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Providing for a disabled child after you have died

Our March and October 2022 articles emphasised the importance of having a well drafted Will to make sure your wishes are carried out in the way you’d like when you die. This is particularly important for protecting disabled children who have specific, and often costly, needs that require special consideration. However, it can often be difficult for parents and grandparents to determine what the right choice is for their disabled child or grandchild.

It is important to consider the needs of your child in order to safeguard their future. This may include considering their age, their care plans, where they will live, any financial benefits they receive, their medical prognosis, and any help they may receive from other family members.

Once you have determined the needs the child may have, there are several options that can be looked at to ensure suitable financial provisions are included in the drafting of your Will.

A Discretionary Trust

You may wish to set up a discretionary trust for your child or grandchild. This provides a vehicle for assets to be held for the benefit of a list of “potential” beneficiaries, leaving it to the trustees to exercise their absolute discretion as to who should benefit and to what extent. The flexibility of this type of trust means your trustees can protect the assets and use them wisely to meet the needs of your child.

When you set up this type of trust in your Will, you will be asked to provide a Letter of Wishes addressed to the trustees. This letter will explain to your trustees how you would like them to use both the income and capital for your child’s benefit. Our April 2022 article explains the purpose and benefits of a Letter of Wishes, and it will be important to have this letter in order to provide clear direction to your trustees.

The advantage of this type of trust is that there can be other beneficiaries (perhaps other children and grandchildren) who will be able to also benefit from the trust. On the death of your disabled child or grandchild, any remaining assets within the trust can be distributed to the other beneficiaries you have included in your Will.  

A Disabled Person or Persons Trust

One option is a ‘vulnerable beneficiary trust’ or disabled person’s trust which are usually set up in a parent’s will, but can also be set up during the parent’s lifetime. These trusts are able to get special tax treatment from HMRC, but various conditions will apply for a trust to qualify as a vulnerable beneficiary trust.

To set up this type of trust, the beneficiary must be a disabled person as defined within the meaning of the Mental Health Act 1983, or a person who qualifies under a ‘benefits test’ and are eligible for certain benefits. The terms of the trust also have to be drafted in such a way as to give that beneficiary a certain guaranteed interest in the trust otherwise the tax advantages below will be lost.

If the trustees of the vulnerable beneficiary trust wish to claim special tax treatment for income tax and capital gains tax purposes then they will need to complete the ‘Vulnerable Person Election Form VPE1’. The election needs to be made within 12 months of the normal filing date of the tax return. There are also some special tax treatments for inheritance tax, including an exemption from the usual ten-yearly inheritance tax charge for trusts.

Generally these trusts are also exempt from the requirement to register on HMRC’s Trust Registration Service, however, if there is a UK tax liability then they may have to register for taxable purposes.

If you are contemplating a disabled person’s trust, then it is important to be aware that the tax treatment can be fraught with technical difficulty, and we advise that you speak with an experienced member of our private client team.  

A Life Interest Trust

A further option to consider is a ‘Life Interest Trust’. This enables you to set aside money or property for your child during your child’s lifetime. The trustees would usually invest the money and the income produced on the investments would be available to your child for the remainder of their life. The trustees must pass on all the trust income to your child as it arises (less any expenses), or the child may be entitled to use a property (for example, to occupy a house during their lifetime). On the death of your child, the assets within the trust pass to other beneficiaries that you wish to benefit from the trust.

It is important to note that any income your child or grandchild receives from this type of trust will be taken into consideration when they are assessed for any means tested benefits (the capital will not be taken into consideration).

An Absolute or Contingent Gift

You may wish to make an ‘absolute gift’ which is an unrestricted financial benefit. This would belong to the child or grandchild for them to do as they wish. You may prefer to give a ‘contingent gift’ with the trustees looking after the money on behalf of your child or grandchild until they reach the age of 18, 21 or 25.  Prior to choosing this option, it is important to consider whether your child or grandchild will be able to make decisions about how they use that money when they reach adulthood. If your child or grandchild is receiving means-tested benefits then giving a gift will likely be taken into consideration when calculating benefits, and as a result the benefits may be lost.

One of the most compelling reasons to make a Will is to protect and support your loved ones in the event of your death. The question of ‘What happens when I die?’ takes on a whole new meaning to parents and grandparents of disabled children. This is a complex area of law and we strongly recommend taking specialist advice. A member of our highly experienced Private Client team can discuss your family circumstances with you to ensure the right option is chosen for your child or grandchild’s needs, and to give you peace of mind that they will be supported when you die.

Written by Anouschka Fenley-Paralegal

If you have any questions or queries relating to this article, please speak to a member of our Private Client Department, all details found here.

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