Tom has three adult children, one of whom, Mary, has learning difficulties. He has approached his adviser because he is concerned about making gifts to her in his lifetime and how he should leave her a legacy on his death. He wants to make sure she is suitably provided for.
The adviser informs Tom that, if Mary is in receipt of a means-tested “care package” from the local authority, any monies left to her will be taken into consideration, which may affect her benefits. This could mean any inheritance left to Mary could be used to pay for the cost of her care.
The adviser tells Tom it may be sensible to create a discretionary trust within his will and include Mary as a discretionary beneficiary.
As long as the trustees make direct payments to purchase capital items (that is, household goods or holidays) for Mary or to pay for alterations to property to suit her disability, the trust assets will not be included in any means test.
Care should be taken if the trustees make any payments to her bank account directly, because there are limits to the amount of capital and income allowed to be held by Mary before it would affect her benefits. Savings of between £6,000 and £16,000 may affect certain benefits.
Another advantage of a discretionary trust is that the trustees can decide what is to happen to the trust fund when it is no longer needed by Mary. For example, it can be distributed to other members of the family as long as they are contained within the class of beneficiaries.
Of course, a discretionary trust can be set up at any time. If Tom does this, he is creating a transfer of value for inheritance tax purposes. This transfer is called a chargeable lifetime transfer.
As long as the transfer does not exceed Tom’s current nil-rate band (including any CLTs he has made in the previous seven years), there will be no entry charges.
Tom can lodge a letter of wishes to his trustees to explain the reason for the trust fund and to give them guidance on how he wants it distributed. Ultimately, the trustees are in charge of the trust fund and make all the decisions, so Tom should choose them wisely. Anyone can act as a trustee as long as they are over age 18 and have full mental capacity.
Trustees normally have wide investment powers and, under a discretionary trust, there is a standard-rate band of £1,000. This means any investments generating income will be taxed at up to 20 per cent on the first £1,000.
Many trustees prefer to invest in assets that do not generate income so they do not have to worry about completing tax returns. They may invest in life assurance bonds where they have access to the 5 per cent tax-deferred allowance.
Tom’s adviser also informs him that, if monies have been gifted to Mary throughout her lifetime, or if she has received them as a legacy from relatives and they are currently in her own bank account, Tom cannot invest these on Mary’s behalf unless he has the appropriate authority.
First, he should think about whether a lasting power of attorney can be set up. This will be dependent on the level of Mary’s disability. When arranging an LPOA, her GP or solicitor must confirm she is mentally capable of understanding the arrangement being put in place.
There is a difference in process between England and Wales, Scotland and Northern Ireland.
If there is a lack of capacity, Tom should speak to his solicitor about obtaining a guardianship order from the Office of the Public Guardian, which will allow him to deal with Mary’s finances.
His daughter’s finances should always be kept separate from his own and he cannot, for example, set up a jointly owned bond with Mary from her own funds. Any investment will be made in her name but he should obtain authority to sign on her behalf.
The powers contained within the LPOA and guardianship order will give Tom guidance on what he is and is not allowed to invest in on her behalf.
An attorney acting for an incapacitated donor has fiduciary obligations: the attorney is required to act in the donor’s best interests. When investing the donor’s assets, the attorney must exercise such care and skill as is reasonable in the circumstances.
Although Trustee Act 2000 does not expressly apply to attorneys, it sets out principles that should be followed in fiduciary relationships. The act requires trustees (and by extension attorneys) to have regard to what are known as the ‘standard investment criteria’ when exercising any power of investment. These criteria can be reduced to (1) the suitability of the investments and (2) the need to diversify the investments, in so far as it is appropriate in the circumstances.
Before exercising any powers of investment or reviewing the investments, trustees/attorneys should obtain and consider advice.
Helen O’Hagan is technical manager at Prudential UK & Europe