Planning for the future of a vulnerable loved one can be challenging, particularly when it comes to securing their financial stability while ensuring they continue to receive essential support. Whether you are caring for a child with special needs, a disabled adult, or someone at risk of financial exploitation, a well-structured trust can provide long-term protection and peace of mind.

Special trusts, such as Disabled Person’s Trusts (DPTs) and Vulnerable Person’s Trusts (VPTs), are designed to safeguard assets for individuals who may struggle to manage their own finances. These trusts allow funds to be used for their benefit while ensuring they remain eligible for means-tested benefits such as Employment and Support Allowance (ESA), Universal Credit, and Housing Benefit.

In this guide, we explore the different types of special trusts available in the UK, how to set up a trust fund for a disabled person, and the key legal and tax considerations involved.

Why Special Trusts Matter for Vulnerable Beneficiaries

Caring for a vulnerable loved one involves more than just meeting their daily needs — it also requires careful financial planning to ensure their long-term security. Many disabled individuals or those with special needs rely on means-tested benefits to cover essential living expenses, healthcare, and support services. However, without proper planning, an inheritance or financial gift could unintentionally disrupt these benefits, leaving them financially worse off.

Special trusts provide a solution by protecting assets while ensuring that funds are used solely for the beneficiary’s well-being. Instead of giving money directly to a vulnerable person — where it could be mismanaged or affect their eligibility for financial support — placing assets into a trust ensures they are managed responsibly by appointed trustees.

These trusts offer several key benefits:

Preserving means-tested benefits — Trusts structured correctly allow beneficiaries to continue receiving state support such as ESA, Universal Credit, and Housing Benefit.
Providing long-term financial security — Trusts ensure funds are distributed in a way that meets the beneficiary’s ongoing needs rather than being spent too quickly.
Protecting against financial abuse — Vulnerable individuals may be at risk of exploitation. A trust provides oversight, ensuring funds are used appropriately.
Ensuring future stability — Parents and caregivers can establish a trust to provide financial support even after they are no longer around.

By setting up the right type of trust, families can offer financial protection without compromising the essential benefits their loved ones depend on.

Types of Trusts for Disabled or Vulnerable People

When planning for the future of a vulnerable beneficiary, choosing the right type of trust is crucial. There are several options available, each designed to meet specific needs and provide varying levels of protection.

1. Disabled Person’s Trust (DPT) / Special Needs Trust UK

A Disabled Person’s Trust (DPT), also known as a Special Needs Trust, is specifically designed to support a disabled beneficiary without affecting their entitlement to means-tested benefits. This type of trust allows parents, relatives, or friends to provide financial support for a loved one with disabilities while ensuring they can continue receiving vital state assistance such as Employment and Support Allowance (ESA), Income Support, and Housing Benefit.

What can a Special Needs Trust pay for?

The funds in a Special Needs Trust can be used for a variety of purposes, including:

Medical and dental expenses not covered by the NHS
Specialist equipment or care services
Housing costs (rent or mortgage payments)
Education or training
Recreational activities and holidays
Daily living expenses (e.g. food, utilities)

By allowing funds to be used only for specific purposes, a DPT ensures the disabled beneficiary’s quality of life is maintained without jeopardising their eligibility for essential benefits.

Tax Considerations for DPTs

One of the significant advantages of a DPT is its tax treatment. A Disabled Person’s Trust is generally exempt from Inheritance Tax (IHT) on assets transferred to the trust, which can help preserve wealth for future generations. Additionally, Capital Gains Tax (CGT) is usually applied at a lower rate for DPTs compared to other types of trusts.

2. Vulnerable Person’s Trust (VPT)

A Vulnerable Person’s Trust (VPT) is designed to protect the financial interests of individuals who may struggle to manage their own finances. This could include children who have lost their parents, individuals with disabilities, or those at risk of financial abuse. The trust provides an effective mechanism for managing the beneficiary’s assets and ensuring they are used for their benefit.

While similar to a Disabled Person’s Trust, a VPT is more flexible in terms of the types of beneficiaries it can cover. It can be used for any individual deemed vulnerable, not just those with disabilities. The trustee has the discretion to manage the funds based on the specific needs and circumstances of the beneficiary, providing ongoing support for their well-being.

3. Discretionary Trust

A Discretionary Trust is a more flexible option for vulnerable beneficiaries. Unlike a DPT, the trustee of a Discretionary Trust has full discretion over how funds are distributed. This means the trustee can decide who receives the funds and in what amounts based on the needs of the beneficiary at any given time.

While a Discretionary Trust offers more flexibility, it does not provide the same tax advantages as a Disabled Person’s Trust. For example, Discretionary Trusts are subject to higher rates of Capital Gains Tax (CGT), with gains taxed at 20% instead of the more favourable rate applied to DPTs.

This type of trust is best suited for beneficiaries whose needs may change over time or where there are multiple potential beneficiaries, and the trustee needs the freedom to adjust distributions based on individual circumstances.

How to Set Up a Special Needs Trust: The Importance of Legal Expertise

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Setting up a special needs trust is a critical decision that requires careful planning to ensure the beneficiary’s needs are met while protecting their access to state benefits and minimising tax liabilities. The process can be complex, involving legal, financial, and sometimes emotional considerations. A solicitor’s guidance is essential to navigate these complexities, ensure the trust complies with the law, and provide peace of mind that the trust will serve its intended purpose.

Step 1: Understand the Beneficiary’s Needs

Before setting up a trust, it’s essential to have a clear understanding of the beneficiary’s current and future needs. This includes considering:

The level of care required
Educational or training expenses
Potential medical costs (including private healthcare or therapies)
Housing or accommodation needs
Other support services

This understanding will help determine the most suitable type of trust, and the level of funding required to meet these needs over time. A solicitor can help you assess these needs and advise on the appropriate structure for the trust.

Step 2: Choose the Right Type of Trust

As discussed earlier, several types of trusts may be suitable for vulnerable beneficiaries, including the Disabled Person’s Trust (DPT), Vulnerable Person’s Trust (VPT), and Discretionary Trust. The choice of trust will depend on factors such as:

The beneficiary’s specific needs
Whether the beneficiary is already receiving means-tested benefits
The size of the trust fund
The desired level of flexibility

A solicitor can guide you in selecting the most appropriate trust based on your loved one’s unique circumstances.

Step 3: Draft the Trust Deed

The trust deed is the legal document that outlines the terms and conditions of the trust, including how assets are managed and distributed. The deed should address the following:

The type of trust being created
The identity of the beneficiary and the trustees
The powers and duties of the trustees
Any specific instructions on how the trust’s assets should be used for the beneficiary’s benefit

It is vital that the deed is drafted carefully, as any ambiguities or omissions could affect the effectiveness of the trust in meeting the beneficiary’s needs. A solicitor will ensure that the trust deed is comprehensive, legally sound, and fully compliant with relevant laws and regulations.

Step 4: Appoint Trustees

Trustees are responsible for managing the trust and ensuring that the beneficiary’s needs are met. It’s important to appoint trustees who are reliable, trustworthy, and capable of managing the trust’s assets. The trustees should understand the legal and financial responsibilities involved, as well as the beneficiary’s needs and preferences.

A solicitor can help you identify suitable trustees, whether they are family members, friends, professionals, or corporate entities. They can also advise on the appointment of backup trustees in case the original trustees are unable to fulfil their role.

Step 5: Fund the Trust

Once the trust deed is drafted and the trustees appointed, the next step is to fund the trust. This can involve transferring assets such as cash, property, or investments into the trust. The type and value of assets that are transferred will depend on the beneficiary’s needs and the financial resources available.

It’s important to ensure that the transfer of assets is done correctly, as mistakes could impact the beneficiary’s eligibility for state benefits or lead to tax liabilities. A solicitor will ensure that the funding process is carried out smoothly and legally.

Step 6: Register the Trust

In some cases, trusts need to be registered with HMRC, particularly if they have income or capital gains that are liable to tax. Registration ensures that the trust complies with tax regulations and provides transparency for the authorities.

A solicitor will help you with the registration process and ensure that all necessary steps are taken to keep the trust compliant with tax laws. They will also keep the trust’s paperwork in order and help with any future tax filings that may be required.

Step 7: Ongoing Management and Review

Once the trust is set up, it’s important to regularly review the trust to ensure that it continues to meet the beneficiary’s needs and complies with any changes in legislation. This may include updating the trust deed, appointing new trustees, or adjusting the trust’s assets.

A solicitor can provide ongoing support to ensure the trust remains effective and legally compliant. Regular reviews can help ensure that the trust adapts to any changes in the beneficiary’s circumstances or in the law, such as changes to state benefits or tax regulations.

Who Can Become a Trustee?

Appointing the right trustee is one of the most important decisions when setting up a trust for a vulnerable beneficiary. The trustee has a fiduciary duty to act in the best interests of the beneficiary, managing the trust’s assets and ensuring they are used in accordance with the trust’s terms. Given the significant responsibility involved, it’s essential to carefully consider who is best suited for this role.

What Does a Trustee Do?

A trustee is responsible for managing the trust and making decisions about how the funds are spent. Their duties include:

Ensuring that the beneficiary’s needs are met by using the trust’s assets for their benefit (e.g., for care, education, housing, and other essential expenses).
Managing and investing the trust’s assets in a way that protects their value and ensures long-term sustainability.
Following the terms set out in the trust deed, ensuring the funds are distributed according to the instructions.
Keeping detailed records of all transactions and ensuring compliance with legal requirements, including tax laws.

Who Should Be a Trustee?

Trustees can be individuals or professionals, and the choice depends on various factors, including the complexity of the trust, the size of the assets, and the level of oversight required. Generally, the following people or entities can act as trustees:

Family Members
Many people choose to appoint a family member as a trustee because they have a personal understanding of the beneficiary’s needs. Family members can be trusted to act in the best interest of the beneficiary, providing emotional insight into their circumstances. However, it’s essential that the appointed family member is willing and able to fulfil the responsibilities of the role.
Friends
A trusted friend can also serve as a trustee, particularly if they have a close relationship with the beneficiary. However, as with family members, it’s vital that the friend is equipped to manage the trust and make sound financial decisions.
Professional Trustees
Many people choose to appoint a professional trustee, such as a solicitor, accountant, or financial advisor. Professional trustees bring expertise and experience in trust management, ensuring that the trust is managed in accordance with legal and financial regulations. They are particularly valuable if the trust involves significant assets or complex tax considerations. Professional trustees are impartial and offer continuity, particularly if family members are unable or unwilling to take on the role.
Corporate Trustees
In some cases, individuals may appoint a corporate trustee — typically a trust company or a financial institution that specialises in managing trusts. Corporate trustees offer high levels of professionalism and can provide long-term stability, especially if the trust is expected to last for many years. However, they often come with higher fees and are not always as well-regulated as a solicitor trustee.

The ideal situation is often to have both a professional trustee and a family member, so the trust benefits from professional expertise and personal family knowledge.

What Qualities Should Trustees Have?

When selecting trustees, it’s important to look for individuals or entities who:

Have the right skills and knowledge — Trustees should have an understanding of finance, and investments. While you don’t need a financial expert for a basic trust, more complex trusts may require someone with specialised knowledge. Trustees must know the law and are subject to many legal obligations. If they make mistakes they can be financially liable to put them right or pay compensation.
Are trustworthy and reliable — Trustees must be people you can rely on to act with integrity and in the best interests of the beneficiary.
Are willing and able to commit time — Managing a trust can be time-consuming. Trustees should be prepared to dedicate the necessary time to fulfilling their duties.
Can act impartially — Trustees must be objective and unbiased, making decisions based solely on the requirements of the trust, trust law, and on the beneficiary’s best interests.

What Happens if a Trustee Cannot Fulfil Their Role?

If a trustee is unable or unwilling to continue in their role, it is important to have a contingency plan. The trust deed should specify how to replace trustees and what steps should be taken in such situations. A professional trustee may also help manage the process of appointing a new trustee, ensuring continuity and consistency in the management of the trust.

Will a Special Trust Affect State Benefits?

The structure of a special trust ensures that the assets held within it do not count as the beneficiary’s own resources, thereby protecting their entitlement to state benefits such as Employment and Support Allowance (ESA), Housing Benefit, and Universal Credit. However, for a trust to preserve these benefits, it must meet certain legal criteria.

Disabled Person’s Trust (DPT): If set up correctly, a DPT can protect means-tested benefits by ensuring that the assets within the trust are not counted as income or capital when the government assesses eligibility for benefits. The trust can pay for specific needs, such as medical expenses, care costs, and housing, without the beneficiary losing access to support.
Vulnerable Person’s Trust (VPT): Similar to a DPT, a VPT also helps protect benefits. The key difference is that it can be used for a wider range of vulnerable individuals, including those at risk of financial exploitation or those who have lost parents. A VPT ensures that assets are used in the best interest of the beneficiary without affecting their state benefits.

Both types of trusts are designed to protect the beneficiary’s finances while allowing them to continue receiving essential support from the state. However, it’s crucial to ensure that the trust is set up correctly, with clear terms that prevent it from being deemed a deprivation of assets by the Department for Work and Pensions (DWP).

Trusts and the Disabled Person’s Trust Exemption

For trusts set up for a disabled person, there is a significant benefit in the form of the Disabled Person’s Trust Exemption. This exemption allows certain types of income or capital held in the trust to be disregarded when assessing eligibility for means-tested benefits. This means that if the beneficiary is receiving benefits like Universal Credit or ESA, the presence of a Disabled Person’s Trust should not affect these entitlements.

However, the exemption does not apply to all types of trusts. For example, a Discretionary Trust does not qualify for this exemption, and the funds held in the trust may be taken into account when assessing eligibility for benefits. It’s essential to understand the distinctions between different types of trusts to ensure the beneficiary’s benefits are protected.

How State Benefits Can Be Used with a Special Needs Trust

While a special needs trust can’t be used to replace state benefits, it can complement them by covering expenses not paid for by the state. For example, the trust can pay for things like:

Non-prescription medical costs (such as private therapy or specialist care)
Specialised equipment (e.g., wheelchairs, hearing aids, or home adaptations)
Educational or training expenses
Holidays or recreational activities to improve quality of life

By using the trust in this way, beneficiaries can maintain a decent standard of living while still receiving essential state support.

The Importance of Legal Guidance

Given the complexity of how trusts can interact with state benefits, it’s essential to seek professional legal advice when setting up a special needs trust. A solicitor can ensure that the trust is established in compliance with the rules and regulations that govern state benefits, providing peace of mind that your loved one’s financial support will be protected for the long term.

The Tax Implications of Special Needs Trusts

When setting up a trust for someone with additional needs, it’s crucial to understand the tax implications for both the trust and the beneficiary. While trusts offer many benefits, including protection for vulnerable beneficiaries and preservation of means-tested benefits, they can also have tax consequences that need to be carefully considered.

Tax Treatment of Special Needs Trusts

The tax treatment of a special needs trust depends on the type of trust established and the assets held within it. In general, the trust itself may be subject to different taxes than the beneficiary, and the way the trust is structured will affect how it is taxed.

Income Tax
Special needs trusts are subject to income tax on any income they generate, such as interest or dividends from investments. The rate at which the trust is taxed depends on whether it is a Bare Trust, Discretionary Trust, or Disabled Person’s Trust (DPT).
- Disabled Person’s Trust (DPT): DPTs are typically taxed at a lower rate than discretionary trusts. They benefit from income tax relief in certain circumstances, which can be advantageous when managing long-term care or other ongoing costs for the beneficiary.
- Discretionary Trust: Income generated by a discretionary trust is taxed at higher rates than for a DPT. The trustee is responsible for distributing income from the trust, and income that remains undistributed is taxed at the trust’s rate, which is higher than the individual tax rates. A beneficiary can sometimes make a tax reclaim for tax deducted on income paid out to them.
Trustees need to ensure they are aware of the tax rates applicable to the trust and manage the income accordingly. Professional guidance can help ensure the trust is set up to minimise tax liabilities.
Capital Gains Tax (CGT)
Capital Gains Tax is applied to the sale of certain assets, such as property or investments. Special needs trusts can be subject to CGT when assets within the trust are sold, and the rate of tax depends on the type of trust and the nature of the asset.
- Disabled Person’s Trust (DPT): DPTs benefit from CGT exemptions, meaning that any capital gains realised within the trust are not subject to the usual tax rates, provided the assets are used in a way that benefits the disabled beneficiary. Calculation of the rates and amounts of tax can be complex.
- Discretionary Trust: Assets within a discretionary trust are taxed at the trust rate of CGT, which is higher than the individual rate. Trustees need to be mindful of these rates when managing the trust’s investments.
This makes DPTs an attractive option for families looking to protect a beneficiary’s financial future while minimising the tax burden. However, trustees must be aware of the rules and exemptions to ensure tax efficiency. To claim special treatment for Income Tax and Capital Gains Tax, the trustees have to fill in the Vulnerable Person Election form.
Inheritance Tax (IHT)
Inheritance Tax applies to the estate of a deceased person, and it can also be relevant for trusts. If a special needs trust is set up correctly, it can benefit from exemptions to IHT, particularly if it qualifies as a Disabled Person’s Trust.
- Disabled Person’s Trust (DPT): A properly established DPT can benefit from the Disabled Person’s Trust Exemption, which allows assets held within the trust to be excluded from inheritance tax assessments. This exemption ensures that the beneficiary receives the full benefit of the trust assets without a significant tax liability.
- Vulnerable Person’s Trust (VPT): While VPTs do not automatically qualify for the Disabled Person’s Trust Exemption, they may still benefit from some reliefs depending on the circumstances and the type of assets held within the trust.
It’s important to note that the tax rules surrounding inheritance and trusts can be complex and the best sort of trust will be dependent on the circumstances of the particular individual. Working with a solicitor who understands the nuances of tax law in relation to special needs trusts can help ensure the trust is structured in a tax-efficient way.

The Role of a Solicitor in Managing Tax Liabilities

Given the intricacies of trust taxation, it is essential to work closely with a solicitor when setting up and managing a special needs trust. A solicitor can:

Advise on the best trust structure to minimise tax liabilities.
Help ensure the trust is compliant with all tax laws, including those relating to income tax, capital gains, and inheritance tax.
Keep you informed about any changes in tax legislation that may affect the trust.
Ensure that the trust benefits from any available exemptions or reliefs, such as the Disabled Person’s Trust Exemption.

By seeking professional guidance, you can ensure that the trust is structured efficiently from a tax perspective, which can make a significant difference in the long-term financial security of the beneficiary.

Ensuring a Secure Future for Vulnerable Beneficiaries

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Creating a special needs trust is one of the most effective ways to ensure that a vulnerable beneficiary receives the financial security, care, and support they deserve while protecting their eligibility for state benefits. Whether it’s a Disabled Person’s Trust, Vulnerable Person’s Trust, or a Discretionary Trust, the right trust structure can provide a tailored solution for managing and distributing assets in a way that enhances the beneficiary’s quality of life.

If you’re considering setting up a trust for a vulnerable beneficiary, it’s crucial to seek expert legal advice to ensure that the trust is structured correctly and provides the long-term support that the beneficiary needs. With the right guidance, you can create a secure future for your loved one, giving them the opportunity to thrive and knowing they have the support they need to live a fulfilling life.

Contact us about setting up a trust and get started today. Our expert team can guide you through the process of creating a trust that meets your loved one’s unique needs and ensures their financial security.

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Protecting Vulnerable Beneficiaries: Special Trusts