Disabled Persons Trust
Caring for a disabled family member comes with unique challenges, and ensuring their financial stability and proper care requires careful planning.
This article, written by Sam Dale, a legal expert specialising in estate planning and trusts, looks at the importance and benefits of a Disabled Persons Trust (DPT) as an essential tool for families and individuals seeking to secure the financial well-being of their loved ones with disabilities.
Please note that the information provided in this article is intended for general guidance only and should not be considered legal advice. For advice tailored to your unique circumstances, it is recommended to consult with a qualified solicitor or legal professional.Top of Form
What is a Disabled Persons Trust?
A DPT is a legal arrangement that allows a person with a disability to receive funds. It is essentially a type of Discretionary Trust (being a trust where trustees decide if and when beneficiaries are to receive funds). This means that the Trustees for a disabled person have flexibility to release (advance) income and capital to the beneficiaries in any way as they deem appropriate.
However, a DPT has specific tax advantages over ‘typical’ Discretionary Trusts. Furthermore, the funds received by the beneficiary will not affect their eligibility for means-tested benefits.
Definition of “disabled person”
A DPT designates a primary beneficiary who must meet the criteria for being considered disabled. In this context, a disabled person is defined as someone who:
- Is unable to administer their property or manage their affairs due to a mental disorder as defined by the Mental Health Act 1983; or
- Receives attendance allowance (AA) or constant attendance allowance; or
- Receives disability living allowance (DLA) by virtue of entitlement to the care component at the higher or middle rate, or the mobility component at the higher rate; or
- Receives personal independence payment (PIP) at the standard or enhanced rate for either of the daily living activities or mobility components; or
- Receives an increased disablement pension; or
- Receives armed forces independence payment; or
- Would qualify for AA, DLA (at the relevant levels), or PIP if not for specific circumstances such as being in the hospital or failing to meet prescribed residency or presence conditions in the UK.
How do you set up a Trust for a disabled person?
There are certain requirements which must be met to set up a trust for disabled persons. To qualify for the favourable tax treatment included in a DPT, the disability trust must have a disabled person as the primary beneficiary.
It is possible to create a trust for disabled beneficiaries during your lifetime, with assets being transferred across to the trust which can help with your Inheritance Tax and estate planning.
Disabled persons trusts can also be included in a Will. Where this is the case, disabled persons trusts in a Will come into effect on your death.
Tax advantages
Ordinarily, discretionary trusts can have unfavourable tax treatment such as lower tax free allowances for income tax and capital gains tax. However, a DPT is treated more favourably as the Trustees can elect to have the income and gains of the trust taxed as if the trust fund belonged to the disabled person.
To qualify for these favourable tax arrangements, the Trust is limited in terms of how much other beneficiaries can benefit during the disabled person’s lifetime; the income and capital must be used entirely for the benefit of the disabled person. There is a small exception that either £3,000 or 3% (whichever sum is lower) of the value of the trust fund can be allocated to another beneficiary of the Trust in each tax year.
A DPT is also not subject to other tax liabilities often incurred by trusts such as 10 year anniversary charges and exit charges.
Additionally, a DPT has benefits from an Inheritance Tax perspective. Whilst assets passing in to a trust do not typically qualify for the Residence Nil Rate Band (the tax free threshold when leaving property to a direct descendant), if a direct descendant is the primary beneficiary of the DPT, the Residence Nil Rate Band could still be claimed.
Does a Trust affect benefits in the UK?
It is important to consider how trusts for the disabled are likely to affect a beneficiary’s entitlement to certain benefits. Money that is held in a trust does not count towards income or savings limits, which means that it may be safer for trustees to agree to pay for things that the disabled beneficiary needs so as not to impact means testing.
How can Butcher & Barlow help?
A DPT serves as a vital legal instrument for families and individuals seeking to safeguard the financial future of their loved ones with disabilities. By establishing a DPT, you can ensure that the disabled person receives the necessary funds for their care while benefiting from specific tax advantages.
Careful planning and consideration, in collaboration with your legal and financial advisers, is essential when it comes to securing the financial well-being of your disabled loved ones. Butcher & Barlow can help you navigate the legal complexities involved in establishing and managing a DPT to ensure the best possible outcome for your family and the disabled person in question.
Sam can be contacted on 01270 762521 or emailed at sdale@butcher-barlow.co.uk
