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Vulnerable Beneficiaries

August 7, 2023 By Jennifer Kerr Estate Planning

We never know what tomorrow will bring, so it is important to ensure that our wishes are heard and that our loved ones are financially protected and cared for the way we wish. This is particularly important if you have a vulnerable beneficiary who may require some assistance both financially and administratively. In order to ensure that they are looked after there are certain steps that can be put in place.

Who are Vulnerable Beneficiaries?

A vulnerable beneficiary is described as someone under the age of legal capacity (16 in Scotland and 18 in England) who has lost one or both parents. 

A vulnerable beneficiary can also be a disabled person who is eligible for benefits such as Adults Disability Payment, Armed Forces Independence Payment, Attendance Allowance, among many more. There is also guidance identifying a vulnerable beneficiary as someone who is unable to manage their own affairs, due to a mental health condition under the Mental Health Act 1983. Full details of who is defined as a Vulnerable Beneficiary can be found via the Government Website. If you have a vulnerable beneficiary, it may be useful to speak to a Solicitor, to help ensure they are financially cared for in the event of your death.

A Vulnerable Persons Trust

One of the steps you can take, is to set up a Trust, to provide support for vulnerable beneficiaries who are unable to manage their own affairs. A vulnerable person’s trust can be set up by a solicitor. This is a useful way of ensuring a vulnerable person receives the support they need by offering financial support and safeguarding your assets throughout their life or until they reach the age of legal capacity. This type of Trust, can be set up during your lifetime by preparing a Trust deed or by providing specific instructions in your Will.

How does the Trust work?

For a bereaved Minor, the assets held in Trust must be released when they obtain the age of 16 (Scotland) and 18 (England). This will include any money, land or other assets held in the Trust. The Trust can be written into a parents Will, providing clear intentions on how the assets should be left to the beneficiary. In Scotland if a parent dies, leaving no Will, a trust can be set up known as a Bare Trust for their children. Bare Trusts are simple Trusts that hold assets for a minor until they reach the age of legal capacity.

For a disabled beneficiary, the Trust can offer financial stability throughout their lifetime. The Trustees will have discretion to ensure the assets are managed for the sole benefit of the beneficiary.

Tax Benefits of a Vulnerable Person’s Trust

There are special tax considerations when implementing a Vulnerable Persons Trust. In 2004, a tax regime put in place special rules for trusts with vulnerable beneficiaries. The Trustees must claim for the special tax regime every tax year. There are conditions however that must be taken into account. The beneficiary must be defined as a vulnerable person and therefore there must be a qualifying trust. The Trustees must submit a Vulnerable Person Election form for each vulnerable beneficiary. The Trustees and the beneficiary must sign the form and submit it to HMRC.

The Tax benefits of setting up a Trust for a vulnerable beneficiary are varied and therefore advice from a tax specialist is always recommended. The Trustees of the Vulnerable Persons Trust, may benefit from a deduction in Income Tax. In addition, there may also be a reduction in the amount of Capital Gains Tax due as the Tax free allowance is £6000 rather than £3000 for other Trustees.

The special tax treatment does not apply following the death of the beneficiary or if the beneficiary ceases to be vulnerable.

There are also Inheritance Tax reliefs that can be considered in the case of Vulnerable Persons Trusts. For a Bereaved Minor, there is no Inheritance Tax charge, whereby the beneficiary receives full ownership on or before their 16th/ 18th birthday.

For a disabled persons trust, Inheritance Tax does not apply, when the person who set up the trust survives 7 years from setting up the Trust. In addition, Inheritance Tax does not apply, on transfers made out of a trust to a vulnerable beneficiary. Trusts usually have 10-year Inheritance Tax charges, but trusts with disabled beneficiaries are exempt. However, when the beneficiary dies, any assets held in the trust on their behalf are treated as part of their estate and Inheritance Tax may be charged.

There are certain conditions when it comes to tax, therefore it is always advisable to seek specialist tax advice.

Who should I appoint as Trustee?

The Trustees are in control of the Trust, so it is important to think carefully about who you wish to appoint. Trustees must act in good faith and adhere to the best interests of the beneficiary. The appointment of a Trustee should be someone who you believe will act honestly and will ensure the smooth administration of the Trust. This could be a Family Member or Close Friend. You might want to think about drafting a Letter of Wishes to provide some guidance to your Trustees. This is not a legally binding document, but may be helpful to explain your intentions.

The Trustees in a Discretionary Trust, have the power to make decisions on behalf of the Trust. It is important that there is no conflict between the interests of the beneficiary and the duties of the Trustee. The Trustees must always act in the best interests of the beneficiary.

If you are concerned about this, it may be best to appoint an Independent Trustee such as a Solicitor. The benefit of having an Independent professional Trustee is that they will ensure the Trust is used for its intended purpose and that all tax considerations are met.

It is always a good time to think about your own Estate Planning. This becomes more important when thinking about a Vulnerable Beneficiary. It is always recommended to speak to a specialist solicitor, who can discuss the best options to suit your needs.

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