Throughout my years as a chartered financial planner, I have often come across clients who have adult children with disabilities or who were vulnerable.
These clients were rightly concerned about how they could provide for their children financially, once they were no longer around to care for them.
This often led to a more detailed conversation regarding the benefits of trusts.
Why consider using trusts?
When considering how to provide financial support for someone who is unable to deal with their own finances, one of the best options is to use a trust.
The primary purpose of a trust is to separate the legal ownership and the beneficial ownership of assets and is particularly useful when a client wants to provide for someone with vulnerabilities or disabilities.
The legal owners are the trustees, who would hold the assets (for example, land, bank accounts) in their names.
The beneficial owners are the beneficiaries, who have the right to the financial benefit – be it capital or income – from those assets.
What to take into account when considering a trust
To help narrow down the most suitable trust or course of action it is beneficial to gain a detailed understanding of the situation from the outset.
Look to establish:
- the nature of the person’s disability, or vulnerability;
- what support they are likely to need going forward;
- what means tested and other state benefits they are receiving;
- the financial position of the parents and whether they can ring-fence funds immediately or only on death;
- who is likely to look after the person going forward; and
- what is the taxation position of the parents and the potential beneficiaries.
The nature of the person’s disability
Does the person with a disability have a physical or a mental disorder?
If they have a physical disorder and are adults, they can deal with their finances themselves. However they may not wish to, in which case they might wish to set up lasting powers of attorney – one for finances and one for health and welfare.
If they have a mental disorder, then a trust may be appropriate.
State benefits
It is important to find out what state benefits the potential beneficiary is receiving and whether they are means tested.
There are some that are not means tested, such as personal independence payment or severe disablement allowance or the state pension.
Or there are some that are not means tested but the level of payment is dependent on the care needs, such as disability living allowance, carer’s allowance or attendance allowance.
And then there are some that are means tested, such as employment and support allowance or statutory sick pay or incapacity benefit.
The sort of benefits currently being received will have a bearing on the type of trust you are most likely to recommend.
Most people wish to preserve the state benefits being received as far as possible, so you need to pay particular attention to those benefits that are means tested.
Selecting the trustees
One of the most important decisions for parents and guardians to make is who they ask to act as trustees of the trust. They should be people they trust to make financial decisions on behalf of the disabled person.
They will have to act unanimously and will become the legal owners of all the assets that are put into the trust. They will be guided by the trust documents to distribute those assets in accordance with the wishes of the parents or guardians.
