Securing the Future for Disabled Loved Ones. A quick guide to Disabled Persons Trusts

When you have a loved one with a disability, one of your main concerns will be ensuring their care and support continues after you’ve gone.  You may worry about the cost of ongoing care, how they will live independently, and if they have a learning disability, you may also have concerns about how they will manage money and  if they will be vulnerable to exploitation.  Additionally, leaving an inheritance to your disabled loved ones may impact their eligibility for any means tested benefits they receive and this could have a knock on impact to other care and Local Authority assistance they receive.

For these reasons, a Disabled Persons Trust offers an effective way to secure your loved one’s future without affecting their means tested benefits.  As receiving means tested benefits can often be a gateway to wider avenues of support, it can be crucial not to implicate them.  Your loved one may also benefit from having Trustees in place to ensure their finances are handled responsibly and to protect them from the risk of being exploited.

There are also advantages to the person setting up the trust which include benefiting from favourable tax rules compared to using other types of trusts.  These rules make Disabled Persons Trusts a valuable tax planning tool for anyone wanting to support a disabled loved one.  For example, most trusts set up during a person’s lifetime will incur an immediate inheritance tax of 20% on any amount over the available allowances.  However, establishing a Disabled Persons Trust does not incur this charge, and is instead considered a potentially exempt transfer, with no immediate tax charge¹.  Additionally, unlike other trusts, a Disabled Persons Trust is not subject to inheritance tax charges when money leaves the trust or at each 10 year anniversary. Even so, it is worth noting that even a potentially exempt transfer can become chargeable to inheritance tax if the person making the lifetime gift doesn’t survive 7 years.

A further tax advantage applies to income tax and capital gains tax which can be treated as if it’s the disabled persons whilst remaining within the trust.  This requires an election under HMRCs vulnerable persons regime, but is often worthwhile, as trusts typically attract higher rates for both these taxes.

To qualify as a Disabled Person your loved one must meet certain conditions.  Either they must be in receipt of certain listed benefits, such as attendance allowance and personal independence payments, or they must be unable to manage their own affairs because of a mental health condition covered by the Mental Health Act 1983.  Mental health conditions such as autistic spectrum conditions and certain learning disabilities are included.

Disabled Persons Trusts may also be set up as life time trusts, rather than through your Will where they only take effect after your death.  The advantage of this would be, once established, other family members could immediately leave money into the trust either in their Wills or as part of their lifetime planning.

There are of course some potential disadvantages to Disabled Persons Trusts.  For instance, the trust assets will still be included in the disabled person’s estate upon their death, which could be problematic if they have a limited life expectancy.  Additionally, distributions to other named beneficiaries are very limited (the lower of £3000 per year or 3% of the Trust fund).  For these reasons, the decision about whether, when and how to establish a Disabled Persons Trust should be taken very carefully and with the appropriate expert advice.

At Ward Hadaway we have a team of solicitors with specialist knowledge of Disabled Persons Trusts.  If you have a loved one with a disability whom you’d like to benefit then please contact Suzanne Jaconelli or a member of the team.

¹ The information contained in this article is based on current inheritance tax rules and rates, which are subject to change in the budget on 30 October 2024 and in the future.