For parents of disabled children, planning for the future is both an emotional and financial necessity. Ensuring that a child is well cared for while maintaining access to means-tested benefits requires strategic estate planning. Establishing trusts, such as Discretionary Trusts and Disabled Persons’ Trusts, can provide a secure and structured means of ensuring financial stability.
Here, Charlotte Crawford, head of our private client team, highlights the importance of early planning and the key considerations for families navigating this complex area.
Understanding the importance of estate planning
Estate planning for a disabled child is vital to ensure they continue to receive the necessary financial support after their parents or caregivers have passed away. A major concern for many families is that an inheritance, if not appropriately structured, could disqualify the child from essential state benefits such as Universal Credit, or Local Authority-funded care.
One of the most effective ways to prevent this issue is by placing assets in a trust rather than leaving them directly to the child in a Will. A well-structured trust ensures that funds are used for the child’s benefit while maintaining their eligibility for state support.
What is the right trust structure for you?
Two common types of trusts are used in estate planning for disabled children – the Discretionary Trust and the Disabled Person’s Trust. Understanding their differences is essential for choosing the most suitable option.
Discretionary Trusts
A Discretionary Trust enables trustees to manage funds flexibly, deciding how and when to distribute money to the beneficiary as well as other family members. This arrangement offers an additional layer of protection, as the child does not have a direct entitlement to the funds. Instead, the trustees determine how the money is spent, ensuring it does not affect the child’s means-tested benefits. However, it is crucial to appoint trustworthy and competent trustees who will act in the child’s best interests. These types of trust are taxed at higher rates and may also be subject to inheritance tax, depending on the value held.
Disabled Person’s Trusts
This type of trust is specifically designed for individuals who qualify as disabled under HMRC rules. The primary advantage of a Disabled Person’s Trust is the favourable tax treatment compared to a standard Discretionary Trust. If the trust qualifies, then income tax and capital gains tax are charged at the beneficiary’s rate of tax (often a lower rate), which can reduce the financial burden on the trust. While this type of trust offers some tax advantages, it requires careful compliance with legal and tax regulations to maintain its benefits. There are also restrictions on who else can benefit from the funds held.
The role of trustees and who to choose
The selection of trustees is a crucial aspect of trust planning. Trustees are responsible for managing the trust’s assets and making financial decisions in the best interests of the beneficiaries. Parents should consider appointing a combination of family members and professionals to ensure a balance between personal understanding and legal expertise.
Professional trustees, such as solicitors or financial advisors, can help navigate complex legal requirements and provide impartial oversight.
Planning to make gifts during your lifetime?
In addition to establishing a trust in a Will, parents may also consider lifetime gifting strategies to provide financial support to their disabled children while they’re still alive, including gifts to the types of trust already mentioned. However, gifts must be carefully planned to avoid unintended tax consequences or impacts on benefits. Seeking professional advice before making significant financial transfers is advisable.
The legal and tax implications of trust planning can be intricate, and professional guidance is essential. Consulting with private client solicitors who specialise in trusts and estate planning ensures compliance with the latest regulations and assists families in making informed decisions.