When planning for a vulnerable child or adult, the key issue is not tax or documents, but protection. Protection from financial abuse, exploitation, loss of benefits, poor decision-making, or well-intentioned interference that causes harm.
Many families assume a simple Will is enough. In reality, protecting vulnerable adults and children usually requires wider estate planning, of which trusts are only one part.
Who Is Considered Vulnerable?
Vulnerability is broader than many people expect and may affect children or adults, permanently or temporarily. It can include individuals who:
- Have autism or other neurodivergent conditions
- Have learning disabilities or reduced capacity
- Experience fluctuating mental health
- Are socially vulnerable or easily influenced
- Are highly capable academically or professionally (including in STEM fields) but lack financial judgement
- Receive, or may receive, means-tested benefits
Importantly, a person can have full legal capacity and still be vulnerable.
The Risks of Inadequate Planning
Without appropriate planning:
- Inheritances may be paid outright and misused
- Means-tested benefits can be lost unnecessarily
- Family disagreements may arise
- Financial abuse may go unnoticed
- The Court of Protection may need to intervene
For vulnerable beneficiaries, an outright gift can create long-term harm, even where intentions are good.
How Trusts Help Protect Vulnerable Beneficiaries
Trusts are commonly used because they allow:
- Control over how and when money is used
- Protection from third-party pressure or exploitation
- Preservation of benefits entitlement
- Long-term financial support without removing dignity
They are particularly useful where vulnerability may change over time.
Will Trusts and Lifetime Trusts
Will Trusts
A Will Trust takes effect on death and is often suitable where:
- The vulnerability is expected to continue long-term
- Parents want to protect a child into adulthood
- Benefits protection is important
It is usually simpler and more cost-effective, but provides no protection during lifetime.
Lifetime Trusts
A Lifetime Trust is created while you are alive and may be appropriate where:
- Vulnerability already exists
- Assets need immediate oversight
- Families want to establish a support framework early
Lifetime trusts can offer greater control but require careful tax and legal planning.
Vulnerable and Disabled Person’s Trusts
In certain circumstances, trusts can qualify for special tax treatment where a beneficiary meets HMRC’s definition of a vulnerable or disabled person. These trusts are designed to:
- Support vulnerable individuals
- Avoid unnecessary tax charges
- Protect entitlement to means-tested benefits
This can apply to both children and adults, depending on their circumstances.
STEM Children and Adults: Capability Does Not Remove Risk
Some individuals excel academically or professionally, particularly in STEM fields, yet remain financially or socially vulnerable.
Example – STEM Child
A highly intelligent autistic teenager may progress to university and employment but still struggle with money management or social pressure. A trust can allow support to continue without exposing them to financial risk.
Example – STEM Adult
An adult working in a technical profession may earn well but be trusting or inexperienced with finances. Trust planning can protect capital while allowing independence.
Intellectual recognition does not eliminate vulnerability — planning must reflect real-world risk.
Choosing Trustees: A Core Safeguard
Trustees are not just administrators — they are a protective layer.
Good trustees should:
- Understand the beneficiary’s needs and vulnerabilities
- Be financially competent and organised
- Be willing to act long-term
- Ideally include a mix of family and an independent or professional trustee
A Letter of Wishes is essential to guide trustees as needs evolve.
The Role of LPAs (Where Capacity Exists)
Where a vulnerable person has capacity:
- Lasting Powers of Attorney should be considered alongside trust planning
- LPAs allow trusted people to assist with decisions
- They reduce the risk of Court of Protection involvement later
LPAs and trusts often work together, addressing different aspects of vulnerability.
Other Protection Issues to Consider
- What happens if capacity fluctuates
- Transition from childhood to adulthood
- Housing and long-term care needs
- Safeguards against family conflict
- Regular reviews as circumstances change
Protective planning should never be “set and forget”.
Anonymised Case Studies
Case Study 1 – Protecting a Vulnerable Child
Parents of an autistic child were concerned about leaving money outright in their Will. Although academically able, their child was socially vulnerable and likely to receive means-tested support in adulthood. A discretionary Will Trust was included, allowing trustees to support education, housing and quality of life while protecting benefits and long-term security.
Case Study 2 – Supporting a Vulnerable Adult
An adult beneficiary lived independently but experienced fluctuating mental health. The family were concerned that an inheritance could be spent impulsively during difficult periods. A trust structure allowed funds to be released only when appropriate, preserving stability without removing independence.
Case Study 3 – A STEM Professional with Hidden Vulnerability
A technically gifted adult working in a STEM role earned well but had limited financial experience and was overly trusting of others. Trust planning ensured capital was protected while still allowing access to support and guidance when needed.
Tax Treatment of Trusts for Vulnerable Beneficiaries
Certain trusts set up specifically for vulnerable or disabled individuals can qualify for favourable tax treatment, provided they are not mixed with other beneficiaries.
Where the statutory conditions are met, these trusts can benefit from reduced rates of Income Tax and Capital Gains Tax, and in some cases, more favourable Inheritance Tax treatment. Crucially, the trust must be established solely for the benefit of the vulnerable person, with other beneficiaries excluded or limited to defined contingency roles. Mixing vulnerable and non-vulnerable beneficiaries within the same trust can result in the loss of these tax advantages, so careful drafting and ongoing administration are essential.
Thoughts on What Could POSSIBLY Go Wrong:
Even well-intentioned planning can fail if key points are overlooked. Common mistakes include:
- Leaving money outright to a vulnerable beneficiary in a simple Will
- Mixing vulnerable and non-vulnerable beneficiaries in the same trust, causing loss of tax advantages.
- Appointing unsuitable or unwilling trustees.
- Failing to provide a Letter of Wishes.
- Assuming intellectual ability removes vulnerability.
- Not reviewing arrangements as circumstances change.
- Relying on family “informal agreements” instead of proper structures.
Many of these issues only come to light after death, when it is too late to correct them.
Funding a Trust with Life Insurance
Life insurance is often an effective way to fund a trust for a vulnerable child or adult.
A policy can be:
- Written in trust from the outset
- Paid directly into a trust on death
- Kept outside the estate for Inheritance Tax purposes
- Used to provide immediate liquidity without disturbing other assets
This approach is particularly useful where:
- The family home is being left to a surviving spouse
- Assets are illiquid or tied up
- Equalisation between children is needed
- Ongoing financial support is required without handing over capital
For vulnerable beneficiaries, life insurance allows certainty of funding, while the trust controls how and when money is used.
I am not a financial adviser, but I can certainly refer you to one, depending on the complexity and size of your estate – horses for courses! As an ex-IFA (MANY years ago) I know lots of good advisers.
Get in touch – or just ring 01323 766766
Final Thoughts
Protecting vulnerable adults and children is about anticipating risk, not reacting to crisis. Trusts are often part of the solution — but only when used as part of a thoughtful, flexible protection strategy that puts the individual first.
What does “vulnerable person” mean for trust tax rules?
For HMRC purposes, a vulnerable person is someone who needs extra protection because of disability or circumstances beyond their control. Where the rules are met, a trust set up for their benefit can qualify for special tax treatment.
There are two main groups who can qualify.
1. Disabled person
Someone will usually be treated as a disabled person if they either:
- Receive certain disability benefits, such as:
- Personal Independence Payment (PIP – daily living component),
- Attendance Allowance, or
- Certain Armed Forces disability payments;
or
- Are unable to manage their property or finances because of a mental disorder.
This does not mean they must lack capacity all the time – it simply means they are not able to manage their affairs reliably without help.
A formal medical diagnosis alone isn’t enough. What matters is whether the person meets HMRC’s criteria.
2. Bereaved (relevant) minor
This applies to a child:
- Under 18 (or 16 in Scotland),
- Who has lost a parent.
Special rules apply while the child is under that age, allowing trusts for bereaved minors to benefit from favourable tax treatment.
When does the trust qualify?
It’s not just about who the beneficiary is – the trust itself must be set up correctly.
In simple terms:
- The trust must exist solely to benefit the vulnerable person; and
- Any money paid out (income or capital) must be used for that person’s benefit.
If the trust allows others to benefit freely, the special tax treatment will usually be lost.
Why this matters
A properly drafted Vulnerable Beneficiary Trust (sometimes called a Disabled Person’s Trust) is often taxed more favourably than a standard discretionary trust.
This can mean:
- Less income tax on trust income;
- Reduced capital gains tax on trust investments; and
- Overall, more of the money being preserved for the person it’s meant to help.
Because the rules are strict, getting the wording right from the outset is essential.
Common misunderstandings
- “They have a diagnosis, so they automatically qualify.”
Not necessarily. A medical diagnosis on its own isn’t enough. HMRC looks at whether the person meets specific legal or benefit-based criteria. - “They must permanently lack mental capacity.”
No. A person can qualify even if their capacity comes and goes, or if they can manage day-to-day life but not their finances. - “Any trust for a disabled person gets special tax treatment.”
This is a common trap. The trust wording matters just as much as the beneficiary. If the trust allows others to benefit freely, the tax advantages may be lost. - “These trusts are only for children.”
They can apply to both children and adults. Many are set up for adults who need long-term financial protection. - “It’s the same as a standard discretionary trust.”
It isn’t. Vulnerable Beneficiary Trusts follow different rules and can be taxed more favourably when set up and run correctly.
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