Trusts for beneficiaries and benefits

[jfgw]

Someone I know has been left a share of an estate. I do not know the exact value but it will probably be about £35 000.

This person is in receipt of the following benefits:
Income support;
Disability Living Allowance;
Housing benefit;
Council tax reduction.

Provision was made in the will for this money to be held in a trust so that the trustee could release smaller amounts of money at a time so that it would not affect the benefits. However, the executor has consulted a financial advisor who has told her that the inheritance will affect these benefits and may have tax implications.

Can someone here clarify what effects this inheritance will have, and what action may need to be taken please? Will the creation of the trust affect the benefits? Is it just individual payments from the trust that will have to be declared?

Cheers,

Julian F. G. W.

[DrBunsenHoneydew]

Recipient needs to declare the new source of income from the Trust. Benefits Decision Maker can look through the attempt at avoiding the real position and reduce benefits anyway. Except for DLA which is not means tested.

[Lootman]

Recipient needs to declare the new source of income from the Trust. Benefits Decision Maker can look through the attempt at avoiding the real position and reduce benefits anyway. Except for DLA which is not means tested.

But since that income derives from a Trust, and is paid only at the discretion of the Trustee, then surely benefits should be affected if and only if the Trustee actually makes that decision to pay out.

If the decision were up to the beneficiary, as in a normal inheritance, then the income could not be effectively avoided. But the point of the funds being in a Trust is that the decision to pay out the income is beyond the control of the beneficiary.

The same situation might arise if, say, the beneficiary had debts or was an undischarged bankrupt. It would be a breach of fiduciary duty for a Trustee to pay out such funds or income if that Trustee knew that it would be third parties who benefit and not the beneficiary.

If what you describe was correct then in effect a Trust achieves nothing.

[Chrysalis]

I’d suggest consulting a benefits expert (eg at Citizens Advice or similar welfare rights service) rather than a financial advisor.
I don’t know the answer, but they should. I wouldn’t be surprised if a Trust can’t be used to hide assets in order to claim benefits one would otherwise not be entitled to. The rules can be pretty strict. But you need to consult an independent source of expertise on benefits.

[Lootman]

I wouldn’t be surprised if a Trust can’t be used to hide assets in order to claim benefits one would otherwise not be entitled to.

Yes, a Trust cannot be used to hide assets for the purpose of things like maintaining eligibility for means-tested benefits, avoiding paying debts in a bankruptcy process or avoiding taxes on those assets.

However, a Trust that is set up by somebody else, with the express purpose of ensuring that funds be paid out solely at the discretion of a Trustee, is different.

The concept of "hiding" implies that you have some measure of control over the disposition of those assets. If they are held in trust by somebody else, then you have no such control, and therefore you cannot reasonably be accused of "hiding" anything. In such a situation you are neither the legal nor beneficial owner of those assets.

In other words, you cannot hide assets in this way, but I can elect to withhold assets I was otherwise going to give to you until a time of my choosing.

[Dod101]

I would not suggest the beneficiary is hiding anything but I wonder if he/she is the sole beneficiary. If that is the case I would have thought it would be difficult for the assets in the trust to be ignored for means testing because then I think it could be argued that the trust is an artificial construct assuming that the potential beneficiary is not a minor.

It would not then be a discretionary trust in that the trustee cannot exercise any discretion certainly not as to the beneficiary anyway. But I do not know and it would be interesting to know what the legal position actually is.

Dod

[Chrysalis]

@lootman yes I do see the difference. I wonder if the regulations do.

[Chrysalis]

I found this which may be helpful, although it is not straightforward. it seems as though a discretionary trust may not affect entitlement to means tested benefits, but only if there is more than one beneficiary of the trust.

https://www.scope.org.uk/support/families/will-trusts

[jfgw]

I found this which may be helpful, although it is not straightforward. it seems as though a discretionary trust may not affect entitlement to means tested benefits, but only if there is more than one beneficiary of the trust.

https://www.scope.org.uk/support/families/will-trusts

Thank you, that is very interesting. Money is held in a trust for three of the beneficiaries so presumably one trust between them, not three separate trusts but I do not know for sure. If the latter is a possibility, I can ask.

Cheers,

Julian F. G. W.