Disabled persons trusts: protecting your assets

Dementia and Alzheimer’s disease affect hundreds of thousands of people every year – according to the Office for National Statistics, they are England’s biggest killer and the Alzheimer’s Society says that by 2025, one million people will be living with the condition in the UK.

With these degenerative diseases having a real impact on millions more carers, partners, families, and friends, it seems fitting that Westcotts chose Alzheimer’s Society as our charity of the year.

Dealing with the emotional and physical repercussions of these devastating conditions is hard enough for anyone, but it can also lead to all kinds of stress, anxiety and worries when it comes to dealing with financial affairs and planning for the future.

Dementia, Alzheimer’s, and other degenerative diseases are recognised as disabilities and there are ways that you can protect your assets and the assets of your loved ones to give you peace of mind when the time is right.

Disabled persons trusts

If you have a medical condition that is expected to lead to you meeting the definition of a disabled person at some time in the future, you can protect your assets by self-settling them into a disabled person’s trust.

A disabled person is defined as someone who is:

• In receipt of Attendance or Constant Attendance Allowance, Disability Living Allowance, Child, or Adult Disability Payment, IIDB or a Personal or Armed Forces Independence Payment; or
• Incapable of administering their own property or managing their own affairs because of a mental disorder within the meaning of the Mental Health Act 1983

Which type of trust to choose?

The trust could be either an ‘interest in possession’ trust, giving you the right to income as it arises, or a ‘discretionary trust’, giving the trustees the right to apply the income and capital for your benefit as they see fit.

Normally, for disabled persons trusts, I would advise that the trust is set up as a discretionary trust so as not to affect any means-tested state benefits you may be in receipt of; however, this protection does not apply to self-settled trusts, so it comes down to your personal needs and preferences.

Whatever the trust type, the terms of the trust must provide that no one else can benefit from the trust property during your lifetime.

Tax consequences

Self-settling assets into a disabled person’s trust has no Inheritance Tax consequences.

There is no Inheritance Tax charge on the creation of the trust and the assets will form part of your death estate, the same as they would if you had owned them directly.

The trust assets are not relevant property and are, therefore, not subject to exit charges (on capital distributions) or principal charges (on every 10th anniversary) even if the trust is set up as a discretionary trust.

It is also worth noting that the special income tax rules which apply to disabled persons trusts will not apply here, as the trust will be created for your own benefit. Instead, the income will be treated as belonging to you and taxed on you.

The trustees will also pay tax on the trust income, and you will receive a tax credit for any tax paid by the trustees.

A disabled person’s trust can also be set up for the benefit of someone else, but different rules will apply.

Why set up a trust?

Trusts can be set up for many reasons but are particularly useful for safeguarding assets and protecting people who could otherwise be vulnerable to financial abuse or exploitation from others.

They may, however, not be suitable for everyone; an alternative to consider is making a lasting power of attorney and appointing a person to help you make decisions on your behalf.

More help and advice

Further information about trusts and taxes for vulnerable people can be found on the Government’s website and the Low Incomes Tax Reform Group also has a page on their website dedicated to trusts for disabled people. You can learn more about dementia and ways to support the Alzheimer’s Society by visiting www.alzheimers.org.uk.

For more help or advice about disabled persons trusts and the tax implications around these financial matters, contact Veronika Boumova FCCA CTA in our Barnstaple office. Details of all our local Westcotts offices can be found here.