Part III: Your guide to estate planning for vulnerable family members
In Part III of our guide to estate planning for vulnerable beneficiaries, learn about why putting wealth in trust could help them now and after you’re gone.
If you receive our monthly newsletter, you might already have read Part I and Part II of our guide to estate planning for vulnerable beneficiaries.
In Part I, you learn about why a traditional inheritance might not suit everyone, especially if one or more of your beneficiaries is living with a learning disability or life-altering injury that affects cognition.
Part II delved into the importance of Lasting Powers of Attorney (LPAs) for both you and your vulnerable family members to safeguard what you hold dear.
In this final instalment, you will learn about trusts. These are often utilised for Inheritance Tax (IHT) mitigation, and while this is certainly a good idea for many families, trusts also carry significant advantages for those who are passing down wealth to beneficiaries with additional needs and certain vulnerabilities.
Keep reading to discover how ringfencing wealth in a trust could benefit your most vulnerable loved ones.
Trustees safeguard wealth within a trust and may have control over how beneficiaries use it
Although there are several types of trust – more on this later – one key aspect underpinning them all is that the funds are not normally managed directly by your beneficiary, but by a separately appointed trustee.
Generally speaking, there are three key roles involved in a trust:
- The “settlor” is the person who puts the funds in trust.
- The “trustee” is the person or people who manage the wealth.
- The “beneficiary” is the person who receives the trust funds.
If your beneficiary is living with a learning disability or any other impairment that affects their cognition, having a trustee manage and distribute the wealth could make a huge difference. However, some trusts give the trustee more control than others.
Much like choosing an attorney for your LPAs or selecting an executor of your will, the trustee(s) you choose should be:
- Trustworthy
- Responsible
- Able to take on the commitment
- Experienced in managing wealth
- Aware of your family’s circumstances.
Whether you set up the trust to provide an income after your death or from today, you can gain peace of mind that your beneficiary is being supported in their wealth management.
There are several types of trust to choose from, each with their own functionalities
Typically, if you are setting up a trust for your spouse, child, or grandchild, there are six standard options to choose from.
| Type of trust | Key functionality |
| Bare trust | Although the funds in a bare trust are under the name of the trustee, once the beneficiary reaches age 18, they have full access to the wealth.
A bare trust may not be entirely suitable for someone with diminished capacity or a learning disability unless they have suitable additional help, such as an attorney appointed through their property and financial affairs LPA. |
| Discretionary trust | As the name suggests, a discretionary trust gives the trustee control over how the funds are distributed to beneficiaries. In essence, the funds are used “at their discretion”.
These are a more popular choice for settlors whose beneficiaries will need extra support when managing large amounts of money. With the trustee’s guidance, your beneficiary may be in a much better position to spend the funds according to their needs. |
| Interest in possession trust | These trusts are relatively simple: all capital generated within the trust should go straight to the beneficiary.
As an example, if you placed income-generating investments in an interest in possession trust, your beneficiary would be entitled to all the income these investments generate, minus any fees. Just like bare trusts, these may not be entirely suitable for certain beneficiaries, depending on their cognitive capabilities and other factors. |
| Accumulation trust | Within an accumulation trust, the trustee has the power to reinvest income generated within the trust in order to generate further growth.
Similar to a discretionary trust, accumulation trusts give a lot of control to the trustee, meaning the beneficiary has plenty of support when accessing the money. |
| Settlor-interested trusts | These trusts allow you, the settlor, to receive payments from the trust too.
For example, if you became vulnerable due to a life-changing illness or injury, your trustee could manage funds and make payments when you need them. |
| Mixed trust | Settlors can combine the types of trust they want to set up, in some cases.
This means you might be able to gain the appropriate amount of support for your beneficiary without having to agree to terms that are not suitable. |
This is not an exhaustive list of all the trust types available, and there may be alternatives that suit your family’s needs. Contact a Kellands financial planner for a full recommendation of appropriate options.
Remember that trust income usually incurs Income Tax. If you are planning to provide a loved one with ongoing income via a trust, it’s worth considering the tax implications when doing so.
Setting up a trust is highly complex, so professional input may help
When you’re making inheritance plans for your loved ones, particularly if they are vulnerable in any way, assessing your options carefully is a vital first step.
As you have read about in all three parts of this guide, there are plenty of viable routes that could help your vulnerable beneficiaries live a full life with financial peace of mind, both now and after you’re gone.
Whether you are looking to set up a trust or discuss any element of your estate plan with a professional, we’re here to guide you. Our Chartered planners have extensive knowledge and experience in supporting individuals of a vulnerable nature and their families.
Email us at hale@kelland.co.uk, or call 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, trusts, Lasting Powers of Attorney, or will writing.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.