Wills, Discretionary Trusts & Disabled Person Trusts

ByDamien J Jones TEP

Wellers Law Group LLP65 Leadenhall Street, London EC3A 2AD

Introduction

Damien Jones LLB (Hons) TEP, SolicitorHead of Wills, Probate & Trusts DepartmentMember of the Society of Trust and Estate

Practitioners, Solicitors for the Elderly and the Law Society Private Client Section

Specialising in Probate, administration of estates, wills, powers of attorney, Court of Protection, trusts, Inheritance Tax planning

Wellers Law Group LLPEstablished in 1881 and a growing firm of

Solicitors

Offices based in London, Bromley and Surrey

Offering a complete range of legal services to individuals, families, businesses and charities

Delivering expert legal advice whilst retaining an approachable, client orientated service

Who has a Will?

Only 1 in 3 people in the UK have a WillAround 60,000 estates each year are

‘intestate’ (where there is no valid Will in place)

In 2010, the Treasury gained £53 million from people who died without leaving a Will – the year before it was £76 million

Surveys show that people put off making a Will, often until they are in their 50s

Why make a Will?Lets you leave instructions about how your

estate is to be distributedEnables you to choose your own executorsAppoint guardians to look after children under

the age of 18 yearsAllows you to make specific gifts to individualsIf you have remarried, you can ensure any

children from your first marriage get a share of your estate

A Will is a useful tax planning tool

What if I die without a Will?Your estate is divided according to the rules of

intestacy instead of your wishesYour estate could be distributed between distant

relatives whom you may not wish to benefitUnmarried partners will not receive anything

from your estateIf you have separated but not divorced, your ex-

partner will still be entitled under the rules of intestacy

Absence of a Will can lead to family disputes

Does my estate pass to my spouse?

• Your spouse may not receive as much as you would have liked them to

• For example, if you are married with children, and your estate is worth more than £250,000

• Your spouse will receive your personal belongings, the first £250,000 and one half of the remaining assets

• The remaining one half will pass to your children

Some common mistakes in making a Will are?Not being aware of the formal requirements

needed to make a Will legally validFailing to take account of all the money and

property available, or of the possibility that a beneficiary may die before you

Being unaware of the effect of marriage or divorce on a Will

Being unaware of the rules which exist to enable dependants to claim from the estate if they believe they are not adequately provided for

When is it particularly advisable to use a solicitor to draft your Will?You share a property with someone who is not

your spouseYou wish to make provision for a dependant

who is unable to care for themselvesThere are several family members, who may

make a claim on your estateYou wish to incorporate a trust within your Will; You own a businessYour permanent home is not in the UK, or you

are resident in the UK but own overseas assets

Trusts for disabled & vulnerable persons

Provide financial stability for a disabled or vulnerable person throughout their lifetime

Management of assets for those incapableEnable trustees to take into account

beneficiary’s changing circumstancesAvoid the loss of state benefits and

preservation of capital by ring fencing assets

What type of trust?

The type of trust depends on your personal circumstances, the flexibility needed and the value and type of assets involved

Two main options available are a Discretionary Trust (DT) and a Disabled Person Trust (DPT)

What is a Discretionary Trust (DT)?Used where you like more than one person to

benefit, and for trustees to decide how and when those people benefit

There has to be more than one beneficiary, might include disabled or vulnerable person, along with other children, grandchildren, charity

Trustees have flexibility in deciding how to use income and capital of the trust fund for the beneficiaries

Beneficiaries do not have a fixed entitlement to receive anything from the trust fund

What is a Discretionary Trust(DT)?

Trust fund held by trustees cannot be taken into account when assessing beneficiary’s entitlement to means tested benefits

Trustees can make decisions to meet changing requirements of disabled or vulnerable person during their lifetime

Trust funds should not be used in a manner which endangers any future claim for benefits

What is a Discretionary Trust (DT)?Tax treatment is not favourable and needs to be

carefully consideredIncome Tax charged at 37.5% on dividends and 45%

on all other income except for first £1,000 (2015/2106), no personal allowance

Capital Gains Tax charged at 28% with trustees only entitled to 50% of annual exemption (£5,550 for 2015/2016)

If value of trust fund exceeds Inheritance Tax threshold of £325,000, charge when trust set up, every 10 years (maximum rate of 6%) and whenever a payment is made from the trust

What is a Disabled Person Trust (DPT)?Set up to specifically benefit a disabled person and

is largely discretionary in its natureDisabled person defined as someone who is;by reason of mental disorder, incapable of

administering their own property or managing their own affairs

in receipt of increased disablement pension, Attendance Allowance, Disability Living Allowance by virtue of entitlement to care component at highest or middle rate, Personal Independence Payment, Armed Forces Independence Payment

What is a Disabled Person Trust (DPT)?

Trust must provide during the disabled person’s life, at least ½ of any capital payments made out of the trust are paid or used for the disabled person

All income paid out of the trust must be paid or used for the disabled person

What is a Disabled Person Trust (DPT)?Main advantage of DPT over a DT is the favourable

tax treatment it receivesTrust will not incur any charges to Inheritance Tax

when payments are made from the trust and the 10 yearly Inheritance Tax charges

For Income Tax and Capital Gains Tax, the trustees pay tax at the rate the disabled person would have paid

Trust aggregates to estate of disabled person and provided disabled person has few assets in their own right, can lead to a more favourable Inheritance Tax position

Which type of trust is more appropriate?Number of factors to be considered before

deciding which type of trust to use. Consider;age of disabled or vulnerable personnature and long term prognosis of any

disabilityneeds of that personFor example, where they are to live, who will

care for them, how the carers will be compensated and the needs of other family members

When should the trust be set up?

A Discretionary Trust and a Disabled Person Trust can be set up by any person;

during their lifetime by creating a Trust Deed or

on death under the terms of their Will

Who should the trustees be?Appointment of suitable trustees is essential

to ensure trust can run smoothly and provide appropriate provision for disabled or vulnerable person

If trust fund is of high value or complex, sensible to appoint an independent trustee

Can be family members, friends or professionals, or a mixture of these

Can be a beneficiary but to avoid any conflict, another trustee should be included who is not a beneficiary

What is a Letter of wishes?Opportunity to explain to the trustees the

reason for setting up the trust and guidance on how the trust fund should be used

Should be kept under review as your wishes and the needs of disabled or vulnerable person change

State how assets should be distributed to the other beneficiaries in the event of the death of the disabled or vulnerable person

Not legally binding, it can be referred to as guidance

Contact information

If you would like to discuss making a Will or setting up a trust, please do not hesitate to contact Damien Jones

Wellers Law Group LLP65 Leadenhall Street, London EC3A 2ADTel: 020 8290 7998Email: damien.jones@wellerslawgroup.com