22 August 2023

Estate Planning And Vulnerable Beneficiaries

The aim of estate planning is to ensure that family and loved ones receive financial support by transferring wealth and assets.

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The aim of estate planning is to ensure that family and loved ones receive financial support by transferring wealth and assets. The process can vary in complexity depending on your circumstances, such as your health, wealth, and who you wish to benefit from your estate. One such circumstance where estate planning should perhaps be considered more carefully is when you choose to benefit a vulnerable beneficiary.

If you are to leave a gift to a vulnerable beneficiary, such as a child with additional learning needs or an elderly loved one with dementia, you are faced with many options, all with differing outcomes. It is of paramount importance when leaving assets to a vulnerable beneficiary that your estate is set up in a manner that allows the vulnerable beneficiary to benefit from your gift in the safest and most tax-efficient way possible.

The perils of the absolute gift

Typically, when leaving a gift for a loved one, you would do so under the terms of your will. However, leaving an absolute gift to a vulnerable beneficiary may have a detrimental effect on the vulnerable beneficiary’s welfare. For instance, the vulnerable beneficiary may be exploited by people who take advantage of their inheritance and vulnerability. It may also have adverse effects on any state benefit they are receiving or ought to receive in the future. To avoid these negative consequences, we often recommend planning your estate with vulnerable beneficiaries in mind and considering placing your gift in the safety of a trust.

Trusts in estate planning can be a useful tool to protect vulnerable beneficiaries. In contrast to a gift, placing assets in a trust for a vulnerable beneficiary has the advantage of being managed by trustees. These trustees are then obligated to safeguard the assets for the benefit of the vulnerable beneficiary, giving you peace of mind that they are not being left open to abuse. There are several trust options available to you.

A Discretionary Trust

This type of trust offers great flexibility. The vulnerable beneficiary would be a potential beneficiary, along with many other potential beneficiaries you may wish to include in the trust, such as other loved ones or even charities. It is important to note that merely including them in your Discretionary Trust does not automatically entitle them to the assets in your trust. It is up to the discretion of the trustees you have appointed to manage the trust to use the funds to benefit the vulnerable beneficiary.

This approach allows the trustees to support a vulnerable beneficiary in the most appropriate way they deem fit. It is important to keep in mind that the trustees you appoint are people you trust will look after the best interests of the vulnerable beneficiary, but nonetheless, we would also recommend writing a detailed letter of wishes. This will be your guidance to the trustees to ensure your wishes are being met.

A Disabled Person’s Trust

This type of trust is designed to benefit a beneficiary who has a qualifying disability as defined in the Mental Health Act of 1983. This trust offers desirable inheritance, capital, and income tax treatment for the vulnerable beneficiary if they qualify under the terms of the Mental Health Act 1983.

In contrast to the Discretionary Trust, the Disabled Person’s Trust is far less flexible. While it does allow for other beneficiaries to be included in the trust, the trustee’s power to provide for them is restricted to 3% of the assets of the trust or £3,000, whichever is lower. The upshot of this is that it may prevent funds from being misappropriated which could lead to the primary vulnerable beneficiary not being adequately provided for. If your estate is relatively large, any excess funds are prevented from being distributed to the other beneficiaries of the trust, during the disabled beneficiary’s lifetime.

Your trustees

An essential part of estate and trust planning is the appointment of your trustees. Trustees are responsible for managing the trust, which includes asset investment, tax considerations, and considering the needs of vulnerable beneficiaries.

It is vital that your appointed trustees respect and recognise the vulnerable beneficiaries’ needs and have the knowledge, or at least the desire, to learn the skills needed to successfully manage a trust. This can be accomplished by appointing professional trustees, such as the partners here at Kew Law. Kew Law could be appointed together with fellow loved ones, ensuring the trust is managed by trustees who know the law and the individual at a personal level. The trustees often have to reach an agreement unanimously, therefore, you will have the peace of mind that the vulnerable beneficiary is well catered for, and the risk of any mismanagement is low.

Letter of wishes

A letter of wishes can be kept alongside your will or trust to offer assistance to your trustees. Though the trustees are not legally bound to follow the letter of wishes, it can aid them in their decision-making on how to best manage the funds of your trust and ultimately how they use their discretion. A letter of wishes does not need to be written by us and, in fact, arguably holds more weight if you personally write the letter. A letter of wishes does not need to be formal and can give non-binding instructions to the trustees, such as allowing the vulnerable beneficiary money for supplementary care or holidays.

Taking the burden of estate planning

Please contact us if you’d like assistance in how best to provide for vulnerable beneficiaries through estate planning.

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