Disabled Discretionary Trust
A Disabled Person’s Trust is similar to a discretionary trust in that it provides trustees with significant authority over managing and using the trust assets. However, the key difference is that more favorable tax rules apply to a Disabled Person’s Trust.
This type of trust must benefit an individual who meets specific criteria, including:
- Being unable to manage their own property or affairs due to a mental disorder, as defined by the Mental Health Act 1983
- Receiving Attendance Allowance
- Receiving Disability Living Allowance (DLA) at the higher or middle care component rate
- Receiving Personal Independence Payment (PIP) for ‘daily living activities’ at the standard or enhanced rate
Disabled Person’s Trusts enjoy tax advantages, including reductions in income tax and capital gains tax, and potential Inheritance Tax (IHT) exemptions in some cases. For the trust to qualify for these benefits:
- The trust must have been established before 8 April 2013, and at least half of the payments go to the disabled person
- For trusts set up after 8 April 2013, all payments must go to the disabled person, with a limited exception of up to £3,000 annually (or 3% of the trust’s assets, whichever is lower) for another beneficiary
- The trust can also be set up by someone who expects to become disabled, for their own benefit
There’s no Inheritance Tax charge if the person who created the trust survives for seven years after its establishment, or on transfers made to a vulnerable beneficiary. However, when the beneficiary dies, any remaining assets in the trust may be included in their estate and subject to IHT.
Disabled Person’s Trusts are exempt from the 10-year IHT charges typically applied to trusts.
Which trust is best for you?
A Discretionary Trust may be better when tax implications aren’t a major concern and maximum flexibility is needed to support multiple family members. A Disabled Person’s Trust is ideal when tax considerations are significant, and there are no other family members with financial needs.
