Estate planning for vulnerable beneficiaries

As a Private Client lawyer, I have seen an increase in clients having to readdress their wills due to a beneficiary suffering from mental health issues or pursuing a divorce.  Unfortunately, these issues are one of many consequences of the COVID pandemic. 

Loved ones are concerned for those beneficiaries whose existing mental health issues have been exacerbated by the pandemic. Alternatively, they may have been diagnosed with new mental health issues due to covid bereavements or the solitary confinement arising from the lockdowns.  Those relatives may have been sectioned, or have become increasingly vulnerable either to themselves or to external influences. This has resulted in clients worrying that if those loved ones were to inherit money, that the money would be adversely dissipated.

Furthermore, clients are concerned where, perhaps, one of their children is pursuing a divorce from their spouse. This again, could have ensued from the stresses and strains of the lockdowns or perhaps, their child is balanced precariously amidst the divorce proceedings. Either way, clients want to guarantee that their wealth will be protected for their beneficiaries, whatever the issues are, and that the future generations will benefit rather than lose to: an unscrupulous third party, to lack of capacity of a beneficiary or through the divorce courts.

Incorporating a discretionary trust structure

One avenue of protecting the wealth on death would be to incorporate a discretionary trust structure into the Will. In order to understand the concept of the discretionary trust, there are three main components to comprehend.

  • The Testator/Testatrix needs to decide upon a class of beneficiaries. This often incorporates: the surviving spouse (if applicable), children, grandchildren, great-grandchildren and so on. Those born during the trust period, please see below.  The choice of beneficiaries is entirely up to the Testator/Testatrix.
  • The Testator/Testatrix appoints trustees to administer and manage the trust.  The choice of the trustees is very important and should be someone who is trustworthy having regard to the next component.
  • The third element is that it is entirely at the discretion of the trustees which of the class of potential beneficiaries receives assets from the trust fund, how much and when. The beneficiaries do not have a definite right to any of the income or capital within the trust fund. This can work favourably for a beneficiary, who is suffering from mental health issues, as the funds would not be theirs absolutely. Instead, the trustees can make distributions on the beneficiary’s behalf for those expenses the trustees feel is reasonable whilst protecting the trust fund from the beneficiary’s vulnerability. For example, funds could be paid directly to a landlord to cover the beneficiaries’ rent thus ensuring the beneficiary has adequate and continued accommodation. The trustees could make payment of all the utility bills so as to ensure that the beneficiary is housed in comfort. In essence, the trustees are dealing with the important day to day financial responsibilities on behalf of the beneficiary so that the beneficiary can prioritise their health.  

Moreover, where there is a beneficiary in the middle of a divorce, and where funds are retained in the trust fund, the divorce courts, on the whole, cannot infer that the divorcing party will become or is entitled to any of the funds. On the basis that distributions are dependent upon the discretion of the trustees, it would be difficult for the beneficiary’s divorcing spouse to include the trust assets as part of the divorce process.

The trustees’ discretion

Although the ultimate decision as to who shall get what from the trust, how much and when, is down to the trustees’ discretion, the Testator/Testatrix can write a letter of wishes to the trustees with guidance.  Such a letter would allow the Testator/Testatrix to provide useful guidance as to how they would like the trustees to manage and distribute the trust fund.  It would allow them to consider different circumstances that may arise for the trustees. Although, the letter of wishes is not legally binding on the trustees to follow, it does provide them with invaluable guidance as to the wishes of the Testator/Testatrix.

The trust period has a term of 125 years from the date of death but can be terminated at any point by agreement of the trustees.  

There are tax implications with the discretionary trust that need consideration but, in my experience, clients often prefer the advantages of the flexibility and protection afforded by the trust.

How can Moore Barlow help?

At Moore Barlow, we can provide you with professional advice so as to ensure that you are providing protection for your family and assuring your wealth is passed to your next generations in the most suitable way possible.

If you would like to discuss any of the issues in the article, please contact Alexandra Milton, head of the private wealth team, on email or call 01483 748560


This information is for guidance and should not be regarded as a substitute for taking full legal advice.