New disabled trust rules

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    Business in Wills

    In the past week the House of Lords approved the Finance Act 2013 which will bring dramatic changes in the way we structure trusts for vulnerable beneficiaries.

    The major change which every Will Writer needs to be aware of is the departure from the current ‘Discretionary
    Disabled Trusts’ which is used and how this trust will work from now on.

    The new changes now take into account the amendments introduced by Schedule 44 of Finance Act 2013 which harmonises the requirements imposed by the income tax, capital gains tax and inheritance tax codes to ensure that a trust for a disabled beneficiary does not fall into the relevant property regime for inheritance tax purposes. The legislation also widens the definition of a disabled person.

    Previously it was possible to set up a trust for a disabled beneficiary with a wide class of beneficiaries and still
    qualify for the inheritance tax advantages of not being relevant property.

    This was achieved by requiring that the income was either accumulated or applied for the benefit of the disabled beneficiary and no less than half of any capital applied, was for the benefit of the disabled beneficiary.

    Therefore the previous system allowed for a number of beneficiaries to benefit in regards to the tax relief in this type of trust and would suffer no anniversary or exit charges. The only charge the trust would face would be an entrance fee on the testator’s death and this would only occur if the estate was over the testator’s inheritance tax threshold.

    The new rules impose a much stricter regime, requiring in practical terms that only the disabled beneficiary can benefit from capital and income distributions. The new clauses provide for this during the lifetime of the disabled beneficiary.

    For this reason further thought must be given to placing only that part of the estate required for that disabled person into the trust as it is not now possible to distribute to other beneficiaries during the lifetime of the disabled beneficiary, as previously was the case.

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    Matt Walkden Will Writer

    About Matt Walkden

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