How trusts can ensure disabled beneficiaries’ future needs are cared for
How trusts can ensure disabled beneficiaries’ future needs are cared for
Sharon Yam, Regional Head for Asia Pacific, explains the factors that settlors and trustees need to consider when establishing a trust for a disabled beneficiary.
The role of trusts in providing financially for beneficiaries both now and in the future is well established. What is less often written about is the critical role trusts can play in providing for beneficiaries who are physically disabled, have a mental health condition, or a life-limiting illness.
It is likely that these beneficiaries will require some form of ongoing care for part or all their lifetime – in some cases this will even entail permanent medical assistance. A trust arrangement, when written professionally, can ensure that this care is provided.
While a trust that provides for a disabled beneficiary isn’t particularly unique in its structure, it is important that both settlors and trustees consider several key factors to ensure the said beneficiary is properly and adequately cared for.
Consider an irrevocable trust
First and foremost, if someone came to Ocorian and said they wanted to set up a trust for a disabled beneficiary, an irrevocable trust would be a typical first consideration.
If care is expected to last for the beneficiary’s lifetime, no one should be able to revoke the trust and remove the assets whilst the beneficiary is still required to be provided for. This approach will give the settlor the certainty that the beneficiary is always taken care of.
Should a revocable trust be required because of certain considerations such as tax domiciliation, the power of revocation should be given only to the settlor as this will ensure the exercise of such a power would not go beyond the lifetime of the settlor. In that regard, it is also possible for a revocable trust to be converted into an irrevocable trust upon the settlor’s passing.
Think about the assets to be put in trust and how they are invested
Clearly, a large enough amount would need to be put into trust to ensure the beneficiary is reasonably comfortable during their lifetime ¬– whether they are under constant medical supervision or are relatively independent but need daily assistance. Importantly, the assets need to be held or invested in highly liquid asset classes (i.e. cash or money market instruments) as they are required to pay for the provision of the beneficiary’s ongoing medical and hospice fees.
Should there be sufficient assets to cover the short-term liquidity requirements, the investment professionals involved with the trust could consider a long-term approach for the remaining trust assets. This may include investing into property for rental income and assets managed for capital gains.
The deployment of trust assets ultimately pivots on the intention of the trust arrangement. Typically, for a trust that seeks to provide for a disabled beneficiary throughout their lifetime, a conservative approach to investments would be prudent as it provides a predictable stream of income for the trust to provide for medical expenses.
As with other trusts, the trustees are free to appoint different investment professionals if the investments aren’t delivering on expectations, and by extension, adequately providing the care required for the beneficiary.
Make sure the level of care is appropriate
Settlors and trustees should consider all aspects of care to ensure the beneficiary’s health needs are attended to and that they are living reasonably comfortably. An appropriate standard of care would vary from person to person. It isn’t uncommon for levels of care to be below what the settlor might expect, with a medical facility merely calling the trustees when they need additional funds for specific procedures.
By saying ‘comfortably’, some onus is put on the trustee to ensure the care is of an acceptable level. As a safeguard, a protector - usually someone who is close to the beneficiary and understands their needs - can be appointed to ensure the trust is administered and managed in a manner that ensures the beneficiary receives adequate and reasonable medical care provided for by the trust. The trust deed should also be written in such a way as to make sure that it accounts for and allows the trustees to provide for any possible changes in the beneficiary’s condition over time.
It isn’t necessary to set up a separate trust for the disabled beneficiary
If a settlor is considering a trust for his or her beneficiaries, it usually isn’t necessary to set up separate structures for disabled and non-disabled individuals, as long as the instructions in the trust deed are clear. However, this may simply come down to a matter of choice, with the settlor establishing a separate trust for the disabled beneficiary to ‘ring fence’ assets for their care – and also to avoid any potential conflicts with non-disabled beneficiaries. Again, however, this is not a pre-requisite.
Changes to personal circumstances may require action
So far, we have addressed establishing a trust for a beneficiary who already has a physical or intellectual disability or life-limiting illness. But there is always a possibility that a beneficiary in an existing trust could suddenly require ongoing medical care – be that, for instance, through an accident or illness.
If there is a ‘trigger event’ such as this, the settlor can inform the trustees and indicate that special arrangements may need to be made. This could entail carving out a portion of the funds or reallocating the investment of assets, or the settlor contributing more money in the trust. If such a scenario is anticipated and to be prepared for at the onset, the settlor could also detail appropriate steps for the trustee to consider in its administration of the trust via a letter of wishes. Alternatively, a separate trust could be established.
Making medical decisions
Typically, the trustee would consult with the settlor, family member or next-of-kin regarding the disabled beneficiary’s care. In the absence of family, it may fall to the trustee to liaise with the beneficiary’s primary carer/medical professionals or the protector.
Consider the experience the trustees bring to the table
When handing over assets to trustees, the settlor is relying on the trustees’ broad-ranging experience that their requests will be properly considered and carried out. When there are disabled beneficiaries, trustees need to be able to balance objectivity with an understanding of the beneficiaries’ needs and requirements, while adopting a long-term view. Empathy and experience of managing other beneficiaries’ expectations are also important.
For settlors considering trusts for disabled beneficiaries, their foremost concern will be to ensure the beneficiaries’ needs are fully taken care of for as long as it is required. In the hands of experienced trustees, this is eminently achievable. As always, however, it is worth taking expert advice as the domicile of the trust and the country in which all parties to the trust live, including the beneficiaries, will likely have a direct impact on how the trust will be written.
Ocorian has specialist trustees with decades of experience establishing and administering trust structures and serving as trustee. We build close and long-lasting relationships with our private clients, enabling them to protect, preserve, and plan for their wealth, now and in the future.
There is very little that we haven’t come across before – so you can rest assured that you are in safe hands and that you and your family’s interests will be taken care of.
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