In CASE you missed it…

Inheriting outright and the effect on means-tested benefits

Where a client wants to provide for a beneficiary who is disabled, they may want to leave assets in a disabled person’s trust. This could be because they do not think the beneficiary will be able to manage a large sum of money depending on the type of disability the beneficiary has.

However, to qualify, the primary beneficiary must meet the definition of ‘disabled’ as defined in section 89 of the Inheritance Tax Act as a person who is:

• by reason of mental disorder within the meaning of the Mental Health Act 1983, incapable of administering their property or managing their affairs;
• in receipt of attendance allowance;
• in receipt of a disability living allowance by virtue of entitlement to the care component at the highest or middle rate;
• in receipt of personal independence payment by virtue of entitlement to the daily living component;
• in receipt of an increased disablement pension;
• in receipt of constant attendance allowance; or
• in receipt of armed forces independence payment

A disabled person’s trust is a type of discretionary trust meaning there must be more than one beneficiary of the trust.

This type of trust is also subject to certain tax exemptions which makes it appealing but did you know another benefit of leaving assets in this type of trust means the primary beneficiary’s means-tested benefits will not be affected in any way?

As an example, an uncle passes away and leaves a large inheritance to his niece. At the time of writing his Will, his advisor recommended placing his niece’s share in a disabled person’s trust as his niece met the conditions set out above. This was done, the niece benefited from the inheritance via the trust and it made no impact on her means-tested benefits.

Contrast this with the uncle writing his own Will (unaware of any trusts out there) and leaving the same inheritance to his niece outright instead of via this trust. In this case, the Local Authority will look to re-assess any benefits the niece is currently receiving and review these which will likely be to her detriment.

Can anything be done to reverse this somehow? This is an issue that the Court of Protection considered in the recent case of F v R [EWCOP 49 2022].

The Claim

R is in his 30’s and has a lifelong disability. His estate mainly consists of monies which have come from state benefits, namely employment support allowance and disability living allowance – both of which are means-tested. Of the total of £60,293.48 he receives per year from state benefits, approximately £52,381.60 of this is means tested.

R’s mother’s cousin (T) had left one third of his residuary estate in his Will to R absolutely. It is anticipated that the value of this share of the estate is between £400k-£600k. This outright gift would lose his entitlement to means-tested benefits.

The application put before the Court of Protection was for the authority to sign a deed of variation (R has capacity) so that the inheritance could be redirected into a disabled person’s trust, therefore not affecting his means-tested benefits.

The Verdict

The Court took the view that redirecting the inheritance into a disabled person’s trust would be seen by the authorities as a deliberate deprivation of assets. The Judge in the case stated, “frankly, I cannot see how any other interpretation can be sustained.” The Judge furthermore went on to add “The Court cannot endorse a proposal whose purpose is to preserve an eligibility for benefits which Parliament has decided does not exist. At this point, it is the Court’s purpose that matters, and the only purpose of the application is to preserve R’s means-tested benefits, whether that is directly or indirectly by giving effect to a supposed intention of T.”

Points to Consider

This is a helpful insight into how Courts deal with the protection of assets v deliberate deprivation.

It is also a useful reminder that inheritance left in a disabled person’s trust does not affect any means-tested benefits as it is seen as belonging to the trust and not the beneficiary.

When putting a Will in place, see a professional who can tailor their advice and recommend any trusts to you providing the information is disclosed to them.

Lastly, it should also serve as a reminder to will writers of the importance of keeping accurate records when it comes to taking instructions.