When a family includes a child or adult with a disability, careful estate planning is essential. It ensures long-term security for that person while balancing the needs of other family members. One option often considered is a Disabled Person’s Trust. In simple terms, this is a trust for someone who meets the statutory definition of a “disabled person”, with special tax rules designed to support their future needs.
A common question is whether to set up the trust during lifetime or only through a will. Both approaches can work well, but the right choice depends on the family’s objectives, financial position, and the beneficiary’s circumstances.
What is a Disabled Person’s Trust?
A Disabled Person’s Trust is a trust that meets the conditions in section 89 of the Inheritance Tax Act 1984. Where these conditions apply, the trust benefits from favourable inheritance tax treatment compared to an ordinary discretionary trust.
These trusts are often used to:
- Protect funds where the beneficiary may be vulnerable or lack capacity.
- Provide lifelong support without giving an outright inheritance.
- Manage how funds interact with means-tested benefits.
See here for more information on disabled person’s trusts.
Setting Up a Trust During Lifetime
A parent or family member can create a Disabled Person’s Trust during their lifetime and transfer assets into it. This could be a substantial initial fund or a nominal amount with the intention of adding more later, including through a will on death.
Note that drafting a Lifetime Disabled Person’s Trust is a reserved legal activity under the Legal Services Act 2007.
Key advantages
- Inheritance tax planning can start earlier: A lifetime transfer into a qualifying Disabled Person’s Trust may be treated as a Potentially Exempt Transfer (PET). If the donor survives seven years after making the gift, its value falls outside their estate for IHT purposes. This can be particularly useful for clients with surplus assets who want to reduce their taxable estate.
- Immediate protection and structure: If the disabled beneficiary needs support now, a lifetime trust allows trustees to pay for therapies, equipment, specialist care, or accessible transport straightaway.
- Governance can be tested while the client is alive: Creating the trust during lifetime allows the client to see how trustees operate, whether investment arrangements are suitable, and whether the trust’s processes are robust. Amendments may still be possible depending on the drafting.
- Single trust pot for family contributions: A lifetime trust can act as a central “container” for gifts from other relatives during their lifetimes or through their own wills, promoting consistent trustee decision-making and investment strategy rather than multiple separate trusts.
Potential drawbacks
- Reduced flexibility for the client: Once assets are transferred into the trust, they are no longer owned by the client. This is a serious consideration if the client may later need funds for retirement, care costs, or unforeseen expenses.
- Ongoing administration and compliance: A lifetime trust involves real administration such as trustee decision-making, record keeping, annual tax returns, and registration requirements via HMRC’s Trust Registration Service.
- Care fees and deprivation of assets concerns: If the client may need local authority funded care in the future, lifetime gifting could be scrutinised under Care Act 2014 principles concerning deliberate deprivation of assets. The assessment is fact-specific.
- Costs: Creating a Disabled Person’s Trust in lifetime is generally more expensive than including on in a will.
Creating a Disabled Person’s Trust by Will
Alternatively, the trust can be created by will so that it only comes into effect on death. The will directs that some or all of the estate passes into the trust rather than to the disabled person outright.
Key advantages
- Full control during life: The client retains flexibility and financial security. They can still provide for the disabled person during lifetime but keep options open if circumstances change.
- Simpler during lifetime: There is no trust administration until death, which is attractive where the priority is a clear, cost-effective plan rather than immediate IHT mitigation.
- Adapts easily to changing circumstances: If the disabled beneficiary’s situation changes, including their health, benefits position or capacity, the client can update the will without having to unwind a lifetime trust.
Potential drawbacks
- No opportunity to reduce the taxable estate during life: Assets remain in the client’s estate until death, so this route does not start any seven-year planning.
- Timing and administration after death: A will trust is usually funded only after probate and estate administration. If the disabled beneficiary needs urgent financial support after death, there may be delays until funds are released.
Conclusion
A Disabled Person’s Trust can provide long-term security and flexibility. The choice between a lifetime trust and a will trust depends on priorities:
- A lifetime trust offers earlier tax planning and immediate support but involves giving up control and accepting ongoing administration.
- A will trust preserves simplicity and flexibility during life but does not reduce inheritance tax exposure and may delay access to funds.
In some cases, a blended approach works well. For example, creating a modest lifetime trust now and various family members adding further funds through their wills. The best solution will depend on the family’s financial position and the beneficiary’s needs.
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