Strategic Estate Planning: The Role of a Vulnerable Persons Trust
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Estate planning is a crucial aspect of ensuring financial security and peace of mind for our loved ones. For families with a disabled child or adult dependent, the stakes are even higher. One of the most effective tools available for such families is the Vulnerable Persons Trust (VPT), also known as a Disabled Discretionary Trust. This specialist type of trust is specifically designed to support individuals who are unable to manage their own financial affairs due to mental or physical disability, both during and after the lifetime of their primary carers.
In this blog post, we’ll explore what a Vulnerable Persons Trust is, who it’s for, how it works, and the legal and tax advantages it offers, to help you understand when and why this form of planning may be appropriate.
What is a Vulnerable Persons Trust?
A Vulnerable Persons Trust is a legal arrangement used to provide financial support for a beneficiary who is unable to lead an independent life due to mental or physical disabilities. It is especially valuable where the individual receives means-tested state benefits or is likely to need long-term care or financial oversight after the death of their carers.
To qualify for this type of trust, the main beneficiary must meet certain criteria:
Be defined as disabled under the Mental Health Act 1983 (e.g. unable to manage their own affairs), or
Be in receipt of certain disability-related state benefits, such as Personal Independence Payment (PIP), Disability Living Allowance (DLA) or Attendance Allowance
The trust is structured to hold and manage assets on behalf of the vulnerable individual, ensuring they are well cared for without compromising their entitlement to state support.
Why Set Up a Vulnerable Persons Trust?
Without such a trust in place, if a disabled individual inherits assets directly, they may:
Lose eligibility for means-tested state benefits
Become vulnerable to financial abuse or exploitation
Require the Court of Protection to step in and appoint a deputy to manage their finances – which can be costly, time-consuming and restrictive
A Vulnerable Persons Trust avoids these risks by placing control in the hands of carefully chosen trustees, who are legally obliged to act in the best interests of the beneficiary. This arrangement offers peace of mind for parents or guardians who want to provide for their loved one while retaining some control and oversight of how funds are used.
Key Features of a Vulnerable Persons Trust
Discretionary powers: Trustees can decide how and when money is used, but all decisions must benefit the named vulnerable person
Additional beneficiaries: The trust must name other beneficiaries who would inherit the trust’s assets only after the death of the vulnerable person
Trustees: A minimum of two trustees (maximum of four) is required to administer the trust effectively
Protection from means testing: Assets held within the trust are not treated as belonging to the disabled person, so will not affect entitlement to means-tested benefits.
Tax efficiency: Provided certain conditions are met, the trust receives favourable treatment for income tax, capital gains tax (CGT), and inheritance tax (IHT)
Tax Benefits of a Qualifying Trust
To be treated as a ‘qualifying trust’ for tax purposes, the trust must be set up in accordance with strict rules:
Income Tax: Normally, discretionary trusts are taxed at the additional rate of income tax (currently 45%). However, a Vulnerable Persons Trust can elect to be taxed as if the income belongs to the disabled person. This means the trust can utilise the vulnerable person’s personal allowance and other reliefs, reducing the overall tax liability. To access this benefit, trustees must make a Vulnerable Person Election with HMRC.
Capital Gains Tax (CGT): Trusts usually only get half the CGT annual exemption that individuals enjoy. But in a VPT, the full CGT exemption of £3,000 is available, giving more headroom for growth in trust assets before tax is payable.
Inheritance Tax (IHT): Gifts into the trust are treated as Potentially Exempt Transfers (PETs), not Chargeable Lifetime Transfers (CLTs), which is often the case for discretionary trusts. Subject to previous gifts, provided the person setting up the trust (the settlor) survives seven years, IHT may not be due on the gift. Additionally, there are no ten-yearly or exit charges. However, upon the death of the disabled beneficiary, the trust’s value will form part of their estate for IHT purposes as they are deemed to have an ‘interest in possession’.
One important note: while the trust can make some payments to other beneficiaries (up to £3,000 per year or 3% of the trust’s assets if lower), the majority of the trust’s assets and income must be used for the benefit of the disabled person to retain its favourable tax status.
Creating the Trust
The trust deed must clearly:
Define the class of beneficiaries, including the vulnerable person and other potential recipients after their death,
Outline the trustees’ powers and duties,
Comply with HMRC requirements to qualify for favourable tax treatment.
As part of your estate plan, a Vulnerable Persons Trust can be included in your Will (a Will trust) or set up during your lifetime (lifetime trust), depending on your circumstances.
Conclusion
For families with disabled dependants, estate planning is about more than just passing on wealth, it’s about creating a framework for care, protection and long-term security. A Vulnerable Persons Trust is a powerful and compassionate solution that addresses all these needs.
While it involves careful planning and specialist advice, the benefits, both financial and emotional can be considerable. Not only can it safeguard eligibility for state support, but it also ensures that your loved one continues to receive care and financial management in a structured and controlled way after you’re no longer around.
If you’d like to explore whether a Vulnerable Persons Trust is appropriate for your family, we’d be happy to support you in putting such measures in place.