Parents of a disabled child face particular challenges in providing for their child and making sure their child’s needs are met both during the parents' lifetimes and after they have died.
If no action is taken and the survivor of a couple with a disabled child dies intestate, under the intestacy rules their estate will be divided equally among their children.
If the disabled child is a minor, their share of the estate will be available to them to deal with as they see fit when they reach 18 years old. This can be particularly detrimental for the disabled child.
If the child is receiving means-tested state benefits, these benefits will stop and they will have to rely on their inheritance until it is reduced sufficiently for their benefits to be reinstated.
If the disabled beneficiary does not have capacity to receive their inheritance, unless they have the mental capacity to appoint an attorney to act for them, it will be necessary for a deputy to be appointed by the court. This is often a long-winded and relatively expensive process.
What's the alternative?
Parents of disabled children might consider setting up a trust during their lifetime, or including a trust in their will to receive the share of their estate intended to benefit their disabled child.
The parents can then appoint trustees to manage the trust for the benefit of their child.
As the trustees receive the child’s share of the estate, there's no need to appoint a deputy for this reason alone, and the child won't have access to capital without the trustees’ consent.
This protects the capital from the child’s own behaviour or from unscrupulous third parties, if this is an issue. It also ensures the capital is ring-fenced from assessment for entitlement to welfare benefits.
The types of trust
The choice would generally be between a life interest trust (where the child is entitled to the trust income), and a discretionary trust where the child has no fixed entitlement to either income or capital, but can generally receive both at the trustees’ discretion.
Discretionary trusts are used frequently as they allow trustees to manage the income flow.
The disadvantage here is if the trust assets are valued at more than the prevailing inheritance tax (IHT) nil-rate band, there will be a potential IHT charge when any capital is distributed from the trust and on each 10-year anniversary of the trust’s creation.
Discretionary trust income and capital gains are also taxed at higher rates than those for individuals.
Disabled person’s trusts
Either a life interest trust or discretionary trust can also be structured as what's known as a 'disabled person’s trust'.
Where the trust qualifies as a disabled person’s trust, there will be no IHT periodic tax charges and a full annual capital gains tax exemption will be available.
The trust’s capital gains and income will also be taxed at the beneficiary’s marginal rate.
To qualify as a disabled person’s trust, the disabled beneficiary must be in receipt of certain benefits, such as personal independence payment.
All the trust’s income and capital which is paid out by the trustees must be paid to, or used for the benefit of, the disabled child.
The exception is for small payments from capital and/or income to beneficiaries other than the disabled person. These small payments mustn't exceed £3,000 a year or 3 per cent of the maximum value of the trust fund during that tax year.
Careful assessment will help determine what form of trust is preferable and how best to structure it.