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Effective financial planning on behalf of the vulnerable or disabled

23 September 2014


Reviewing the long term financial requirements of a vulnerable or disabled person are important but Trustees need to understand the differences between a standard discretionary trust and a vulnerable/disabled person’s trust, how it can be used and the tax implications warns Adams & Remers.

Simon Mitchell, at Adams & Remers comments: “On paper, the trusts can look identical to each other but the difference is largely down to how the trust fund is applied.  A disabled person’s trust is one where the capital and income, when applied, must be applied for the benefit of the disabled person in question rather than for a class of beneficiaries as the trustees think fit at their discretion. “Disabled” in this context has a statutory definition which either means someone who cannot deal with their own affairs by reason of mental disorder under the Mental Health Act 1983 or who receives one or more of a specified list of state benefits linked to disability (such as Attendance Allowance, the highest or middle rate of Disability Living Allowance, etc).”

There are various tax implications that Attorney’s should also be aware of, Simon Mitchell continues: “Whilst a discretionary trust pays tax at the rates applicable to trusts, a disabled person’s trust has special tax treatment.  For example, the income tax payable by the trust is relieved so that the total tax bill is the same as if the disabled beneficiary declared the income so that the trust is taxed at a rate lower than that usually applied to trusts.  There are similar relieving provisions for Capital Gains Tax purposes but the rules are complicated and an election has to be made to HMRC by the trustees and the disabled person (or his parent, guardian, etc) for these provisions to apply.  A disabled person’s trust may also avoid the 10 year charge to Inheritance Tax which discretionary trusts encounter if the conditions in the Inheritance Tax Act are met.”

There are no specific limitations on the way in which the funds held in a disabled person’s trust can be invested – ultimately, whether the trust is discretionary or for a disabled person, the decision will remain with the trustees who will have to be mindful of their duties under the Trustee Act 2000 (to diversify investments, take appropriate advice, etc).

Simon Mitchell concludes: “The cost of setting up a Trust, either be it created by Will or during one’s lifetime and the paperwork is different depending on which option is used.  Discretionary trusts typically achieve the same end results (controlling and investing the trust fund) just as well as a disabled person’s trust but without having to worry about the eligibility factors, additional elections, etc so worth looking at all options.”

Simon Mitchell, Associate Private Client, Adams & Remers
Simon Mitchell, Associate Private Client, Adams & Remers

For further information regarding this issue contact Simon Mitchell at Adams & Remers.

Telephone

+44 (0)1273 403284


Telephone

+44 (0)1273 403284


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