Providing for disabled children

Approximately 6% of children in the UK are disabled and about 2.5% of children have a learning disability. Given this, it is likely that a number of your clients will be parents to a disabled child, and will want to ensure that their child’s individual needs are provided for after their death or during their lifetimes.

If no action is taken

If the survivor of a couple with a disabled child dies intestate under the intestacy rules their estate will be divided equally among their children. If the disabled child is a minor their share of the estate will be held on “statutory trusts” for them until they reach eighteen when it will be available to them to deal with as they think fit. This has disadvantages, whether the child is disabled or not, but can be particularly undesirable for the disabled child. As with all young adults, a disabled person who has the mental capacity needed to receive their share of the estate and to deal with their own finances, is unlikely to have the life experience necessary to deal sensibly with large sums of money.
If they are receiving state benefits which are means tested those benefits will stop and they will be forced to rely on their inheritance until the capital is reduced sufficiently for their benefits to be reinstated.

If the disabled beneficiary does not have capacity to receive or deal with their inheritance, unless they have the mental capacity to appoint an attorney to act for them, it will be necessary for a Deputy to be appointed by the court. This is often a long-winded and relatively expensive process.

What is the alternative?

Parents of disabled children might consider including a trust in their Will to receive the share of their estate intended to benefit their disabled child. The parents can then appoint trustees of their choosing who will manage the trust for the benefit of their child. As the trustees receive the child’s share of the estate there is no necessity to appoint a Deputy for this reason alone, and the child will have no access to capital without the trustees’ consent. This protects the capital from the child’s own behaviour if this is an issue, and ensures that the capital is not taken into account in assessing entitlement to welfare benefits.

What type of trust can be chosen?

The choice would generally be between a life interest trust (where the child is entitled to the trust income) and a discretionary trust where the child has no fixed entitlement to either income or capital but can generally receive both at the trustees’ discretion.

Discretionary trusts are used frequently as they enable the trustees to manage the income flow. The disadvantage with discretionary trusts is that if the trust assets are valued at more than the prevailing inheritance tax (IHT) nil rate band (currently £325,000) there will be a potential IHT charge when any capital is distributed from the trust and on each ten yearly anniversary of the trust’s creation. In addition, discretionary trust income is currently taxed at 45%, the trust pays capital gains tax at the highest rate of 20% and is only entitled to a maximum of half an individual’s capital gains tax annual exemption.

Disabled person’s trusts

If the trust qualifies as a disabled person’s trust there will be no IHT periodic tax charges, capital gains will be taxed at the beneficiary’s marginal rate (which could be 10%),a full annual capital gains tax exemption will be available and the trust income will be taxed at the beneficiary’s marginal rate which is likely to be 20%.

To qualify as a disabled person’s trust, with one exception, all the trust’s income and capital which is paid out by the trustees must be paid to, or used for the benefit of, the disabled child. The exception is for small payments from capital and/or income to beneficiaries other than the disabled person. These small payments must not exceed £3000 per annum or 3% of the maximum value of the trust fund during that tax year. In addition, the disabled beneficiary must be in receipt of certain benefits such as personal independence payment.

Whether to use a disabled person’s trust will depend on each family’s particular circumstances. For example if there are several children and the disabled child’s financial needs are likely to be met from benefits with the trust providing “extras”, it may be that the parents would prefer the flexibility of being able to provide benefits from the trust to the non-disabled child in excess of the permitted small payments.

Careful assessment will help to determine the best trust, and the most advantageous way forward, for each particular family, while ensuring that the best provision is made for the disabled child.

Provision during lifetime

If your clients are keen to make provision for their disabled child during the parents’ lifetime (perhaps for inheritance tax planning purposes), disabled trusts can also be created outside of a Will and assets added during the parents’ lifetime. The trust can then be a vehicle to receive any funds which the parents wish to leave their child in their Will.