Discretionary Trust
A discretionary trust is one where trust income and capital may be paid at the discretion of the trustees to one or more of a class of beneficiaries as defined in the trust.
Requirements
This type of trust cannot have a sole beneficiary as it requires a class of beneficiaries. Therefore, there must be other beneficiaries in addition to the disabled beneficiary.
A letter of wishes should be used to give guidance to the trustees.
Advantages
- This type of trust can benefit any named persons or class of beneficiaries. Therefore, this type of trust can help more people than just the disabled beneficiary.
- The trustees can use their discretion to decide when and who to distribute income and capital to i.e. to reflect the circumstances at the relevant time.
- This can be a more flexible option and there is no need to predict the future needs of the beneficiaries.
- Trust assets remain outside the beneficiaries’ estates (including the Disabled Beneficiary) for tax purposes and these are therefore disregarded when calculating means-tested benefits.
Disadvantages
- The trustees have the ultimate discretion on how assets are distributed. The choice of trustees is therefore very important.
- There are inheritance tax charges on every 10 year anniversary and inheritance tax exit charges may apply when capital is distributed.
Disabled Person Trust
Requirements
The beneficiary must meet the requirements of a ‘disabled person’ under the Mental Health Act 1983:
The beneficiary must be incapable of managing their own affairs; AND
Qualify under the ‘benefits test’ by receiving or being eligible to receive any of the following:
- Personal Independence Payments; or
- A disablement pension; or
- Constant Attendance Allowance; or
- Armed Forces Independence Payment.
Advantages
- This trust is not subject to the 10 year anniversary charge or exit charges for inheritance tax.
- The trustees can claim special treatment for Income Tax and Capital Gains Tax by completing a Vulnerable Person Election form.
- The sole beneficiary of the trust can be the disabled beneficiary.
Disadvantages
This type of trust can impact means-tested benefits based on the amount of income the beneficiary receives from the trust.
The beneficiary is treated as owning the trust property. The trust assets are therefore treated as part of the beneficiary’s estate for inheritance tax.
These notes are not exhaustive and are meant as a basis for discussion with your legal adviser. If clients wish to discuss any of the above, please contact our Private Client Team 020 8940 4051 who will be pleased to help you
IMPORTANT: this information is intended to be a general statement of the law. No action should be taken in reliance on it without seeking specific legal advice.
