VULNERABLE BENEFICIARIES

How to provide for a vulnerable beneficiary.

With life expectancy increasing and the costs of social care growing dramatically, it is natural to be concerned about what will happen to your savings and assets in the future. Successive governments have encouraged you to save for later life, but then impose measures that deplete your assets drastically should you require social care.

Perhaps you consider that there is a risk of financial mismanagement due to poor decision-making, or, in the case of mental disability, a helplessness to make any financial decisions at all.

Where the intended beneficiary has difficulty managing money, perhaps due to disability, illness, addiction, or lack of experience, you may fear that an outright gift could be quickly wasted or lost.

If the person is particularly vulnerable, there may be a risk that they may become the victim of financial abuse or exploitation.

Your genuine concerns about making provision for a vulnerable beneficiary may be addressed by the use of one of several available Trusts that can be included within the terms of your Will.

What is a Trust and how does it work?

A trust is a legal arrangement in which you provide your assets to responsible people (your “Trustees”) to look after on behalf of the people you wish to favour (your “beneficiaries”). The Trustees have an obligation to look after or invest your assets, and to provide those assets to your beneficiaries in accordance with your stated wishes.

The trust may take various forms.

For example, one option is a “life interest trust”. This involves the trustees managing your capital and using it to generate income. This income is paid to your first choice beneficiary for the rest of their life. Thereafter, when the first-choice beneficiary no longer requires the income, the capital is paid to the secondary beneficiaries.

Another option is a “discretionary trust”, where you name a number of potential beneficiaries, but leave decisions about which of those beneficiaries receives what benefit to your trustees. It is expected that you would provide written guidance in the form of a “letter of wishes” to inform your trustees about your preferences, such as which beneficiary is to take priority over the others.

How does a Trust protect a vulnerable beneficiary?

The Trust will protect vulnerable beneficiaries because they will not directly receive the capital from your estate. It will be managed on their behalf.

Those who are incapable of making decisions and those who are susceptible to exploitation will have decisions made on their behalf.

Beneficiaries who depend on welfare payments will not receive capital and will therefore continue to be entitled to their means-tested benefits. The trustees can even use the trust fund to buy things for the beneficiary or pay for services on the beneficiary’s behalf, rather than providing an income.

People who are irresponsible with money, in debt, or even bankrupt will not receive the funds directly. They will not be able to waste the funds, and the capital will not be available to pay towards their debts. Instead, the trustees can indirectly provide for the beneficiary’s needs.

Ensure Your Vulnerable Beneficiaries Are Safe

With the right will and estate planning, you can legally secure your beneficiaries’ future—avoiding risk, confusion, and financial vulnerability.

Speak with a will specialist now.

What is the best way to make provision for a disabled beneficiary?

It is natural for you to be concerned about how to make proper provision in your Will for a disabled beneficiary because the wrong approach can lead to unintended consequences. Some disabled people lack the capacity to make financial decisions or may be vulnerable to influence or exploitation by others. This poses significant risks to any monetary gift you might make to them, as it could be mismanaged or lost due to poor decision-making, or even accessed by others. Other disabled people are perfectly capable of making their own financial decisions, but are dependent on state benefits for income, and your provisions for them may disrupt their eligibility for means-tested benefits and have a knock-on effect on their housing or social care needs.

A cost-effective and reliable way to address these issues while still providing for a disabled beneficiary is to create a Will-trust. The two most common of these are a Discretionary Trust and a Disabled Person’s Trust. In each case, the money that you provide is protected and managed by trustees, and so will not affect your beneficiary’s eligibility for means-tested benefits, and will not be wasted if your beneficiary is not capable of making financial decisions.

Key Strategies for Providing for a Disabled Beneficiary

Use a Will-trust rather than leaving assets outright

When considering how to provide for a vulnerable disabled beneficiary, first of all, consider the potential consequences of making a direct gift in your Will. Providing direct inheritance can jeopardise access to vital benefits and, in turn, may also affect housing and social care. Setting up a trust instead can help avoid this risk by putting your money under the control of trustees rather than the individual. The trustee applies the fund in accordance with your wishes, while your beneficiary can continue to receive their state benefits.

Consider a Discretionary Trust

A Discretionary Trust offers maximum flexibility. Your trustees can decide when and how funds are used, adapting to the beneficiary’s changing needs throughout their life. You can also include other children, relatives or even a charity.

Consider a Disabled Person’s Trust (DPT)

A Disabled Person’s Trust is a special type of discretionary trust that provides significant tax advantages if the beneficiary meets HMRC’s requirements. Although the rules are stricter, charges such as inheritance tax, capital gains tax, and income tax may be lower than for a discretionary trust, making a DPT a powerful tool for families seeking long-term financial security without unnecessary costs.

Your trustees should be reliable, understanding of your beneficiary’s needs and capable of managing the trust responsibly. Choosing the right trustees helps you feel assured that the trust will be managed with care and integrity.

Your trustees should be reliable, understanding of your beneficiary’s needs and capable of managing the trust responsibly. Many people choose a combination of family members and a professional trustee to ensure the disabled beneficiary’s best interests are always protected.

A Letter of Wishes gives trustees clear guidance on how you want the trust funds used. Expressing your preferences helps ensure your intentions are understood and respected, providing peace of mind for your family.

A Letter of Wishes gives trustees clear guidance on how you want the trust funds used. You can express your preference for whether the trustees provide for day-to-day support, therapies and lifestyle needs, or even major future expenses. This document is informal but extremely helpful in ensuring your intentions are followed.

What Is a Discretionary Trust?

A Discretionary Trust usually appoints multiple beneficiaries, and the trustees are given the power to decide how and when each person benefits. The trustees have complete flexibility to apply income or capital as needed. This structure is ideal when circumstances may change in the future.

Consider a Disabled Person’s Trust (DPT)

A discretionary trust can help to protect vulnerable beneficiaries.
It can preserve your beneficiary’s entitlement to means-tested benefits
The beneficiary does not have automatic rights to the funds, preventing misuse by themselves or others
Trustees can respond to the changing needs of the beneficiary over time

Tax considerations:

While highly flexible, discretionary trusts can face higher tax charges, including 10th anniversary charges and top-rate income tax.

What is a Disabled Person’s Trust (DPT)

A Disabled Person’s Trust is designed specifically to support someone who meets HMRC’s definition of disability. It works similarly to a discretionary trust but offers substantial tax advantages.

A person qualifies if they:

Cannot manage their affairs due to a mental disability such as dementia or bipolar disorder, or suffer from cognitive impairment, or
Receive qualifying disability benefits such as Attendance Allowance, the higher rate of Personal Independence Payment, or the middle or higher rate of Disability Living Allowance.

Tax advantages of a Disabled Persons Trust include:

No 10-year anniversary charges on the trust.
No exit charges if money is removed from the trust.
Any applicable taxes may be charged at a reduced rate applicable to the individual.

What is a deprivation of assets?

A deprivation of assets in the context of this page is the deliberate disposal of your assets, such as by giving them away, paying them into trust, or even wasting them on a spending spree, with the aim of making those assets unavailable to be used towards care home fees. It is the deliberate reduction of the value of your estate to gain an indirect financial benefit – by not having to contribute towards care expenses. It does not matter whether this was the sole motive or one of several genuine reasons; the fact that one of the motives was to avoid care fees will cause the whole gift or transfer to be considered a deprivation of assets.

If a local authority, performing a financial assessment for social care payments, considers that you have deliberately deprived yourself of assets, it will assess the value of your estate on the basis that those assets are still available. This may result in a requirement to pay your own care costs, even though you no longer have the assets to use.

Creating a life interest trust in your will in respect of your share of your property will not be considered a deliberate deprivation of assets.

What might be considered a deliberate deprivation of assets?

Giving your property away in life, or paying it into a trust for your or someone else’s benefit whilst you are still alive, might be considered a deliberate deprivation of assets.

Whether such a lifetime transfer is considered a deliberate deprivation of assets depends upon the context in which the payment was made. The more likely it is that you considered there to be a possibility that you might require social care in the future, the more likely a payment will be regarded as a deliberate deprivation of assets.

However, where gifts or transfers are clearly made for other reasons, they ought not to be considered a deliberate deprivation of assets.

The Local Government and Social Care Ombudsman has provided guidance to local authorities on what they should consider when determining whether there has been a deliberate deprivation of assets.

The local authority is obliged to consider whether you “must have known that you may develop a need for care and support”, and whether you “had a reasonable expectation that you might need to pay towards that care”. If you genuinely had no reason to believe that you might require care (for example, because you are perfectly healthy, or if you are unwell, it is due to a condition that does not ordinarily require you to need care and support, then it may be wrong for a local authority to determine that there has been a deliberate deprivation of assets

The timing of your payments or transfers is also essential. Whilst there is no time limit on how far back the council can investigate your payments, it is usually the case that the greater the time between the transfer and the need for care arising, the less likely such a transfer will be deemed to be a deliberate deprivation of assets.

Protect Your Home From Care Fees

Get expert guidance on structuring your will and estate to safeguard your assets and reduce the risk of care home fee assessments.

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Choosing the Right Type of Trust

In making your decision, you should account for the following factors:

The disabled person’s age and long-term prognosis
The value and nature of the assets
The future care environment and family circumstances
The role of any other beneficiaries

Both types of trusts can be created during your lifetime or through your Will – often as part of a cost-effective will writing plan.

Appointment of Trustees

Trustees may be family members, friends, professionals, or a mix. If the trust is significant or complex, appointing an independent professional, such as a solicitor or accountant, may help ensure proper management of the funds and avoid a conflict of interest.

The Role of a Letter of Wishes

In your Letter of Wishes, you can provide an explanation as to:

The reasons why the trust was created
How the disabled person should be provided for
How remaining assets should be distributed after their death

Disabled Person’s Trust vs Discretionary Trust — The Key Difference

A Disabled Person’s Trust offers significant tax benefits, but it must primarily benefit the disabled person.

A Discretionary Trust offers greater flexibility but incurs higher tax charges. Both can be excellent solutions depending on your goals, and a specialist writing service can help you choose the most affordable and effective option.

Ensure Your Vulnerable Beneficiaries Are Protected

With the right will and estate planning, you can legally secure your beneficiaries’ future—avoiding risk, confusion, and financial vulnerability.

Speak with a will specialist now.

How can I best provide for a child?

It is natural to worry about how your children will be provided for should you pass away unexpectedly. At Wise Owl Wills, we have the know-how to help you make decisions so that your Will makes appropriate provisions for your child.

Providing for a Child or Young Person Through Your Will: Bereaved Minors Trusts and 18–25 Trusts Explained

Planning for your child’s future is one of the most meaningful things you can do. This is especially the case when considering what will happen to them if you were to pass away.

With the right will-writing service, you can help to put strong protections in place for your children. In this regard, understanding how certain trusts work can make all the difference.

Two of the most valuable tools for parents who wish to provide for their children are the Bereaved Minor’s Trust and the 18–25 Trust. These trusts not only help you provide financial security for your child, but they may also offer valuable tax advantages. If you have ever wondered how to provide for a child or a young person safely and tax-efficiently, these trusts are essential to understand.

What Is a Bereaved Minor’s Trust?

A Bereaved Minor’s Trust is a legal arrangement created in your Will for a child under the age of 18 who has lost a parent. It ensures that the assets you leave for them are protected, responsibly managed, and used for their direct benefit.

Key Features of a Bereaved Minor’s Trust

The trust is used to secure and manage assets for a child who has lost a parent until the child reaches age 18. Trustees are appointed to manage the money on behalf of the child and can use any income and capital for that child’s needs. This might be to pay towards the child’s education, or living expenses, or even for clothing or membership of social and sports clubs.

A significant advantage is that no inheritance tax (IHT) is payable on the trust fund if the child becomes fully entitled to the assets by age 18. The trust enjoys “vulnerable beneficiary status” and often qualifies for special tax treatment, helping families reduce the tax burden on the child’s inheritance.

If you are exploring how to save tax with a Bereaved Minor’s Trust, this structure offers generous exemptions and reliefs unavailable in many other types of trusts.

What Is an 18 to 25 Trust?

An 18 to 25 Trust (also called a Bereaved Young Person’s Trust) works similarly to a Bereaved Minor’s Trust, but the child receives their inheritance at an age between 18 and 25. This is a popular choice for parents who feel that their child may be too young and inexperienced to receive a large sum of money at the age of 18.

Key Features of an 18–25 Trust

Only parents can set up this type of trust for their children or stepchildren. The beneficiary receives their inheritance at any age you choose between 18 and 25.

The trust may enjoy a privileged status for income tax and capital gains tax purposes in the same way as would a Bereaved Minor’s Trust. Inheritance tax is treated slightly differently, but if payable, it will still be at a reduced rate (the precise rate varying depending on how close the beneficiary is to age 25 when they receive the fund).

Many families choose this option when wondering how to provide for a young person who may need more time before receiving complete control of their inheritance.

How These Trusts Help You Provide for a Child or Young Person

Both trusts are powerful tools that allow you to:

Support Education

Pay for school fees, or for university costs, or for training courses, and even for educational materials.
Cover accommodation costs, the purchase of equipment and materials, tuition fees and more.

Protect Their Financial Well-Being

Funds can be released for key life milestones in your child’s life, such as purchasing their home or the start-up costs associated with a business.

Ensure Responsible Money Management

The money that you provide is protected until your child reaches the age that you deem to be suitable.
The trustees will ensure the fund is only used for your child’s benefit.

Tax Benefits of Bereaved Minors' Trusts and 18–25 Trusts

If you are researching how to save tax with a bereaved minor’s trust, here are some of the key advantages:

Inheritance Tax (IHT)

No IHT charges will apply if the child receives the entire fund at the age of 18.
The “10-year anniversary charges” applicable to most trust funds will not be payable.
There will be no charges if the trustees need to use some of the money for the child’s benefit before they turn 18.
In the case of an 18–25 trust, there will only be small “exit charges” if funds are released after age 18.

Capital Gains Tax (CGT)

If the circumstances arise, then the trust will benefit from its own annual CGT allowance (half of the individual allowance).
Only gains above that allowance are taxed.
Special reliefs may apply if the beneficiary lives in the property at the time of its final transfer.

Income Tax

Any income that the trust might make is usually taxed at trust rates, but
Trustees can claim a “Vulnerable Persons Election” to reduce tax to the lower level that would otherwise be charged to the individual beneficiary.

Why Use a Trust Instead of Leaving Money Directly to a Child?

The main advantage of using this kind of trust facility is that it protects the funds until your child is mature enough to manage them. It also prevents money from being accessed by others, especially those who may not have your child’s best interest at heart.

The trust can be used to provide structured support for your child’s education, living costs, and well-being.

The Bereaved Minor’s Trust and the 18 to 25 Trust can offer significant tax protections.

Most importantly, they can help to ensure that your wishes are followed precisely.

Get Expert Help Setting Up a Bereaved Minor’s Trust

Setting up a trust properly requires a legally sound Will. Choosing the right will-writing service is essential.

With Wise Owl Wills, this need not be expensive. We provide an affordable will writing service that extends to including a Bereaved Minor’s Trust or an 18 to 25 Trust in your Will.

A professionally drafted Will-trust ensures:

the right trustees are appointed
tax advantages are maximised
funds reach your child at the right time
your wishes are clearly and legally protected

If you are planning how to provide for a child or how to provide for a young person, a Bereaved Minor’s Trust or 18–25 Trust is one of the strongest tools you can use to secure their future.

Ensure Your Vulnerable Beneficiaries Are Safe

With the right will and estate planning, you can legally secure your beneficiaries’ future—avoiding risk, confusion, and financial vulnerability

Speak with a will specialist now.

How do I protect somebody who is on benefits?

For someone who depends on state benefits, receiving an inheritance may be a mixed blessing. Whilst they may welcome your generosity, they may also lose their entitlement to receive the benefits that they depend upon.

How to Avoid Inheritance Affecting Benefits

Careful will planning matters.

If you want to leave money to someone who receives means-tested DWP benefits, you must plan your will correctly. Direct inheritance might unintentionally reduce or even eliminate their benefits. Using an affordable will-writing service to include a Discretionary Trust or Vulnerable/Disabled Person’s Trust in your Will is a safe and cost-effective will-writing strategy to protect them.

Understanding How Inheritance Affects Benefits

The Solution: Using a Trust in Your Will

Savings above £6,000 reduce benefit payments.
Savings above £16,000 can stop means-tested benefits completely.

Leaving money directly might therefore place your loved one in financial difficulties. This is why many families search for ways to avoid inheritance affecting benefits.

The Solution: Using a Trust in Your Will

Money held inside a trust does not legally belong to the beneficiary. Because of this, it is usually ignored when the DWP assesses eligibility for means-tested benefits.

This makes using a trust one of the most secure ways to protect a vulnerable person’s income and independence.

Types of Trusts for Vulnerable Beneficiaries

Discretionary Trusts

A Discretionary Trust provides funds to the trustees instead of to the beneficiary. It ensures that the trustees control how the money is used, and may even prevent misuse while shielding the beneficiary’s entitlement to benefits.

When you provide for somebody through a discretionary trust, the fund will not count as your loved one’s personal savings because it is looked after by trustees instead. The trustees will apply the fund for your loved one’s use responsibly. In addition to preventing the inheritance from being counted towards means-tested benefits, it will also help to protect it from financial abuse.

The trust will also enable the trustees to react to your loved one’s changing circumstances, and is therefore suitable for people with financial or health vulnerabilities.

This is one of the most commonly recommended tools in affordable will writing for families needing long-term protection.

Vulnerable Person’s Trust / Disabled Person’s Trust

If the beneficiary receives PIP, DLA, or similar benefits, they may qualify for a Vulnerable Person’s Trust.

This kind of trust receives favourable tax treatment and is usually not taken into account when assessing means-tested benefits.

As the trustees are responsible for disbursing the funds, they can ensure they are used for appropriate purposes and not wasted on frivolous spending. It can provide long-term protection for disabled or vulnerable beneficiaries. It can be a powerful option for families who want the best protection without losing access to vital state support.

What to Include in Your Will

It is essential to consider the provisions you make carefully.

Choose the Right Trustees

Trustees should be trustworthy, responsible and understand the beneficiary’s needs. They may be relatives or close friends, or alternatively, you may appoint professional trustees instead.

Their role is crucial in ensuring the inherited funds are safe and used wisely. If appointing relatives, be careful not to appoint somebody who may allow petty family squabbles or historical grievances to cloud their judgment when considering payment for your vulnerable loved one.

Add a Letter of Wishes

A Letter of Wishes guides trustees on how to support the beneficiary, explaining your reasons for setting up the trust and your preferences for spending the fund, such as on treatment or therapy, home improvements or adaptations, holidays, or daily living enhancements.

Such spending ought not to impact your loved one’s benefit entitlement, but will nevertheless significantly improve their quality of life.

Avoid Making Direct Gifts

Leaving money directly to your loved one can trigger a DWP reassessment and result in the clawback of unintended overpayments. It may even stop benefits entirely. Using a trust can help to avoid issues.

Get Expert Help Today

If you wish to protect your loved one’s benefits with a professionally drafted will-trust, we offer:

Affordable will writing
Trusts that safeguard benefits
Expert advice tailored to vulnerable beneficiaries

Ready to Protect Your Loved One’s Future?

Let us help you create a will that keeps your family safe — without affecting their benefits.

Make Sure Your Vulnerable Loved Ones Are Looked After

Put the right legal protections in place with a professionally drafted will and tailored trust planning.

Book your free, no-obligation consultation today.

How to Provide for a Financially Irresponsible Beneficiary.

It is normal for parents to feel worried or overwhelmed when planning how to provide for a child who is either financially irresponsible or else too inexperienced to be trusted with a large sum of money. You may have reason to worry that a large inheritance could be spent too quickly, mismanaged through impulsive decisions or lost to debt. You may even be concerned that your child is at risk of financial exploitation by others. These concerns are entirely natural, especially if you feel that making a direct gift to your loved one could prove to be a waste of your hard-earned assets.

Fortunately, there are efficient ways to protect your child’s future while still safeguarding your estate. Our cost-effective will-writing service provides practical estate-planning options, including the option to use one of several Trusts to help you make secure, thoughtful provision for a child who may struggle with money.

Suppose you are seeking guidance on how to provide for a financially irresponsible beneficiary. In that case, we can help you make the right decisions, including whether to use a discretionary trust, a life interest trust, or a protected trust.

Including a Discretionary Trust in Your Will.

Utilising a discretionary trust in your Will can prevent a financially irresponsible beneficiary from wasting or mismanaging an inheritance. Instead of leaving a lump sum directly to a child who struggles with money, a discretionary trust allows trustees to look after the estate on their behalf. This approach gives you far more control over how and when the inheritance is used, making it a perfect solution for anyone interested in providing long-term protection for a beneficiary who might not make the best decisions for themselves.

A discretionary trust offers the appointed trustees flexibility. The trustees get to decide how much money to release, when to release it, and in what circumstances the beneficiary should receive support. They get to react to your child’s needs as they develop. This takes control away from a beneficiary who may be vulnerable to impulsive spending, addiction, debt, or financial abuse. A discretionary trust can provide parents with peace of mind by passing decision-making authority over the assets to responsible individuals. Provision can even be made subject to certain conditions, such as being paid in stages as the child reaches certain ages, or payment being released only upon the child achieving specific goals, such as overcoming addiction or holding down a job.

Whether your beneficiary struggles with money management now or you want to ensure responsible distribution later on, a discretionary trust provides peace of mind and a robust framework for protecting your legacy.

Using a life interest trust

A life-interest trust is another excellent estate-planning option for parents who want to provide for a financially irresponsible beneficiary. Provision is made for the child without relinquishing control of valuable assets. With a life-interest trust, the beneficiary, who may struggle with spending, debt, or unstable finances, can receive an income from the trust during their lifetime but never actually gains ownership of the underlying capital. This means they can enjoy financial stability and regular support, while the assets themselves remain protected. For families seeking an effective way to balance support with security, a life-interest trust offers a practical and reassuring structure.

One of the key benefits of a life interest trust is that it prevents a financially irresponsible child from wasting the estate. Instead, trustees ensure the assets are managed sensibly. They can provide the beneficiary with an income to help cover living expenses, rent, and other essential costs. In turn, the beneficiary is prevented from spending trust capital, thereby protecting your estate from impulsive decisions, third-party pressure, or financial exploitation.

A life interest trust also allows you to preserve your long-term wishes for your estate. Once the financially irresponsible beneficiary passes away or their life interest ends, the trust capital automatically passes to your chosen ultimate beneficiaries. These might be other children or grandchildren. Your assets are not wasted during the first beneficiary’s lifetime, and are then passed on to others exactly as you intend. Including a life interest trust in your Will can create a structure that is both flexible and efficient, giving you peace of mind that your estate will support your child appropriately while still safeguarding your legacy for future generations.

Using a Protective Trust

A protective trust works in the same way as a life interest trust. Under a protective trust, the beneficiary initially receives the trust’s income, which can help cover everyday expenses and provide financial stability. However, the crucial difference is the presence of an additional “protective” mechanism. There may be circumstances where a life interest beneficiary can still try to sell their “interest” in the trust. Under a protective trust, if the beneficiary attempts to dispose of their interest by selling it or borrowing against it, their right to receive income during life terminates, and the trust automatically switches to a discretionary arrangement. This means trustees can choose whether to provide for the irresponsible beneficiary or pass the assets to other beneficiaries. In turn, this makes it impossible for the original beneficiary to sell or borrow against their interest.

This protective feature makes a protective trust particularly useful for families dealing with addiction issues, heavy debts, gambling problems, or external financial pressures.

Another key advantage of a protective trust is that it still allows you to preserve your estate for other beneficiaries once the first beneficiary’s interest ends. After the financially irresponsible beneficiary passes away, the remaining trust capital is passed to your chosen beneficiaries, such as other children or grandchildren. This ensures your estate is used responsibly during the first generation and then protected for the next. By using our cost-effective will writing service, you can establish a protective trust that balances compassion with control, giving your financially irresponsible beneficiary the support they need while safeguarding your long-term wishes for your estate.

Key Steps for Parents Supporting an Irresponsible Child

Discretionary Trusts

Estate planning is vital for parents with a child who struggles with money, addiction, impulsive behaviour, or legal difficulties. A robust plan ensures your loved one is supported without risking their inheritance.

Choose Trustees Carefully

To protect your child’s future, your will should be professionally drafted with explicit trust provisions. Choosing a cost-effective will-writing service makes the process both affordable and reassuring.

Write a Letter of Wishes

This gives helpful guidance to trustees about how the funds should be used over time. While not legally binding, it strongly influences how trustees manage the trust. In this letter, you can explain the reasons for your decisions, why you created a trust, and your preferences regarding how the fund is spent.

Call us for guidance.

If you’d like personalised guidance on how to provide for a financially irresponsible beneficiary, we offer a free initial telephone discussion. Our experienced staff can explain your options simply and clearly, helping you put a secure plan in place.

For professional advice, call 0161 524 1033 or send us an enquiry today. We’re here to help you protect your assets and provide for the people you care about—sensibly, safely, and affordably.

Make Sure Your Vulnerable Loved Ones Are Looked After

Put the right legal protections in place with a professionally drafted will and tailored trust planning.

Book your free, no-obligation consultation today.

Can I make provision for a bankrupt beneficiary?

It is perfectly possible to make a gift in your Will to somebody who is bankrupt. However, if a beneficiary who is bankrupt becomes legally entitled to an inheritance, the provision from your estate can be taken to be paid towards that person’s debts. The executor or trustee will have an obligation to prove the benefit to the “trustee in bankruptcy”. If you do not wish your hard-earned money to be applied towards somebody else’s debts, then there are alternative steps that can be taken instead of making a direct gift to that person.

If you know that your intended beneficiary is bankrupt, or if you consider that there is a considerable risk that your intended beneficiary will become bankrupt in the future, you could use either a Discretionary Trust or a Protective Trust to benefit that person indirectly and to prevent your assets from being taken to pay debts.

Using a Discretionary Trust.

A discretionary trust is a legal mechanism by which your assets are held by trustees instead of being passed to your intended beneficiaries, and the trustees are provided with a discretion as to who should receive funds and how much they should receive.

Your assets do not pass to the beneficiaries themselves, and therefore cannot be accounted for towards their debts or their bankruptcy.

With a Discretionary Trust, you generally name several beneficiaries in your Will, including the bankrupt beneficiary. When your Will is administered, none of those beneficiaries gains an immediate right to receive any payment from your assets. Instead, the trustees receive the fund and can then choose how to distribute the estate to the named beneficiaries.

You can provide written guidance to the trustees in the form of a “letter of wishes”, in which you explain your preferences for making provision. For example, you could explain that the trustees should prioritise payments on behalf of the bankrupt beneficiary, to be used for necessities like living expenses and bills, before providing any funds to other beneficiaries. That way, you can still provide for the welfare of your intended beneficiary, but you can also ensure that your assets are not taken to pay off a bankrupt’s debts.

Using a Protective Trust.

A Protective Trust creates a “lifetime interest” for your chosen beneficiary. This means they are allowed to receive income generated by the trust, but they do not receive the capital fund itself. Trustees manage the capital and pay income from it to your chosen beneficiary in accordance with your instructions. After your chosen beneficiary has passed away, the capital in the trust is then provided to further beneficiaries of your choosing.

However, this “lifetime interest” is subject to certain conditions. If the conditions are met, such as your chosen beneficiary becoming bankrupt, then the “lifetime interest” is immediately terminated and a discretionary trust is created, enabling the trustees to pay the benefit of the capital to the further beneficiaries that you have identified.

The Protective Trust is also a good way to control the actions of a wayward beneficiary because the “lifetime interest” terminates if they try to dispose of their interest in any way, such as by selling it or borrowing against it.

Make Sure Your Vulnerable Loved Ones Are Looked After

Put the right legal protections in place with a professionally drafted will and tailored trust planning.

Book your free, no-obligation consultation today.

What is a Disabled Persons Trust?

A Disabled Persons Trust is a legal mechanism whereby funds that you provide can be managed on behalf of a disabled beneficiary and be applied for their benefit in a controlled but flexible way, in circumstances that may be advantageous for tax purposes and may even protect the beneficiary’s entitlement to means-tested state benefits and support.

How does a disabled person qualify for a Disabled Persons Trust?

A disabled person may qualify to benefit from a Disabled Persons Trust set up by a Will in one of two ways. They may be eligible because they have some form of mental disorder that makes them incapable of managing their own property or administering their own affairs, or they may qualify because they receive certain state benefits.

What kind of mental disorders qualify a person for a Disabled Persons Trust?

A “mental disorder” sufficient to qualify a person for a Disabled Persons Trust is defined by the Mental Health Act 1983 as a “disorder or disability of the mind” that makes a person incapable of managing their own affairs.

This might be due to dementia, Alzheimer’s, or another condition that affects capacity. It might also arise from conditions such as schizophrenia, bipolar disorder, or autism.

The key element is that the individual must not be able to manage the fund that they would otherwise receive from you, to such an extent that that might otherwise require the appointment of a Court of Protection Deputy if they were to receive the fund for themselves.

Which state benefits qualify a person for a Disabled Persons Trust?

The receipt of various types of state benefits can make a person eligible to take advantage of a Disabled Persons Trust. They include: -

Receiving Attendance Allowance.
Receiving the care component of Disability Living Allowance at the middle or highest rate.
Receiving the mobility component of Disability Living Allowance at the highest rate.
Receiving Personal Independence Payment.
Receiving Armed Forces Independence Payment.

What tax advantages might a Disabled Persons Trust provide?

Most trust funds in the UK are subject to various taxes, but the main 3 are Income Tax, Capital Gains Tax, and Inheritance Tax.

Income tax is chargeable on any income the trust fund may make, whether arising from rent, interest, dividends, etc.

Capital Gains Tax is charged on any increase in value that the trust fund might achieve, or when trust assets are transferred out of the trust or sold.

Inheritance Tax may be payable when assets are transferred into or out of the trust, and on every 10th anniversary from the date the trust was first created.

For assets in a Disabled Persons Trust, Inheritance Tax is generally not payable when those assets exit the trust, and the 10th anniversary tax is not typically applied. Income Tax and Capital Gains Tax may still be payable, but the trustees may be able to pay them at a lower rate if the disabled beneficiary would personally qualify.

To qualify for those tax advantages, what form must a Disabled Persons Trust take?

The tax advantages of a Disabled Persons Trust will not be available unless the trust itself takes on one of two forms.

The first type of trust provides a “lifetime interest” to the disabled beneficiary. This is where the trust capital or assets are managed by the trustees, who may pay the income generated to or for the benefit of the disabled beneficiary. It must be in circumstances where no capital provision can be made for any other beneficiary during the lifetime of the disabled beneficiary (with the exception of a small allowance).

The second trust is a “discretionary trust” (which will actually provide for multiple beneficiaries) in circumstances where the discretion to make provision must be exercised only in favour of the disabled beneficiary during their life (again, with the exception of a small allowance).

At the time of writing, the “small allowance exception” that can be paid to people other than the disabled beneficiary must not exceed the lower figure of either £3000 or 3% of the value of the trust fund.

Means-Tested Benefits

Many state benefits are means-tested and therefore affected by a person’s income, savings, or assets. This means that providing a gift directly to a disabled person who receives state benefits might affect their eligibility for those benefits. The same can be said for the provision of care services.

A Disabled Persons Trust causes the fund to be held by the trustees; therefore, the capital is not classed as belonging to the disabled beneficiary and is not accounted for towards their means-tested benefits.

Care must nevertheless be taken when providing for the individual. If the trustees make regular payments directly to the disabled beneficiary, those payments might still be treated as income for means-testing purposes. The flexibility provided by a Disabled Persons Trust should enable the trustees to work around this.

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What is a Discretionary Trust?

A Discretionary Trust is a legal arrangement under which trustees look after assets for a number of potential beneficiaries, in circumstances where they have the authority to decide which of those beneficiaries receives a benefit, along with when and how much they might receive.

A Discretionary Trust differs from most trusts because it does not guarantee that any particular beneficiary will receive anything.

A Discretionary Trust is often used to look after assets and provide for beneficiaries who are vulnerable or not capable or responsible enough to manage the money properly themselves.

How does a discretionary trust work?

If you create a Discretionary Trust in your will, then you bequeath your estate, or at least some of it, to a Trust. You must decide who the potential beneficiaries of that Trust should be. You must also select trustees (people who will look after the fund) and guide them as to your preferences for how they should distribute the assets.

After your death, the trustees hold the fund, and they decide how to apply it to your beneficiaries. The trustees get to determine which of your potential beneficiaries will actually receive a provision, and they even have the power to add additional beneficiaries in certain circumstances.

What are the advantages of a Discretionary Trust?

A Discretionary Trust can be useful when leaving a gift to a category of beneficiaries – for example, to your grandchildren. Some potential members of that category might not even have been born when you write your will, or even at the time that you pass away, but the trustees will have the flexibility to make some provision for them in the future.

The Discretionary Trust is also useful if one or more of your chosen beneficiaries might be vulnerable in some way. For example: –

If you are making provision for a child, the trustees can look after your bequest and apply it to that child’s needs until such times as the child is old enough and mature enough to manage the fund for themselves.
The trustees hold the funds, and your beneficiaries do not, which can help any beneficiary who would be at risk of losing means-tested benefits if they were to receive a gift directly. This is especially useful for a disabled beneficiary who is unable to work and dependent upon means-tested benefits to get by.
The trustees can control the fund on behalf of a beneficiary who is too irresponsible to manage the fund themselves, or where there is a risk that a direct gift would be taken to pay the debts of that beneficiary or even to discharge a bankruptcy.
The trustees can manage the fund and apply it for the benefit of a mentally handicapped beneficiary who lacks the capacity to manage their assets correctly, and where an expensive Court of Protection Deputy may otherwise have to be appointed.

What tax implications does a Discretionary Trust have?

When considering using a Discretionary Trust in your Will, you should give careful consideration to the possible tax implications.

Inheritance tax

When paying money or assets into a Discretionary Trust, inheritance tax is paid on anything above the value of the nil rate band (currently £325,000), or the portion of the nil rate band that is left if some lifetime payments have been made less than seven years before death.

On every 10th anniversary of the creation of the Discretionary Trust, a tax of up to 6% may be charged on the value of the trust that exceeds the nil rate band.

When capital is distributed from the trust to beneficiaries, up to a 6% charge may be applied.

Income tax

If the assets within the Discretionary Trust generate income, income tax of 45% may be charged on that income. There is an exemption if the trust earns less than £500.00.

When capital is distributed to beneficiaries, they may be able to claim a refund of some of that tax, depending on their personal tax rates and other income.

Capital Gains Tax

When assets are paid into the Discretionary Trust, no Capital Gains Tax is payable on the transfer. This is because the Discretionary Trust is deemed to receive the assets at their current market value, and so there is no “capital gain” to be taxed.

If assets within the trust are sold and the proceeds of sale are retained by the Discretionary Trust, Capital Gains Tax may be payable on any increase in value the assets have achieved.

When assets are transferred out of the Discretionary Trust to beneficiaries, Capital Gains Tax may be charged on any increase in value the assets have realised. However, the recipient may benefit from “holdover relief,” so that the tax is not paid until they themselves dispose of the asset.

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