Providing for a vulnerable loved one in your Will - why an outright inheritance may not always be the best option

When making a Will, it is natural to want to make sure that the people closest to you are financially secure after your death.

But what happens where the person you want to provide for may need additional support in managing their inheritance?

This may be a child or other family member with a learning disability, a mental health condition or another disability. There may also be concerns about their ability to manage money, their susceptibility to financial exploitation, or the interaction between an inheritance and means-tested support.

In these circumstances, simply leaving an inheritance to that person outright may not always achieve what you intended.

Careful planning during your lifetime can instead provide a framework through which an inheritance can be managed for a vulnerable beneficiary over the longer term.

Why might an outright inheritance cause difficulties?

An outright gift under a Will generally means that, once the administration of the estate is complete and any applicable age condition has been satisfied, the beneficiary is entitled to receive and control their inheritance themselves.

For many beneficiaries, that is entirely appropriate.

For someone who is vulnerable, however, it may present difficulties. They may find managing a substantial sum of money challenging or require assistance in making financial decisions. Depending on their circumstances, the family may also be concerned about their vulnerability to financial abuse.

There can also be implications where the beneficiary receives means-tested benefits or support. The interaction between trusts and benefits is complex and will depend on the particular arrangements, so this should be considered carefully when deciding how an inheritance should be structured.

The important point is that the right solution is not simply about how much to leave to a vulnerable beneficiary, but how that inheritance should be held and managed for them.

Could a trust help?

One option is to leave the inheritance on trust rather than giving it directly to the beneficiary.

Instead of the vulnerable person receiving and controlling the assets themselves, trustees are appointed to manage the trust fund in accordance with the terms of the Will.

This can provide a degree of flexibility and long-term oversight which an outright gift cannot.

For example, depending upon the terms of the particular trust, trustees might be given discretion over when and how trust funds are used for a beneficiary.

The key advantage is therefore not necessarily tax. It is the ability to create a structure around the inheritance which reflects the individual's particular circumstances.

Discretionary trusts

A discretionary trust is one structure that may be considered.

Under a discretionary trust, individual beneficiaries do not necessarily have an automatic right to demand a particular share of the trust fund. Instead, the trustees have powers to make decisions about how the trust fund should be applied within the terms of the trust.

This flexibility can be particularly useful where circumstances may change over time.

A relatively young vulnerable beneficiary, for example, may have very different needs in 10 or 20 years' time. A carefully drafted trust can give trustees flexibility to respond to those changing circumstances rather than attempting to predict everything when the Will is prepared.

What is a vulnerable beneficiary trust?

There are also special tax rules relating to certain trusts for vulnerable people.

Despite the terminology, not everyone who might ordinarily be described as "vulnerable" will necessarily meet the statutory requirements for these rules.

HMRC states that, for these purposes, a vulnerable beneficiary can include a person under 18 whose parent has died or a disabled person satisfying particular qualifying conditions, including eligibility for specified disability benefits. It can also include someone unable to manage their affairs because of a qualifying mental health condition.

Where the necessary conditions are satisfied and a trust is prepared accordingly, special tax treatment can potentially be available.

For Income Tax and Capital Gains Tax purposes, HMRC provides for trustees to make a Vulnerable Person Election, subject to the applicable requirements.

It is therefore important to distinguish between a trust established because someone is vulnerable in the everyday sense and a trust which meets the specific statutory conditions for favourable tax treatment.

They are not necessarily the same thing.

Choosing the trustees

The legal drafting is only part of the picture.

Choosing the right trustees can be just as important.

Depending upon the terms of the Will, those trustees may potentially be responsible for managing substantial assets and making decisions affecting the beneficiary for many years.

Parents considering such arrangements will therefore want to think carefully about questions such as:

• Who understands the beneficiary and their particular needs?

• Who is likely to remain involved in their life?

• Will the proposed trustees be comfortable dealing with investments, tax and professional advisers?

• Would a combination of family members and independent or professional trustees be appropriate?

• What happens if a trustee dies, loses capacity or no longer wishes to act?

These are practical questions, but they can determine how successfully the arrangements work in the future.

A letter of wishes can also be valuable

Some of the most useful information for trustees may not belong in the Will itself.

A separate letter of wishes can provide trustees with greater context about the person for whom the trust has been established and the person making the Will's intentions for the trust.

For example, it might explain the beneficiary's circumstances, priorities and the sorts of things the person making the Will would like the trustees to take into consideration.

Such a letter can also be reviewed and amended as family circumstances develop without needing to re-draft the Will.

It is not just about tax

Tax is an important part of trust planning, particularly because qualifying trusts for vulnerable beneficiaries can receive special treatment.

But it should not be the starting point.

The more important questions are often:

• Who needs protecting?

• What support are they likely to need?

• Who should make decisions after you have gone?

• And how can your assets be used to improve that person's life over the longer term?

Only once those objectives are understood can the appropriate legal and tax structure be considered.

Planning ahead

Families can understandably find it difficult to plan for a future in which a parent or other principal carer is no longer around.

But putting suitable arrangements in place can provide reassurance both for the person making the Will and for the wider family.

Where a Will includes provision for somebody with additional needs, it is particularly important not to assume that a straightforward outright inheritance is necessarily the best answer.

A properly considered trust can provide flexibility, continuity and financial oversight for a vulnerable beneficiary, while allowing the arrangements to be tailored to their individual circumstances.

For families in this position, planning should start with the needs and future wellbeing of their loved one, and how their inheritance can best support them over the longer term. If you need assistance with this, please contact our Wills, Trusts & Probate team.

This article provides general information only and does not constitute legal or tax advice. The appropriate structure and its tax and benefits treatment will depend upon individual circumstances.