Disabled Discretionary Trusts

What is a Disabled Discretionary Trust?

A Disabled Discretionary Trust can be utilised where a child or other relative has a disability. If this person inherits from a Will directly, their entitlement to benefits could be affected.

The Local Authority will want to assess them once they have received their inheritance. If a disabled person holds assets over a certain threshold (which can vary) the Local Authority may consider that they can now financially support themselves and cut the benefits that they receive.

A disabled person may be unable to manage a large sum of money due to their disability. If that person also lacks mental capacity and does not have a Property and Affairs LPA, it is likely that an application would have to be made to the Court of Protection to appoint a Deputy. This is a lengthy and expensive process and incurs ongoing costs and should be avoided.

A disabled person’s inheritance should therefore be placed into a Disabled Discretionary Trust. The disabled beneficiary is the Principal Beneficiary of this trust and, as with any other Discretionary Trust, there must be more than one further beneficiary.

There is no advisable amount to place into a Disabled Discretionary Trust. How much goes into the trust will depend on the size of the estate and whether there are other beneficiaries that should be considered, for example other children.

For the purposes of the trust, S89 Inheritance Tax Act 1984 defines a disabled person as a person who either by reason of a mental disorder, is incapable of administering their property or managing their affairs, or is in receipt of any of the following:

  • Attendance Allowance
  • An increased Disablement Pension; or
  • Disability Living Allowance (DLA) by virtue of entitlement to the care component at the highest or middle rate or entitlement to the mobility component at the higher rate; or
  • Personal Independence Allowance; or
  • Constant Attendance Allowance; or
  • An Armed Forces Independence Payment.

Furthermore, there are provisions to ensure that if a person would qualify for one of the above but are not in receipt of such due to residing in a hospital or care home, they would still qualify as a disabled person.

Disability Living Allowance is being phased out and replaced with the Personal Independence Payment, which will likely be the main reason for qualification going forward.

How does it work?

Whilst the Principle Beneficiary is alive, the Trustees are to apply both the income and capital of the trust for the Principle Beneficiary’s benefit as they see fit. This will usually be applied in such a way that they will not affect the benefits that the Principle Beneficiary receives.

As of 17th July 2013 the Trustees may also, at their discretion, benefit the other beneficiaries to a total of either £3000 or 3% of the capital held in Trust, whichever is lower in value, per annum. This amount will be shared between the other beneficiaries.

On the death of the Principle Beneficiary, the Trust will continue as a standard Discretionary Trust.

To find out more about how we can help you with a Disabled Discretionary Trust, please get in touch.