Vulnerable beneficiary trusts and planning

At LCF Law we are often asked to advise parents of children with additional learning needs; in particular how best to make financial provision for their children.

We help clients who have children who are living with Down's syndrome, autism, cerebral palsy or even early onset dementia, among many other conditions.

We help clients deal with the various challenges involved around vulnerable children having to deal with an inheritance; or who are potentially vulnerable to financial abuse because of their situation. This also includes helping to ensure that any means-tested state support is not affected by a change in circumstances.

It is important to understand the unique considerations and circumstances that each family faces and we take the time to do this thoroughly. There are various options available to parents and grandparents of children with learning needs and the tax implications of these can be complicated.

Making direct gifts, for example, is not usually the best way forward. Leaving a substantial inheritance can leave children, as well as vulnerable adults, open to financial abuse. And it can adversely affect state benefits that were already being claimed.

Pilot Trusts and Will Trusts

The use of trusts is one of the main ways that adults can provide for their children. Parents or grandparents can establish a trust during their lifetime; by a trust in a will which comes into effect when someone dies.

A trust may be set up initially with a small amount of money; (often a £10 note), which is attached to the Trust Deed. Once created, the trust is then available to receive further assets in the future. Such assets may be from parents but can also be from other relatives who could either make direct gifts to the trust or leave money or share of their estates to the trust through their wills. These trusts are often known as ‘pilot trusts’.

A pilot trust can then be referred to in parents’ or grandparents’ wills without the need for those wills having to have complex trust arrangements of their own.

If a suitable trust is not in place and money is left directly to children - either in a will or under intestacy rules (the rules which set out who receives what if there is no will in place) - this can have a direct impact on any means-tested benefits they may be entitled to. It can also lead to a costly and time-intensive application to the Court of Protection to find someone to assist with looking after the money.

For the protection of vulnerable persons - that is minors (children under the age of 18) or adults who for some physical or mental reason are unable to take care of themselves or their finances - we usually advise on two types of trust: discretionary trusts and disabled persons trusts.

A Discretionary Trust

We consider this to be the most flexible option, with any child or vulnerable person being a beneficiary alongside other beneficiaries, such as other children or grandchildren. The trustees then decide when and how capital and income is used for the benefit of all the beneficiaries. Any vulnerable beneficiary receives money as and when necessary.

An important part of the discretionary trust planning, therefore, is to have a ‘Letter of Wishes’ from the parents to the trustees explaining how they would want the trust to be used for the benefit of their child or children.

A Disabled Persons Trust

This is a type of discretionary trust which gives favourable tax treatment for a child who qualifies as disabled under various legal definitions. The favourable tax treatment covers inheritance tax, capital gains tax and income tax.

HMRC acknowledges that certain conditions, such as diagnosed learning disability, autism, Down's syndrome or diagnosed medical illness, qualify for special tax treatment.

This type of trust, however, is more restrictive in terms of provisions that can be made for any other beneficiaries. Consequently, on balance, we tend to prefer a suitably drafted discretionary trust which allows for much greater flexibility, including the ability to change the type of trust.

Trustees

We frequently advise clients on the appointment of trustees and this is a vital part of trust planning. Trustees have the burden of administering the trust including tax planning and management, the investment of assets and considering the needs of the beneficiaries.

We always advise that it is important to find the right balance between appointing individuals who understand the needs of the child and those with the experience and skills to be able to administer a trust effectively.

Clients often achieve this balance by appointing legal professionals along with close family members. Whatever the balance, it is vital that trustees can work together effectively as trustee decisions normally have to be unanimous.

If there are no suitable trustees available then we can advise our clients on the availability and appointment of professional trustees; for example individuals who are available through Mencap’s Trustee Service or from one of the many firms of professional trustee providers.

Letter of Wishes

We can advise on the terms and details of the Letter of Wishes to accompany any discretionary trust. This can cover not only how the trust fund should be used, it can also include more specific information about the child - such as their hobbies, likes, and dislikes; and detail how the trust should be used to support them accordingly.

How we can help?

Advising and supporting parents of children with learning difficulties is one of the most challenging, yet most rewarding, aspects of our work at LCF Law.

We work in close cooperation with other professional advisors, in particular accountants and IFAs, to ensure an individual or a family’s aims are met. Our lawyers have specialist qualifications and are members of the Society of Trusts and Estate Practitioners (STEP).

STEP is the worldwide professional body which promotes high professional standards and education for its members. Becoming a full STEP member is a benchmark many solicitors strive for: it is the top professional qualification for a wills, trusts and probate solicitor.

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