Setting up a Trust to protect a Disabled Dependant.

How easy is this and could it be easier?

The answer it appears relatively straight forward or that is how it is positioned but the reality is do not expect it to be cheap, simple or quick and be prepared for some challenges in establishing the trust terms how you want them.  There are pitfalls along the way which as you are doing something for the first time and dealing with solicitors and cutting through the legal speak will always be a challenge.

Starting at the logical first point is the setting up of the Will in which you are leaving all or part of your estate to the trust.  At this stage you will define who the beneficiaries of the trust would be and imagine that you have two children and one (A) gets 50% and the other (B), who is disabled their share is to be put into trust. The first realisation is the trust is not purely for them and to avoid a tax burden and the monies being considered as part of their wealth multiple beneficiaries will be identified.  This is required based on the assumptions that the disabled person will most likely be on benefits and any monies purely in their name would be part of the means testing process. Therefore, what might be deemed a relatively small inheritance sum might have significant implications on the amount the individual is receiving in benefits and ultimately having to live on.

The Will in most cases will sit until the eventuality of someone dies at which point the executors will be instructed to set up a discretionary trust as part of the terms.  Be prepared that this means legal costs in establishing and registering the trust and then the added complication of setting up a bank account in the trust name so the monies can be deposited. 

What many would recommend is that the trust is set up in advance so that the heartache and pain of dealing with the solicitor and a bank is done when not coping with the tragic loss of a family member, yet there are downsides to this also.  Banks do not set up trust accounts on a daily basis and the counter staff do not understand.  It took a family 4 different banks before eventually getting one that understood the trust terms and then from an initial request it was over a month to get something that could operate how the trustees required.  If you have a few failed attempts in progressing getting the account set up it could result in three or four months of going back and forward, signing different forms and lengthy conversations.

So, what to look out for is that banks see trust accounts as possible tax avoidance schemes and typically have a small team in a head office that you will not get to speak to regardless of however many times you request it.  The people in the branch reassuringly will say it is simple and straightforward but the reality is the banks see it as complicated and you will experience a chain of Chinese whispers with ultimately restrictions on the account which are the banks position but in many cases, renders the account inoperable.  Many of the banks see the area of trusts for their few private banking clients and do not want to operate the service unless the sums are significant. Banks also have some difficulties with trusts and the arbitrary rules that they set sometimes do not accord with the law.

Given the complexity of just getting a bank account established the next consideration is once the trust is established you will need to register and do annual returns with HMRC.  These are relatively straight forward and typically good record keeping will keep you right in doing the return.

Going back to the consideration of setting up the trust in advance though one area to consider is that trusts can only generate income for a period of 21 years.  So, if you are planning ahead, you will need to have the trust making no money for the period up to the deaths of the individual leaving their inheritance.  Obviously if it is the Will executors who are setting up the trust then it is assumed the individual has died. 

Is it easy then, no. Could it be, yes.

The problem though is that both banks and the government have their guidelines on how they expect the trust should be established and managed, the law has clear guidelines on what can and cannot be in the trust so you will need to be clear and concise in your requirements but willing to accept further beneficiaries of the trust and some of the conditions about trusts are antiquated and have been challenged but remain conditions, such as the 21 years ruling.

The reality, and in conclusion is that the trust needs legal input and you should not try and establish a trust without it.  You might need to shop around for a bank to work with and do not be afraid to walk away and start setting up an account with another if they start to restrict the terms of operating the account.  Finally, we do recommend do it in advance of the death because it taking 2, 3 or even 6-months to set it up in advance is nothing like struggling to do it on someone else’s bequest when possibly grieving.