What is a Disabled Person’s Trust?
A Disabled Person's Trust is often used to ensure that a potentially vulnerable beneficiary is financially protected and provided for.
For the trust to qualify as a Disabled Person's Trust certain conditions need to be met. These include the beneficiary of the trust being either mentally or physically disabled, or potentially a minor (child under 18) whose parent has died.
For a beneficiary to be classified as disabled they must be eligible to receive certain benefits, even if they do not actually receive them. These include attendance allowance, personal independence payment, and increased disability pension.
Provided these conditions are met, a disabled person's trust has more favourable treatment for Inheritance Tax, Capital Gains Tax and Income Tax than other trusts.
However, disabled person’s trusts are not used very often in Wills. If you want part of your estate to benefit a disabled person and the rest to be used to benefit other family members, you may find it more flexible to set up a fully discretionary trust in your Will. You can then ask your Trustees to pay any funds for the disabled person into a Disabled Person’s Trust you have created during your lifetime.
Types of Disabled Person’s Trust
There are two types of disabled person's trust that can be set up:
Non-interest in possession trust (discretionary trust)
Under the discretionary trust arrangement, the beneficiary of the trust has no right to receive income from the trust, but at least 50% of the capital of the trust must be applied for the disabled person’s benefit during their lifetime.
For tax purposes, the assets of the trust are treated as forming part of the disabled person’s estate so there is an Inheritance Tax charge when they die.
The trust does not affect any means tested benefits the disabled person is entitled to, as income generated can be accumulated rather than paid out.
Interest in possession trust (life interest trust)
If the disabled person has an interest in possession in the trust, they have an absolute right to the income from the trust. That income will be taken into consideration in the assessment for any means tested benefits.
As with the discretionary arrangement, the assets are treated as belonging to the disabled person so there will be an Inheritance Tax charge when they die.
Different conditions apply to each type of Disabled Person’s Trust and need to be tailored to suit each person's individual circumstances. It is essential that you seek specialist legal advice when you are considering this type of trust your Will.