Published on: 11th April 2022

Why Wills are even more important when a child is vulnerable or has a disability

Most parents plan on leaving most, if not all, of their assets to their children in their Will. Whilst this is common and can be straightforward, there are more aspects to consider when you have a vulnerable or disabled child.

Whilst a parent is legally able to leave money to their vulnerable child outright, this can cause certain issues. If the child is unable to handle and receive the funds, someone will have to be appointed by the Court of Protection which can be a long and costly endeavor. Leaving money outright could also mean that means-tested benefits could stop. If the funds being left are not sufficient to last the rest of the vulnerable child’s life, this could create serious issues where the child no longer has enough money to survive.

Instead of leaving money directly to a vulnerable child in a Will, there are two main types of trust that can be created to ensure that the asset is protected for the use of the vulnerable child:

Discretionary Trusts

A Discretionary Trust is the most flexible of the options for leaving funds to a vulnerable or disabled child. The Discretionary Trust holds the allocated funds by trustees who can distribute them, when needed, to the beneficiaries. Although a Discretionary Trust can be used for the benefit of one person, the trustees have the discretion to appoint other beneficiaries. As there is more flexibility, a Discretionary Trust may provide protection against, for example, future divorces and can protect against bankruptcy as no one beneficiary has an absolute right to the asset. Although the trust can be used for multiple beneficiaries, it will also not affect a vulnerable person’s benefits if the trustees act carefully. 

Because a beneficiary of a Discretionary Trust does not have the absolute right to the asset, it does not form part of their estate for Inheritance Tax (IHT) purposes. For this reason, if the funds would ordinarily put the vulnerable person over the IHT threshold, a Discretionary Trust can be used to ensure that there are lower tax ramifications when the vulnerable person passes away.

Vulnerable Persons Trust

A Vulnerable Persons Trust also protects assets for a vulnerable or disabled beneficiary and does not affect their means-tested benefits. Importantly, however, this trust is not able to be used for all vulnerable people. The beneficiary must meet the requirements for a disabled person under Schedule 1A of the Finance Act 2005. This means that the vulnerable person must either be incapable of managing their affairs as defined under the Mental Health Act 1983 or be entitled to certain benefits.

Unlike the Discretionary Trust, the assets within a Vulnerable Persons Trust cannot be used to benefit other family members, if needed. Whilst there is less flexibility with a Vulnerable Persons Trust, there can be significant tax benefits. Vulnerable Persons Trusts qualify for the additional Main Residence Nil-Rate Band (MRNRB) allowance whilst a Discretionary Trust does not. This means that if your estate is over £325,000 for a single person or £650,000 for a married couple and want to leave assets including your family home to a vulnerable child, a Vulnerable Persons Trust results in a lower IHT liability than a Discretionary Trust.

If you have a vulnerable or disabled child and would like to discuss your estate planning to ensure that they are protected, please consider booking a no-obligation appointment with one of our consultants. To do so, call our client services team at 01732 868190 or use our online form by clicking here.

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If you wish to give instructions or require general information about our Wills, Lasting Powers of Attorney, or Trusts then we will carry out a telephone or Zoom appointment. However, if you wish to give instructions to one of our Consultants and you feel that you can only do this at a Face to Face meeting we are offering, at our Consultant’s discretion, a limited number of Face to Face appointments in most of the areas we normally cover (subject to Government advice). To see the areas we normally cover please click here. To arrange an appointment please telephone 01732 868190 or click here.

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