Estate planning is important for everyone. But, if you have vulnerable beneficiaries, then it’s absolutely essential that you have everything in place, laying out your wishes for them after your death.
According to the Financial Conduct Authority (FCA), a vulnerable beneficiary is defined as “someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care.”
“Vulnerability” comes in many different guises, including physical and mental disability, and individuals at risk of potential exploitation – such as those in debt who might be at the temporary mercy of scammers.
This means that a significant number of people fall into this category, with the FCA’s ‘Financial Lives 2020 Survey’ discovering there were almost 28 million adults with at least one characteristic of vulnerability in 2020.
Their vulnerability may mean they face any number of issues relating to their finances.
That might include:
- Being unable to effectively access financial services
- Finding it hard to create their own income
- Not understanding how to make the most out of their money.
Children under 18 who have lost at least one parent are also classed as “vulnerable”. Similarly, parents with children who will fall into the vulnerable category after the age of 18 will need to think about providing for their child’s future into adulthood, too.
If you have beneficiaries in potentially vulnerable circumstances, it’s essential to start your estate planning now. That way, in the event of anything happening to you unexpectedly, they will be cared for in accordance with your wishes.
3 ways planning now could help to support your vulnerable beneficiaries after your death
1. Writing a will
Your will is a legal document that sets out your wishes for how your estate is distributed. You can also use it to appoint a guardian for your child – someone who will take responsibility for them if there is no surviving parent (or person with parental responsibility).
Without this in place, your child could become the responsibility of the court, which will appoint a guardian, and they may be taken into temporary care until this decision is made.
Choose your guardian(s) carefully, selecting someone who you can rely on to bring up your child as you would wish. You may also want to consider someone who lives locally, so that your child wouldn’t have to change schools.
Important, too, is to think about their relationship with your child. Do they get on well with your child? Do they have other children of their own? Do you think they will genuinely have your child’s welfare at heart?
It’s also vital that you talk things through with your potential guardian, making sure they’re happy to be nominated and understand the responsibilities this entails.
Your will can also make sure that your child is looked after financially, setting out how you’d like their upbringing to be paid for. For example, if you have a property, will this be sold and the proceeds used? Will you leave a direct gift to your chosen guardian to pay for your child’s upbringing?
2. Setting up a trust
A trust can often offer better protection than a will, as you appoint trustees to control the fund, on behalf of your vulnerable beneficiary. A trust is an arrangement whereby you select assets to include, trustees to manage them, and rules that they must abide by.
Discretionary trusts for vulnerable beneficiaries
There are different types of trust available for beneficiaries in vulnerable circumstances.
Under a discretionary trust, your trustees will decide how to manage and distribute the income held in the trust. While this includes your vulnerable beneficiary, you would also need to specify who would receive any remaining funds if your beneficiary dies with income still left in the trust.
You need to take into account tax considerations and the value and type of assets you’d like to include in your trust to decide if this is the right option. For example, trustees may be able to claim special treatment for Income Tax and Capital Gains Tax (CGT) in some cases.
This type of trust can also offer special Inheritance Tax (IHT) benefits, although certain qualifications apply. Trusts set up before 8 April 2013 must offer at least half of their income to the beneficiary, for example.
Those set up after this date, meanwhile, must offer all payments to them, less £3,000 or 3% of the assets, whichever is lower, which can be used for the benefit of another person.
If you are still alive seven years after setting up the trust, it won’t be included in your estate for IHT calculation purposes.
There’s also no IHT charge for payments made out of the trust to vulnerable beneficiaries. The assets within the trust may be included in the beneficiary’s estate for IHT purposes on their death under certain conditions. However, the circumstances for this are varied, so please speak to us about your own individual situation.
Trusts for children who’ve lost a parent are usually set up by the parent’s will, or by special rules of inheritance if there’s no will.
If someone dies without a will in Scotland, a trust set up there for their children is usually treated as a bare trust for tax purposes. This is where a trustee holds assets for a named beneficiary.
Other types of trust do exist, such as a disabled person’s trust, a hybrid type of discretionary trust offering certain tax breaks.
Trusts can be complicated to understand and they come with rules and caveats, so speak to us if you’d like to find out more.
3. Writing a letter of wishes
A letter of wishes is a separate document to your will that allows you to make specific wishes clear to your executors, elaborating on what’s in your will or writing more personal messages to your loved ones.
This isn’t a legal document, so specific bequeathments need to be set out in your will, and you’ll need to ensure your letter of wishes doesn’t contradict anything in your will.
Here, you can explain any decisions you’ve taken, especially if they might be controversial or unexpected. You can also be more specific about the care of your vulnerable beneficiary, including details of things like education and religious upbringing, and their particular likes and dislikes.
You can also make future requests on how assets in trust are handled, leaving no room for misinterpretation or confusion.
Get in touch
If you’d like to find out more about how to manage your estate planning with a vulnerable beneficiary in mind, please get in touch. Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.
