it cannot be treated as their income or capital when assessing their eligibility to receive means-tested benefits.
Through the Trust, the trustees can ensure that the inheritance is used to actually benefit your child or grandchild and to protect them from both themselves and possible exploitation by others.
The Trust can also be used to benefit, for example, other family members if you wish.
If correctly drawn up, such Trusts can qualify for favourable tax treatment.
It is vital that you take legal advice from a solicitor who has both expertise and experience in this area. This should ensure that the Trust arrangement included in your Will is both correctly drafted and most importantly is tailored to the circumstances and needs of your particular family situation. It really is not a case of one type of Trust fits all.
How this could work in practice
So, for example, Ann has two children, Mark who is autistic and Lucy.
Ann knows that, because of his difficulties, Mark would not be able to manage his inheritance himself and that after her death, he will not be able to live independently.
Ann takes legal advice and has a Will drawn up which leaves 50% of her estate directly to Lucy and 50% of her estate into a Disabled Beneficiary Discretionary Trust for Mark. She decides to appoint her younger sister and her solicitor to act as the trustees.
The Trust names Mark as the primary beneficiary and the pool of other potential beneficiaries are Lucy and her children. The trustees are to decide if, when and to what extent to make payments from the trust for Mark while he is alive. When Mark dies, the trustees are to decide how what remains in the Trust fund is to be inherited by any one or more of the other beneficiaries.
Ann also has a Letter of Wishes drawn up which says that while Mark is alive, she would like the Trust fund to be used for his benefit but that her trustees should take account of his entitlement to receive means-tested benefits. After Mark’s death, Ann would like the trustees to pass anything left in the Trust fund to Lucy but if she had died then to her children.
After Ann’s death, her estate is administered and Lucy’s 50% is paid out to her. The trustees take professional advice and decide how to invest the remaining 50% for Mark’s Trust. Arrangements are made for Mark to move into specialist accommodation with appropriate support.
The Local Authority looks at Mark’s financial position to see whether he has the means to pay for his own accommodation and living expenses. They do not take into account the value held in the Trust set up by Ann’s Will as it is a Discretionary Trust and Mark is not entitled to receive anything from it unless and until the trustees so decide. Mark has no income or assets himself. Therefore, the Local Authority agree to pay for his accommodation and provide him with an income through welfare benefits.
The trustees, therefore, decide not to make any substantial payments from the trust fund directly to Mark as he would then lose all or part of the provision he receives from the Local Authority. They decide instead to use the Trust fund to fund a support worker for Mark and to provide Mark with holidays and buy him a computer and a gym membership, all of which enhance his quality of life.
The Letter of Wishes Ann has left provides guidance to the trustees but isn’t legally binding on them. The trustees must act unanimously but you can see that they do have considerable power with this sort of Trust. Careful thought, therefore, has to be given to who the trustees should be. There is a danger that if the trustee is also one of the beneficiaries, they will use that power to benefit themselves and not as you intended. In those circumstances, it may be appropriate to appoint independent trustees to act.
So in our example, Ann might not want to appoint Lucy to act as a trustee. Lucy might be reluctant to use the Trust fund for Mark’s benefit but prefer to wait until he dies so that she or her children could inherit it. Ann might, therefore, want to appoint a more independent family member and a professional to act as trustees.
Obtain legal advice
We would stress that you should always take specialist expert legal advice in these circumstances as the terms of Will Trusts should always take account of the individual circumstances of the situation.
But hopefully, this article gives you a starting point as to the issues involved and how these can be successfully managed.
Get in touch
Karen Salt is an Associate in our Wills, Trusts and Probate team.
If you would like more information or advice on Will Trusts or would like to arrange a meeting with Karen or another member of the team in Derby, Leicester or Nottingham, please contact us on 0800 024 1976 or via our online enquiry form.
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