It is natural for parents to want the best for their children as they move into adult life. However, where those children are vulnerable or have disabilities that make it difficult or impossible for them to look after themselves or live independently, those worries multiply.
Whilst the government does provide benefits and financial support for those who are unable to live alone or support themselves, many parents will, however, want to go above those often-limited and means-tested benefits to ensure their children live comfortably and safely throughout their adult lives.
Here, trusts and lasting powers of attorney will help.
Where a child needs additional support, a starting point for parents is to make sure their own finances and affairs are properly managed by setting up Wills and Lasting Powers of Attorney for themselves. However, once a vulnerable child reaches 16, the parents could consider making an application to the Court to be appointed as their child’s deputy to allow them to make financial as well as health and welfare decisions on their behalf, where their child lacks the mental capacity to make those decisions themselves.
To ensure that support continues when you are no longer able to help, parents will often turn to discretionary trusts or a more specialised Disabled Persons Trust.
Discretionary trusts
Here, the appointed trustees have the discretion to make decisions regarding the distribution of income and capital held in the trust. A discretionary trust can make distributions to vulnerable children and any other individuals named. Importantly, a discretionary trust can continue to make distributions after the death of a vulnerable child.
It is possible to transfer up to £325,000 without triggering any immediate inheritance tax charge and if the donor lives for seven years it will fall outside of the IHT net entirely. Helpfully, it will also fall outside the IHT estate of the vulnerable child when they die. There is normally, however, a charge of 6% every 10 years on the value of the trust over the nil rate band (currently, £325,000) and also sometimes when assets leave the trust in between 10-year anniversaries.
Parents putting money into a discretionary trust will also need to consider capital gains tax (CGT) charges if they need to liquidate assets to put into the trust or if they transfer assets directly into the trust (as that is considered a disposal of CGT purposes).
It should also be remembered that vulnerable children may also be liable for income tax, charged at the dividend basic rate of 8.75% or the higher rate of 33.75%. It may, however, be possible to reclaim a proportion of income tax if the child is a non or low-income taxpayer.
Disabled Persons Trust
A Disabled Persons Trust operates in a similar way to a discretionary trust but with some additional tax advantages. To qualify, it must be used primarily to support an individual deemed as vulnerable, typically those in receipt of certain benefits or unable to manage their own affairs. In order to retain the trust’s special tax treatment, during the lifetime of the vulnerable beneficiary the trustees cannot pay more than £3,000 per year (or more than 3% of the value of the trust, if it is lower) to any other beneficiaries of the trust.
Assets transferred to this type of trust will not suffer the 10-year charges and exit charges that are imposed on discretionary trusts. Additionally, assets transferred into the trust that generate an income will benefit from the vulnerable child’s personal income tax allowance, meaning very little or no income tax is payable.
However, one of its significant disadvantages is that should the vulnerable individual die, the trust is considered ‘compromised’, meaning IHT will apply to the vulnerable child’s assets over the £325,000 nil rate band.
Making a long-term financial provision for a vulnerable or disabled child via a trust is complex, will have considerable tax implications and will incur ongoing costs. It is therefore always important to take specialist advice before acting.
Contact our Private Client Solicitors
If you are in need of advice or assistance on any of the legal issues mentioned in this article, please contact Olivia Meekin, Partner or Shelina Vaiya, Associate Solicitor, or any member of our experienced Private Client team on 020 7631 4141 or email privateclient@bishopandsewell.co.uk
The above is accurate as at 06 February 2025. The information above may be subject to change.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.
