Vulnerable Person’s Trust

What it is

A trust written into your Will for a beneficiary who is disabled or vulnerable. The money is held and applied for them by trustees, rather than handed over. Done properly, it supports them without displacing the help they already receive.

How it works

• During the disabled person’s life, the settled property and its income must be applied for their benefit if it is applied for anyone. There is a small annual allowance for payments to others, which in practice covers things like paying for a carer to take a break.
• The beneficiary has no right to the income, which is what keeps the fund from being treated as theirs.
• These trusts sit outside the relevant property regime, so there are no ten year anniversary charges and no exit charges. Instead the fund is added to the beneficiary’s estate for Inheritance Tax when they die.
• The residence nil rate band is still available where the disabled person is a lineal descendant, because a disabled person’s interest created by Will counts as inheriting.
• The trustees and the beneficiary can make a vulnerable person election, which brings income tax and Capital Gains Tax back to the rate the beneficiary would have paid personally. The election has a deadline, so it is not something to leave until later.
• While the trust is non taxable it is excluded from the HMRC trust register.

What happens if you do nothing

An outright legacy to someone on means tested benefits can remove those benefits, sometimes for years, and leaves the money exposed to anyone who takes an interest in it. Nor is it safe for the beneficiary to hand the legacy into a trust themselves afterwards. That can be treated as deliberate deprivation of capital, with the money still counted as theirs.

Where specialist advice matters

• The income and capital conditions have to be met exactly, or the tax treatment is lost.
• Funds deriving from a personal injury award are treated differently and need separating out.
• If the trust is to continue for other beneficiaries after the disabled person dies, the assets become relevant property at that point and the charges begin.
• Choosing trustees who understand the benefits system is at least as important as choosing trustees who understand investment.