It is generally undesirable for a testator to leave money or property as an outright gift to a mentally disabled person for two reasons; firstly because if the beneficiary is unable to deal with their own financial affairs a deputy will need to be appointed by the Court of Protection (if a registered power of attorney is not in place) and secondly because any gift may affect any state benefits or local authority provision that they may be entitled to.
Few testators would be happy with causing the problems described above and would rather ensure that the situation is avoided. It is easy to anticipate the scenario where a testator is wishing to provide for a disabled son or daughter or an elderly family member who is mentally incapacitated and supported by public funds in a residential care home. It is too late to introduce solutions after the death of the testator as a variation cannot be entered into by anyone lacking the capacity. It is vital therefore that the needs of a disabled beneficiary are considered when making the Will by the inclusion of a suitable trust.
The additional advantage is that more favourable treatment for inheritance or capital gains tax might be available.
A lifetime settlement may be advantageous where the situation can be anticipated. The trust can be established with suitable provisions and powers and by a small sum of money with the ability to add further money or assets when appropriate.
Because the trust is already established it can receive any death in service benefits or life assurance which will provide an immediate source of funds for the disabled beneficiary without having to wait for probate of the Will.
The Finance Act 2006 restricted the types of trust that are treated for inheritance tax purposes as belonging to the holder of that interest and forming part of their estate. A Disabled Person’s Interest (DPI) qualifies as such and will not be subject to the charging regime for relevant property. The person must fit the description of a disabled person as laid out in the Inheritance Tax Act 1984 to obtain favourable tax treatment. The benefits include:
• A lifetime transfer into a trust of this nature is a potentially exempt transfer which avoids entry charges
• There are no ten yearly charges
• There will be no exit charge on capital payments made to, or for the benefit of, the disabled person
In the case of some beneficiaries the tax saving may be irrelevant and it will be more important to preserve state funding. It is therefore vital to understand the testator’s objectives when advising them how to correctly achieve the best result for their chosen beneficiary. Of course, you can only provide advice based on the current tax regime in light of the beneficiaries circumstances and both are likely to change either before the date of death or throughout the trust period.
