A 'Vulnerable person's trust' is often used to provide protection to the money or assets held within the trust and also to ensure that the beneficiary of the trust is financially protected and provided for. The trust is a legal wrapper to hold the money or asset.

For the trust to qualify as a Vulnerable person's trust certain conditions need to be met which include the beneficiary of the trust being either mentally or physically disabled; or potentially a relevant minor (child under 18) who has lost their parent through death.

For a beneficiary to be classified as disabled they must be eligible to receive certain benefits (even if they do not actually receive them) such as attendance allowance, Personal independence payment, and increased disability pension for example.

Provided these certain conditions are met a disabled person's trust has more favourable tax treatment for Inheritance tax, Capital Gains Tax and income tax than other trusts.

There are essentially two types of disabled/ vulnerable person's trusts that can be set up:

Under the discretionary trust arrangement, the beneficiary of the trust has no right to receive income from the trust but at least 50% of the capital of the trust must be applied for the disabled person’s benefit during their lifetime. For inheritance tax purposes, the assets of the trust are treated as forming part of the disabled person’s estate so there is an inheritance tax charge when the disabled person dies. The trust does not affect any means tested benefits the disabled person may be entitled to as income arising in the trust can be accumulated rather than paid out.

If the disabled person has an interest in possession in the trust, they have an absolute right to the income from the trust and that income will be taken into consideration in the assessment for any means tested benefits. As with the discretionary arrangement, the assets are treated as belonging to the disabled person so there will be an inheritance tax charge when they die.

Disabled person’s trusts can be set up during lifetime or in a Will. A trust set up in lifetime can be either for yourself or someone else who is disabled, but of course, setting it up for yourself is not relevant in a Will. In practice, disabled person’s trusts are not used very often in Wills. This is because if you want part of your estate to benefit a disabled person and the rest to be used to benefit other family members, you may find it more flexible to set up a fully discretionary trust in your Will and to ask your Trustees to pay any funds destined for the disabled person to be paid into a disabled person’s trust that you have created during your lifetime.

Different conditions apply to each type of disabled person’s trust and need to be tailored to suit each person's individual circumstances. It is essential that you seek specialist legal advice when you are considering including a trust of this nature in your Will.