Leaving gifts to a beneficiary on means tested benefits can be a particularly tricky area. When preparing a Will, most people simply wish to be equal between their children, or ensure that their loved ones receive recognition from their estate. I have however seen Wills where a beneficiary was not named for fear that the inheritance would be swallowed up in care costs - and therein lies the rub (as they say).
If a beneficiary who is on means tested benefits receives an inheritance of more than £16,000 then they are likely to loose their right to state assistance. The inheritance is then used to pay the costs that were previously being funded and are quickly dissipated as a result. The beneficiary therefore receives very little (if any) benefit from the money they receive. In some instances the beneficiary’s life improves none-the-less, for example someone on housing benefits who receives enough to buy their own home, however this is rarely the case for those with a long term reliance on state aid, such as those in care or with severe disabilities. There is however a way to provide for beneficiaries under a Will, without impacting their access to state funding.
This is usually achieved by including a discretionary trust in the Will. The nature of these trusts means that the beneficiary is not deemed to own the funds, but the money can be used to buy things for them, provide an income, pay for holidays etc. Discretionary trusts are complex structures and you should instruct a specialist solicitor to prepare these for you. If they are badly drafted then they may not have the desired effect, and the beneficiary may be treated as owning the trust assets. They can also have significant tax implications which need to be discussed at the outset. Solicitors who are members of The Society for Trusts and Estate Practitioners (STEP) have undertaken additional training in relation to trusts and so should be your first port of call.
There are two courses of action which ill-advised people usually consider, both of which carry significant risks:
Post-death variations
I wanted to specifically address the use of deeds of variation in relation to beneficiaries who are in receipt of means tested benefits. This is a question that I am being asked more and more, particularly where a beneficiary is elderly and in Local Authority funded care.
A deed of variation is a means of redirecting a gift after a person has already died. The beneficiary who is entitled to the legacy (either by Will or under the intestacy rules) can complete a variation and, in so doing, state that they want all or part of the gift to pass to a different person. For inheritance tax and capital gains tax purposes the gift is treated as though it was made by the deceased, rather than the beneficiary. This is however not the case in the eyes of the Local Authority. A deed of variation completed by a person in receipt of means tested benefits will be treated as a deliberate deprivation of assets, and so they will continue to treat the beneficiary as having received that sum.
A disclaimer is slightly different. In this instance, the beneficiary states that they do not want the gift, but cannot choose who then receives the money. Instead the Will or intestacy rules are read as though the beneficiary had predeceased the testator. The rules around whether or not this constitutes a deliberate deprivation are much less clear. Some Local Authorities will still treat this in the same way, however there is a legal argument to be made against this, as the beneficiary never had the funds and so could not have deprived themselves. In either case, this is somewhat shaky ground and it will always be better to put provisions in place in the Will to make allowances for the beneficiary in a protected fashion.
Leave them out
Finally, many people are unaware of the Local Authority’s right to bring a claim on behalf of someone who is entitled to means tested benefits. Such claims would be made under the Inheritance (Provision for Family and Dependants) Act 1975, and so could be made where the potential beneficiary is a person entitled to bring a claim against the estate for reasonable financial provision. Generally speaking this will include spouses, long term partners, children or anyone else who was financially dependant on the deceased. It can therefore be very risky to completely exclude a beneficiary (or to make a token gift), particularly where that person is clearly financially dependent. Including a discretionary trust in the Will can also help to avoid this type of claim.
If you wish to discuss preparing your Will to include provision for a beneficiary who is in receipt of means tested benefits then please do not hesitate to contact a member of our Wealth Management Team.