Will Trust Series Six: Disabled Discretionary Trusts

One of our core Estate Planning offerings is the use of Will Trusts. Different types of trusts can be written into your Will to protect assets for the family, in case certain problems arise. However, to the average man on the street, there are potentially a bewildering amount of different Will Trusts available, all with different names and uses. To make matters worse, different legal advice firms have different names for the same type of Will Trust!

Although this article is an attempt to de-mystify Will Trusts a little, don’t panic! My main takeaway advice with regard to Will Trusts (and Estate Planning in general for that matter) is to get in touch for an initial meeting with one of our later life specialist advisers. At this initial meeting be prepared to talk about your current situation, what you are looking to achieve and what you are worried about. Once our advisers have got a good grasp of your situation, they will be able to start discussing some recommendations with you, which may or may not involve a specific Will Trust!

Anyway, back to Will Trusts. Let’s talk about the Disabled Discretionary Trust (DDT). A DDT is a type of Discretionary Trust created for the express benefit of a qualifying disabled or vulnerable beneficiary. On the death of the person making the Will, specified assets should be transferred into the DDT. The trustees then have the power, as they see fit, to transfer capital / and or income to the benefit of the disabled beneficiary.

Who qualifies for a DDT?

A DDT can only be created for any beneficiary who qualifies under statute as a disabled person in respect of this type of trust.

What are the benefits of a DDT?

The main benefit is the protection for the primary beneficiary, the disabled person. Effectively, the DDT provides security for that disabled person for their lifetime. The trust income and capital can be paid to the disabled person, or applied on their behalf, for as long as they live.

The trustees’ powers are discretionary in respect to these payments, which means that the trustees can make, or withhold payment as they see fit.

Importantly, the DDT benefits from special tax treatment. The trustees need to complete a vulnerable person’s election form (1 for each vulnerable beneficiary).

Considerations before using a DDT

It is obviously vital that suitable trustees are chosen. The DDT is less flexible than the standard DT but receives favorable tax treatment.

Trust tax charges attracted by the standard DT are only applicable on assets above the ‘Nil Rate Band’ (the Nil Rate Band is the first £325k of assets that qualify for Inheritance Tax at 0%). For this reason, where the value of trust assets are below the NRB, it can be beneficial to opt for the standard Discretionary Trust, even where there is a disabled beneficiary, to capitalize on this flexibility.

The trustees should clarify whether the disabled person is in receipt of any means tested benefits before they apply income or capital. It might be more appropriate to purchase items on the beneficiary’s behalf, rather than advancing sums of capital to the disabled person, to avoid reassessment for these purposes.

For Inheritance Tax purposes, the DDT still qualifies for the Residence Nil Rate Band provided that the disabled beneficiary is a ‘lineal descendant’ of the person making the Will, usually a child or grandchild (the Residence Nil Rate Band is the additional Inheritance Tax relief at 0% of £175,000 on the main residence if it is left to the children or grandchildren).

Joined Up Estate Planning

Often when people hear the phrase ‘Estate Planning’, they often think of writing their Will, perhaps incorporating a Will Trust such as explained above. But in practice, Estate Planning often involves more than many people think. When families begin reviewing their estate plans more holistically, especially with our guidance as later life financial and legal specialists, they are often surprised to discover gaps and inconsistencies.

A well-considered estate plan usually brings together several areas of financial and legal planning. Wills, LPAs and Trusts form part of that picture, but so do questions about inheritance tax, long-term care considerations and investment management.

Alongside legal arrangements, financial planning considerations are often closely connected. Investment decisions, pension planning and inheritance tax allowances can all influence how efficiently assets might pass between generations both in lifetime and on death.

For some families, another important aspect of estate planning, particularly with regard to LPAs, is considering how financial resources might be used later in life, particularly if care or support becomes necessary. With this in mind, thoughts turn naturally to aligning investment management, Immediate Care Plans and inheritance tax strategies. 

Many people find that different parts of their planning have been put in place at different times of their life. A Will may have been written many years ago, LPAs actioned at some point but long forgotten about, pensions and investments taken out whilst still working.

Individually, each decision may have been sensible at the time. But without reviewing them together, it is not always clear whether the overall plan still reflects current intentions and your life situation as it stands. It is critical that the financial and legal arrangements for your estate planning are perfectly aligned. If they are not, it can create unwanted upset down the line.

Estate Planning Events

To help people understand these issues more clearly, we will be running a series of free Estate Planning seminars locally this June and July. These sessions will explore key elements such as Wills, LPAs and Trusts and explain how they work alongside your financial planning arrangements like inheritance tax, investment management and care fee planning.

To find out more about the seminars or arrange a relaxed chat about your circumstances, call 0117 363 212 or email office@haroldstephens.co.uk.
50 High Street, Westbury on Trym, BS9 3DZ