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20 November 2015 | Comment | Article by Roman Kubiak TEP

Deliberate deprivation of assets and means tested benefits

Several times in the last year, I have been presented a familiar problem. Someone died some time ago, leaving a fairly substantial sum of money for a grandchild to be given to them when they attain a certain age (say 18 or 25). The grandchild is now approaching that age, but the grandchild will not benefit much from this inheritance because they have a disability – which means that their day-to-day needs are met by their carers and by the National Health Service, and through means-tested benefits.

If they did receive their inheritance, as planned, the consequence would be that their benefits would stop until the inheritance was spent-down on their care, until eventually their capital reached the threshold for payments to recommence. No one has really benefitted and the grandchild cannot do much about this because (even if we assume they are a mentally capably adult) anything they do (such as giving their inheritance away to a relative or creating a new trust) is likely to be treated as a “deprivation” by the authorities and will reduce their benefits anyway.

What can the trustees do about this?

There are some clever legal answers to this question. The will (assuming there was a will) might contain powers which the trustees could use to divert this money from the grandchild – perhaps into a discretionary trust. There is also legislation called the Variation of Trusts Act 1958 which can be used to a similar effect.

But a solution which is often forgotten is this: Why not spend it?

Now, I cannot recommend this approach with a multi-million pound trust fund. But what if we are speaking of, say, £50,000? The advantages of simply spending the money would include avoiding the trouble and expense (and tax consequences) of the continued existence of a trust, bringing “closure” to the matter completely, and that, having been spent, the money does not form part of anyone’s estate for tax or benefits purposes.

Of course you cannot spend this money on just anything. This decision should only be taken if the money can be spent in such a way as to improve, to a significant extent, the life of the beneficiary going forward. But ideas to consider include asking ourselves whether we could improve the beneficiary’s life by buying them a home or adapting their existing home to better meet her specific needs, by buying (or adapting) a car or scooter, by or providing training or education which will set them up for later life, or by buying furniture or electronic equipment.

And the family often have other, better, ideas.

Of course you also have to remember the disadvantage also – that once spent this money is never available to the beneficiary again so it is not a decision to take lightly. Trustees may be taking a significant risk in using their trust fund in this way and should only do so with the benefit of robust legal advice on their specific situation.

Author bio

Roman Kubiak is a partner and head of the market leading Contested Wills, Trusts and Estates team.

He advises across the whole spectrum of private wealth disputes, with a particular focus on high value, complex and cross-border disputes including: trust disputes, breach of trust claims and applications to remove trustees; will disputes, particularly those with an international element; claims under the Inheritance (Provision for Family and Dependants) Act 1975; and claims for equitable relief under proprietary estoppel, constructive trusts and resulting trusts.

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