Aimed at anyone considering setting up a trust, this is intended to be an accessible introduction to what is often a complex subject. It is not a substitute for legal advice from a specialist in this area.
Trusts and means-tested benefits
Trusts are an excellent way to provide for someone who is receiving means-tested benefits – or might reasonably expect to receive means-tested benefits in the future. This includes someone who is getting help with the cost of residential care, or is likely to be eligible for that help in the future.
As long as the trustees have discretion whether or not to pay funds to a given beneficiary, those funds cannot be treated as belonging to the beneficiary and so would not affect their right to receive state benefits – unless and until the trustees actually choose to release funds to them.
Care would need to be taken to ensure the trustees genuinely are using that discretion; if the reality is that the trustees will release funds for the beneficiary whenever that beneficiary asks for them, the risk is that the trust is seen as a sham. Appointing competent, independent trustees who fully understand their responsibilities is the best way to avoid that risk.
You can’t normally put your own money in trust in order to claim benefits yourself. This extends, for example, to any inheritance you might be entitled to. (For this reason, anyone considering leaving a significant sum to someone who is on means-tested benefits should include a suitable trust in the will).
There is one important exception. If you have received compensation for a personal injury within the last year, the law does specifically allow you to put that compensation in trust – and for the money in that trust to be ignored when working out what benefits you can receive.
Beneficiaries who are unable to manage their financial affairs
One of the main strengths of a trust is that the people who benefit from them do not have to be the same people who are responsible for managing the investments.
There are many situations where it might be inappropriate to hand control of assets over to the person you want to benefit. Some examples include where the recipient:
- Is a child;
- Lacks the capacity to manage their own money;
- Is or might become insolvent;
- Struggles with addiction; or
- Is financially irresponsible.
Some people may choose not to make a gift at all in such a situation, preferring to retain the assets themselves – perhaps earmarking the funds in their own mind for the intended beneficiary. If the sum in question is modest, that may indeed be the most practical solution (although even then you should consider updating your will to include appropriate trust provisions). But for larger sums, a formal trust may well be appropriate, to prevent the kinds of issues that can arise if you yourself lose capacity, go through financial difficulties, or die.
Trusts and divorce
Clients often hesitate to give away substantial sums when there is, or may be, a risk of the recipient going through divorce or the dissolution of a civil partnership in the future. This comes up most often with parents or grandparents who want to help their child (or grandchild) – perhaps with the purchase of a property. The donor may or may not have specific concerns about the relationship, but they want the reassurance of knowing their gift will benefit the person they intend. Can trusts assist?
The short answer is: yes. Funds held within a discretionary trust do not belong to any one beneficiary; and therefore trust funds may not be taken into account when dividing the marital assets.
There are some exceptions. An obvious one is when the person going through divorce or dissolution sets up a trust themselves, hoping to conceal assets from the court: it will come as no surprise to hear that judges take a dim view of this! Another exception is if a trust, while appearing on the face of it to be discretionary, is in practice treated as the property of the person going through a divorce or dissolution (sham trusts).
It’s also worth saying that judges might take the trust fund into account indirectly. Say for example that the trust owns a house in which the beneficiary lives; a judge might conclude that this is likely to continue for the rest of their life, and therefore decide that the beneficiary’s need for housing has been met. If the other party to the marriage or civil partnership does not have a home available to them, the judge might award them a larger share of the marital assets (not including the trust) to meet that housing need.
So do trusts give protection against a beneficiary’s divorce or dissolution? Well, we have seen it is not an absolute protection. But if a properly managed trust is in place, it may become much more difficult to argue that the fund should be brought into account in divorce or dissolution proceedings. For those clients who want to provide for their family while also preserving the family wealth against a relationship breakdown, a trust may be the best option available.
Conclusion
If you would like advice about setting up a trust, or in connection with an existing trust, speak to one of our trust law solicitors today and find out how we can help. Contact us on 03456 465 465 or email enquiries@rotherabray.co.uk
Disclaimer: This blog is for information only and does not constitute legal advice. If you need legal advice please contact us on 03456 465 465 or email enquiries@rotherabray.co.uk to get tailored advice specific to your circumstances from our qualified lawyers
