By Christine Thornley, Head of Tax, Trusts and Estates at Irwin Mitchell 

Making a Will often gets put on the ‘to do’ list and, although people know they should prioritise them, they are often only thought about once something has happened to a friend or family member. 

Not making a Will often causes problems for families as, without a Will, the intestacy provisions apply and these don’t always ensure that assets are left to the correct people or in the correct way.

For parents of vulnerable or Special Educational Needs (SEN) children, making a Will is even more important. Some of these children won’t be able to manage money themselves and there may be a danger of them being taken advantage of for their inheritance. Often parents have fought for years to get their child the right benefits and support structure and, inheriting money outright, can cause all of that to be taken away and any means tested benefits to be stopped.  People often think that children only need protecting until they become adults but this is often not the case.

Making a Will is not only about who’ll benefit from an estate but also how. The use of trusts within Wills can solve a lot of problems when there’s a vulnerable child. Although this article refers to a ‘child’ the same principals and rules apply to any beneficiary and shouldn’t be forgotten by relatives who want to provide for a vulnerable child.

Is it always wrong to leave a vulnerable child money in a Will outright?

Making a Will is about having the freedom to leave your assets in the way you want and accordingly, there is no ‘wrong’. Having said that, leaving a vulnerable child, assets outright can cause all sorts of issues and it might not be the sensible thing to do.

Examples of common problems we encounter are:

• The ‘child’ lacking capacity and being unable to acknowledge receipt for the money. This often results in an application being made to the Court of Protection so that someone can acknowledge receipt and then manage that money for that child
• The child having the capacity to take the money but then not being responsible enough to know what to do with it. This can lead to the money being wasted and sadly, other people ‘helping’ that child spend the money
• Means tested benefits being stopped. This might not be such an issue if there are going to be sufficient funds to maintain that child for the rest of their life but, if the money runs out after a year or so, someone will have to go through the process of applying for all of the benefits again.

How do I make sure my child is looked after without leaving them money they can control?

Trusts are mentioned above and these are fantastic vehicles to ensure that money can be used for the benefit of a child but that they are also protected. To ensure children don’t just receive assets outright at a certain age there are 2 types of trusts often used:

• Discretionary Trusts

This type of trust is very flexible and is the most common type of trust when people want an extra layer of protection to ensure children don’t just receive assets at a specified age.

A discretionary trust can be thought of like a bucket, it holds all or some of the estate assets. It relies on trustees and beneficiaries. The trustees control the assets within the trust (bucket) and can apply those assets for the benefit of any or all of the beneficiaries. Naming someone as a beneficiary doesn’t give them any right to benefit from the assets within the trust. The assets within the trust are not counted towards any mean tested benefits assessment. The trustees unanimously make a decision at a particular time about who (from the named beneficiaries) will benefit from the assets within the trust and when. If the assets aren’t paid out of the trust they can stay within the trust structure.

Our clients often use this structure to protect children who aren’t very good with money, where there’s an unsatisfactory partner and very frequently where children are vulnerable.

This type of trust is an excellent mechanism to ensure those children can have funds made available to them if they need them, but that they aren’t in control of those funds themselves and their benefits aren’t affected.

• Disabled Persons Trust

This type of trust also protects funds for the benefit of vulnerable children by ensuring they don’t have control over the assets and that their means tested benefits aren’t affected. However they can’t be used for all vulnerable children.

To use this type of trust the primary beneficiary of the trust has to be classed as disabled and what is classed as disabled for this purpose is defined in legislation. This in itself isn’t necessarily easy to understand but, put simply, it’s someone who’s incapable of managing their property and financial affairs, and/or would (or does) qualify for attendance allowance, disability living allowance or PIP at certain rates.

If this type of trust is set up the funds within the trust have to be used for the benefit of the disabled person and cannot, during the disabled person’s lifetime be used for anyone else (subject to a minimum of £3,000 or 3% of the fund per year, whichever is lower).

This type of trust isn’t as flexible as a discretionary trust and the funds couldn’t be used for the benefit of other children or family members if the disabled person did not need them. People often ask why anyone would use this type of trust and give up the flexibility offered with a discretionary trust, the answer is tax.

As soon as the disabled beneficiary has passed away other children or family members can benefit from the trust but the trust then also becomes subject to the same tax regime as a standard discretionary trust.

The difference in the trusts often causes families to weigh up whether or not tax or flexibility is more important to them. There’s of course no right answer and what is right for one family might not be right for another.

The one thing that is right for every family with a vulnerable beneficiary is that the use of trusts within wills is essential to make sure that that child is protected.