What is a “vulnerable beneficiary“?

Parents naturally, would like to leave assets onto their children when they pass away, and for the children to fully benefit from them in the most sensible and appropriate way.

Unfortunately, life is often not simple, and there can be practical difficulties in allowing a child benefit from an estate fully. The term “vulnerable beneficiary” might be relevant when perhaps a child has a disability or an inability to manage money appropriately.

Examples might be a child who is not good with money, a child who could be taken advantage of by others or who has perhaps a lack of mental capacity.

What are the alternatives where an outright gift to a child is simply not appropriate?

An outright gift (or absolute gift) would be where perhaps a share of an estate would be left directly to a beneficiary for them to manage the money completely.

If this is not suitable, then other alternatives must be looked at.

These could include the following: –

1. A life interest trust could be created

Where a child benefits from the income of an asset, such as a share of a parent’s estate, the asset would be transferred to trustees and this means that the child would not be able to control the capital. The child would be entitled to receive all of the income that the asset generates. Potentially provision could be included also for capital to be released to that child by the trustees at their discretion.

If the child is in receipt of means tested state benefits, and the income generated by the capital is significant, this could well create problems with the entitlement to ongoing benefits. This may not necessarily therefore be the best solution. On the death of the vulnerable beneficiary, the capital held in the life interest trust would be aggregated with their own free estate and can contribute towards an Inheritance Tax bill at that time.

2. A discretionary trust could be used

A discretionary trust is a special type of trust where assets are held for a range of beneficiaries to include the vulnerable beneficiary. The vulnerable beneficiary would have the right to be considered for distributions of capital and income, and it would be usual for a letter of wishes to be left by the person making the Will giving guidance as to how they would like the trust operated by the trustees who are appointed.

Because the trustees would be in charge of what capital and income could be released to the beneficiary, provided the sums that were released were strategically appointed, a trust like this could be used to avoid issues with means tested state benefits.

This is a very flexible type of trust. The taxation of a discretionary trust is not simple and extra costs would have to be factored in for annual tax returns to be prepared, usually by an accountant.

On the death of the vulnerable beneficiary, the value of the discretionary trust would not have to be aggregated with their estate for Inheritance Tax purposes.

3. A “disabled persons” trust could be used

This is a particular type of discretionary trust and again the trustees would have a good degree of flexibility as to release in capital and income.

To comply as a disabled persons trust, the primary beneficiary of the trust must be defined as “disabled” by being in receipt of certain state benefits, or being incapable of managing their affairs through a mental disorder has defined under the Mental Health Act 1983.

Although seemingly attractive, as with a life interest trust, the value of the assets held in this trust would aggregate with the vulnerable person’s estate on their death and potentially could trigger of the payment of Inheritance Tax.

This would not happen with a discretionary trust, and therefore the use of a discretionary trust may therefore be the best solution in the circumstances.