Estate Planning for Parents of Disabled Children: Why a Vulnerable Person's Trust is Crucial

Estate Planning for Parents of Disabled Children: Why a Vulnerable Person's Trust is Crucial
Photo by Steven Libralon / Unsplash

As a parent, you want to do everything you can to protect your child and ensure they have a secure future. But have you thought about what will happen to your child if you're no longer around to care for them?

It's a difficult question, but one that every parent needs to consider, especially if their child has a disability or is otherwise vulnerable.

The good news is that there's a way to provide for your child's financial needs and protect their future: a Vulnerable Person's Trust, also known as a VPT. This type of trust is designed to benefit a disabled person and can help ensure that your child is taken care of throughout their lifetime.

In this article, we'll explain what a Vulnerable Person's Trust is, how it works, and why it's so important for parents to consider.

Whether you're a parent of a child with a disability or just want to ensure that your loved ones are taken care of, read on to learn more about this powerful estate planning tool.

Understanding Vulnerable Persons Trust

Putting plans in place for your loved ones can be a daunting task, especially when it comes to caring for someone with disabilities. As a parent or caregiver, you might be concerned about what would happen to your disabled loved one when you're no longer around. This is where a vulnerable persons trust can offer peace of mind.

A vulnerable persons trust is also referred to as a disability trust. It's designed to cater to the needs of disabled individuals and ensure they're financially provided for throughout their lifetime.

The trust allows you to hold your assets, such as your home, savings, or investments, in the hands of trusted individuals called trustees, who will manage the assets for the benefit of the beneficiaries (the disabled or vulnerable person).

When you're no longer around, a disabled or vulnerable person will be more dependent on others to manage their finances, including any means-tested benefits and support they're entitled to.

By setting up a trust, you can protect your loved one from becoming even more vulnerable. A trust can ensure that your assets are managed properly, and the disabled or vulnerable person will have the financial support they need to thrive.

To establish a trust, you'll need to choose trustees who will manage your assets on behalf of the beneficiaries. You'll also need to provide guidance on how the assets should be used for the benefit of the beneficiaries. This guidance is provided through a trust document and a Letter of Wishes.

What is a Vulnerable Person's Trust and how does it benefit families?

When parents of a disabled child or other vulnerable individuals are considering their estate planning, they may have concerns about what will happen to their loved ones when they pass away.

One option for providing financial support and protection is to set up a trust. A trust is a legal arrangement where a trustee holds assets on behalf of a beneficiary.

A Vulnerable Person's Trust, or VPT, is a specific type of trust that is created to benefit disabled individuals. The trustee that you choose is responsible for managing the trust's assets and deciding how they will be used for the beneficiary's benefit.

In order to qualify for this type of Trust, a disabled person is defined as a person who:

  • By reason of mental disorder, within the meaning of the Mental Health Act 1983,
    incapable of administering their own property or managing their own affairs; or
  • In receipt of Attendance Allowance; or
  • In receipt of Disability Living Allowance (DLA) by virtue of entitlement to the care component at the higher or middle rate; or,
  • In receipt of Personal Independence Payment (PIP) at the standard or enhanced rate for ‘daily living activities’.

One of the major advantages of a VPT is that it can offer tax benefits.

For example, if the trust is set up in a way that the income and capital are wholly applied for the disabled person's benefit, it can avoid Inheritance Tax, Income Tax, and Capital Gains Tax.

However, there is a minor exception where the lesser of £3,000 or 3% of the value of the trust fund can be applied to another beneficiary of the trust each tax year.

A VPT is subject to certain conditions to qualify for favourable tax treatment. For example, the trust must be set up in a way that the income and capital is wholly applied for the disabled person's benefit. Trustees also have to make an annual election to HMRC for favourable tax treatment for Income Tax and Capital Gains Tax.

When setting up a VPT, guidance should be provided to trustees in the form of a Letter of Wishes, which outlines how the disabled person's needs should be met. This gives trustees flexibility to make provisions that meet the beneficiary's specific needs.

A Vulnerable Person's Trust can provide peace of mind for families and caregivers of disabled children, ensuring that their loved ones are financially protected and supported throughout their lifetime. It also offers potential tax benefits, making it a valuable option for estate planning. Talk to a qualified adviser or tax professional to learn more.