Common Legal Issues With Disabled Person Trusts

A Disabled Person Trust (DPT), also known as a Disabled Trust, is a type of discretionary trust designed to provide for individuals who are physically or mentally disabled. These trusts offer vital financial protection and flexibility, enabling funds to be managed and used in a way that best suits the needs of the disabled person. However, while DPTs are an invaluable tool in estate planning and social care provision, they can also raise a variety of complex legal issues that trustees, beneficiaries, and families must navigate.

This article outlines some of the common legal issues that can arise when establishing and managing a Disabled Person Trust, focusing on the legal framework surrounding these trusts, the challenges trustees may face, and the potential pitfalls in their administration.

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1. Establishing a Disabled Person Trust

The first challenge often comes at the point of establishing the trust. A DPT is commonly set up by a family member or loved one of the disabled individual, with the intention of protecting the person’s inheritance and ensuring it is used appropriately for their care and welfare. However, there are several legal considerations to keep in mind during this process:

• Eligibility of the Beneficiary: To qualify as a beneficiary of a DPT, the individual must meet the legal definition of disability. In the context of a Disabled Person Trust, a disabled person is typically someone who suffers from a mental or physical condition that severely limits their ability to manage their own financial affairs. Establishing this condition can sometimes be legally challenging, especially if medical evidence is disputed or inconclusive.
• Drafting the Trust Deed: The trust deed must be carefully drafted to ensure that the terms of the trust comply with both tax and legal regulations, and properly reflect the intentions of the settlor (the person creating the trust). Common mistakes in drafting may lead to the trust being ineffective or unable to achieve its intended purpose. In particular, trustees must ensure that the trust is correctly worded to avoid inadvertently disqualifying the beneficiary from benefits like means-tested social security or local authority support.
• Choice of Trustees: The selection of appropriate trustees is critical. Trustees are responsible for managing the trust’s assets and ensuring that the beneficiary’s needs are met. They must be capable of understanding the disabled person’s needs and managing financial matters, which may involve complex investments, tax planning, and interactions with public sector services.

2. Trustee Duties and Responsibilities

Once the trust is established, the trustee’s role becomes vital in managing the trust’s assets for the benefit of the disabled person. Trustees must adhere to strict fiduciary duties, including the duty to act in the best interest of the beneficiary, and to comply with the terms of the trust. However, there are several legal issues that often arise during the management of a DPT:

• Acting in the Best Interests of the Beneficiary: Trustees must always ensure that they act in the best interests of the disabled person. This can be complicated when the beneficiary is unable to express their wishes clearly. Trustees must balance the disabled person’s immediate needs with longer-term considerations, such as preserving the trust’s assets for future care requirements. They must also consider any potential conflicts of interest, for example, where a family member is also a trustee.
• Managing Financial Assets: A trustee is responsible for the prudent management of the trust’s financial assets, which might include investments, savings, or property. Mismanagement can lead to legal consequences, including personal liability for losses suffered by the trust. Trustees must ensure they comply with their duty of care, meaning they must be reasonably diligent in managing the trust and must not act negligently or outside the scope of their powers.
• Interacting with Benefits and Funding: One of the primary concerns when managing a Disabled Person Trust is how the trust may affect the disabled person’s entitlement to means-tested benefits, such as Universal Credit, Housing Benefit, or Disability Living Allowance (DLA). It is important to structure the trust to avoid jeopardising the beneficiary’s access to these crucial public funds. In some cases, if a trust provides the beneficiary with too much income or capital, it could result in a reduction or loss of benefits.

3. Impact on Means-Tested Benefits

As noted above, the administration of a Disabled Person Trust can have a significant impact on a disabled person’s entitlement to means-tested benefits. One of the most common challenges faced by families is ensuring that the trust does not interfere with the disabled person’s eligibility for benefits.

• Discretionary vs. Absolute Trusts: Disabled Person Trusts are typically discretionary, meaning the trustees have the authority to decide how the funds should be used for the benefit of the disabled individual. This flexibility allows the trust to be tailored to the individual’s needs. However, the presence of a trust fund may affect the person’s means-tested benefits, even if the trustees do not disburse any funds directly to the beneficiary. The presence of a trust fund could be viewed as “capital” and may lead to a reduction in benefits. Therefore, trustees must carefully navigate the rules governing the treatment of trust assets by the Department for Work and Pensions (DWP).
• Deprivation of Assets: If a person has deliberately transferred assets into a Disabled Person Trust to avoid means testing for benefits, this could be considered “deprivation of assets.” The DWP may scrutinise the establishment of the trust and, if they believe the transfer was made to reduce the person’s wealth for the purposes of claiming benefits, they may treat the assets as if they still belong to the individual. This can result in the denial of benefits or even recovery of funds already paid.

4. Taxation and Reporting Requirements

Disabled Person Trusts are subject to complex tax rules, which can lead to potential legal issues if not properly addressed. These trusts are generally subject to Income Tax, Capital Gains Tax, and Inheritance Tax, with different rates and exemptions applying depending on the structure and administration of the trust.

• Income Tax: Income generated by a Disabled Person Trust, such as rental income or dividends, is subject to Income Tax. The trustee must ensure that the trust is compliant with all tax reporting requirements and that any taxes owed are paid on time. In some cases, the trust may be liable to a higher rate of Income Tax if the beneficiary is unable to receive the income directly or if the trust is considered a “settlor-interested” trust.
• Capital Gains Tax: Capital Gains Tax (CGT) applies when the trust disposes of assets, such as selling property or investments. The trustees must ensure that any CGT liabilities are appropriately managed, and may need to obtain professional advice to mitigate the potential tax burden on the trust.
• Inheritance Tax: While Disabled Person Trusts are generally exempt from Inheritance Tax (IHT) when the beneficiary is disabled, the structure of the trust and the assets it holds can still lead to IHT complications. Trustees must keep detailed records of all transactions to ensure that the trust remains compliant with IHT regulations.

5. Challenges in Terminating a Disabled Person Trust

Finally, one of the more overlooked legal issues surrounding Disabled Person Trusts is the potential complexity involved in terminating or winding up the trust. Whether due to a change in the beneficiary’s needs, a change in the law, or other reasons, terminating the trust requires careful legal consideration.

• Disposal of Trust Assets: The trustee must follow the terms of the trust deed and ensure that the beneficiary’s needs are properly addressed in the event of termination. This may involve distributing trust assets, which could trigger tax liabilities or impact the disabled person’s benefits.
• Disputes and Litigation: Disputes may arise if there is a disagreement between trustees or between family members over how the trust should be administered. In some cases, these disputes can escalate to formal litigation, with the courts providing the final resolution.

Conclusion

Disabled Person Trusts are an invaluable tool in ensuring that individuals with disabilities receive the care and support they need. However, the legal complexities associated with these trusts must be carefully navigated to ensure they achieve their intended purpose. Trustees, families, and legal professionals must work together to address the issues discussed in this article, including ensuring the trust is properly established, managed, and structured to protect the beneficiary’s entitlements and assets.

At Blackstone Solicitors, we offer expert guidance on establishing, managing, and resolving legal issues related to Disabled Person Trusts. Our team is experienced in navigating the complexities of trusts, tax, and benefits law, and we are here to help you make informed decisions and protect the future of your loved ones.

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We have a proven track-record of helping clients create Trusts. We are a multidisciplinary firm and have all the expertise inhouse to satisfy the most exacting requirements of our clients. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.

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It is important for you to be well informed about the issues and possible implications of creating a Trust. However, expert legal support is crucial in terms of ensuring your wishes are met as you would want them to be.

To speak to our Wills and Probate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

Authored by Ben Posted in Blog, News Tagged as

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