We are instructed to draft a Will Trust for the benefit of a child with a disability.
We have considered both Discretionary Trusts and Disabled Persons Trusts and it would seem to me that Discretionary Trusts are a better option considering that they do not restrict the Trustees and in light of the fact that the estate is under IHT thresholds, however the client is undecided.
I understand that the income under a disabled persons trust has to be paid to the disabled beneficiary during their lifetime - can anyone tell me whether the trustees have a discretion as to whether to pay out any income at all or in respect of the amounts of income that they pay out? Or is it the case that all income produced has to be paid out? I am trying to establish whether the income would affect her means tested benefits or whether the trustees could opt to accumulate the income in a way that negates any negative impact on benefit entitlement.
I know when I was on a course recently the lecturer favoured the DT over the disabled beneficiary trust if the estate was within the IHT limits as it provided greater flexibility to provide for other beneficiaries as well.
Lynsey Bashforth
Bashforth Young Solicitor
My understanding is that so long as the terms of a trust provide that if a distribution is made, it meets the conditions for a disabled person’s interest, it is a disabled person’s trust and that this is not defeated by a power to accumulate.
If using a discretionary trust to qualify under s.89 IHTA, consideration might be given to including a provision to the effect that no power or provision contained within the trust shall be capable of being exercised or operated in any manner whatsoever which might prevent the trust satisfying the terms of a disabled person’s interest.
However, if using a discretionary trust, in the circumstances do you want it to qualify as a disabled person’s trust?
For clarification, if we were to draft a disabled persons trust, the trustees do not HAVE to distribute all income that arises? I.e - power to accumulate still exists…
I would say no, if using a Discretionary Trust, it would be for the purpose of the income not having to be paid out to the disabled beneficiary but so that the trustees could pay it elsewhere if needs be.
My understanding is that a DT is always beneficial unless the amount going in is over IHT threshold, would you agree?
Future uncertainties, including inheritance tax and state benefits are so great that a discretionary will trust is probably best so that decisions can be deferred until the testator’s death. See, for example, the following notes -
Williams on Wills 10th edition page 785 – “A discretionary trust will usually be the best solution…”
Drafting Trust & Will Trusts – James Kessler QC– 11th edition page 445, (sorry we do not have the current 13th edition
If it’s a disabled person’s interest the income has to be applied for the disabled person’s benefit during his lifetime (section 89(1)(b), Inheritance Tax Act 1984 and section 89A(2), Inheritance Tax Act 1984). However, for trusts established on or after 8 April 2013, there is express provision in the legislation for benefits (paid either from capital or income or a combination of the two) of the lower of £3,000 or 3% of the maximum value of the trust fund in any tax year to be paid to non-vulnerable beneficiaries without breaching the restrictions on capital and income.