Robert Cartmell explains the main differences between a Discretionary Trust structure and a Vulnerable Persons Trust structure.
When you consider making gifts in your Will (or indeed during your lifetime) there may be persons benefiting who are ‘vulnerable’ or who suffer with a disability. Where such vulnerability impairs on their day to day functions and the ability to properly manage the inheritance you intend to provide to them, it is favourable to consider leaving the gift or share of estate to them safely protected within a Trust environment.
As such, there are two main options in terms of Will-trusts, those being a ‘Discretionary Trusts’ or a ‘Vulnerable Persons Trust’.
I, Robert Cartmell, have seen many families in such circumstances opt for a Vulnerable Persons Trust in the belief that this is the only method of safeguarding the inheritance for the vulnerable person. Equally, others choose the flexible approach of a Discretionary Trust not aware that this might mean that the vulnerable person is not sufficiently provided for or protected.
What are the merits of a Vulnerable Persons Trust?
The Vulnerable Persons trust is also known as a Disabled Persons Trust.
The primary advantages are:
- Taxation: as the Trust is primarily for the vulnerable or disabled person, the UK Government grant tax concessions. The treatment can be favourable in terms of Inheritance Tax, Income Tax and Capital Gains Tax;
- Protection for the vulnerable person (against 3rd parties): The structure protects the value so that it ought not to fall within the estate of the vulnerable person unless an outright gift of capital/value or income is guaranteed or provided. This can protect the assets and value as against third party claim or attack.
- Protection for the vulnerable person (against variation of original wishes or by acts of the Trustees to benefit other beneficiaries): for the lifetime the Vulnerable Persons Trust is primarily for him/her and there is a restriction against benefiting other beneficiaries. That protects some or all of the value for the lifetime of the vulnerable person. On the death of the vulnerable person, the other terms can revert to a discretionary trust format.
What are the merits of a Discretionary Trust?
- Protection for the vulnerable person (against 3rd parties): as with the Vulnerable Persons Trust, the Discretionary Trust also gives protection and even more so as the vulnerable person is simply within a class of beneficiaries, any of whom can benefit from the Trust at the discretion of the Trustees.
- Flexibility: for example, the Vulnerable Person may never need their inheritance and thus if there is no flexibility to benefit other beneficiaries, it can be seen as a ‘waste’ when other family members might have had need (and such the wishes of the deceased settlor better catered for). The discretionary trust provides the flexibility for the Trustees to consider the needs of other beneficiaries.
THEREFORE
There is no hard and fast rule as to which route is the best to go down. A proper assessment of the wishes of the creator of the Trust is needed (and from the outset) to establish the principles under which the Trust is intended to operate.
Take expert and experienced advice from us to ensure you understand all options and the tax implications of the structures.
If you would like help or advice from Robert Cartmell on the issues raised in this article, please get in touch. Email Robert Cartmell Consulting at info@robertcartmell.co.uk to make an enquiry or arrange a discussion.