Back in 2020 I wrote a blog about gifts to beneficiaries on means tested benefits and I have to admit that I have probably had more queries in relation to this blog than any other to date. I therefore felt it was about time to do a follow up.

The main issue that usually arises for beneficiaries on means tested benefits is that receiving an inheritance, gift or settlement will result in them losing their benefits. This means that they end up using their windfall to fund their basic needs, rather than enriching their life, until it is sufficiently depleted to allow them to reapply for benefits. It can also leave some individuals worse off, for instance if they are provided with an income, rather than a lump sum, which impacts their access to benefits and on which they must then pay income tax. It is not uncommon in these scenarios for the new income source to be less than the reduction in benefits.

Because of this, the usual reaction is to give the funds away. This however will always be seen as a deliberate deprivation of assets by the Local Authority. Deeds of Variation (explained in my earlier blog) are treated in the same way and so the beneficiary will be treated as though they still owned these assets, leaving them worse off in any case.

There are two ways to mitigate the impact an inheritance or settlement can have on someone’s means tested benefits:

Discretionary Trust

If the money is a gift (either made during a person’s lifetime or by Will on their death) the person leaving the legacy or making the gift can place it on the terms of a discretionary trust. This would have to be done by the person making the gift, and not after the fact by the person on means tested benefits. Any attempts to alter the direction of a gift to themselves will be a deliberate deprivation.

This type of trust works by naming a class of beneficiaries, meaning that no one person has an immediate right to the trust funds. It is then for the trustees to decide how to exercise their authority. Generally speaking, if a beneficiary is in receipt of means tested benefits, the trustees will not give them lump sums of cash or a regular income. Instead, the funds can be used to enrich their life by paying for holidays, cars or improvements to their home to make their lives easier. It is used to add value to their lives, rather than funding their day-to-day needs.

Personal Injury Trust

Where someone receives funds as a result of a personal injury, it is possible to place these funds on trust so that they also remain disregarded when assessing someone’s access to means tested benefits. This is not a deliberate deprivation, as the award has not been given away and the injured person remains the primary beneficiary. These types of trust are specifically permitted by legislation which recognises that personal injury awards are made where someone requires these funds due to the specific additional needs resulting from their injury. As such, it would be counter-productive to require the beneficiary to use the funds on their normal day-to-day expenses.

There are some specific rules around Personal Injury trusts and, in order for them to be effective, they need to be set up at the time the award is received, rather than retrospectively, as awarded funds should not be mixed with the recipients other money. It is therefore best to get the wheels in motion to set up a personal injury trust at the same time as any claim is made.

In most other circumstances, the beneficiary will be required to receive the funds and to use them to fund their day-to-day expenses, which will impact their means tested benefits. With that being said, if the sum inherited is of a reasonable amount, it would always be advisable to take professional financial advice as it may be possible to invest the funds in a way that produces an income which could support an individual in the long term. The funds could also be applied in a way that meets an ongoing need (such as housing) to reduce an ongoing reliance of benefits.

Each case will vary depending on the amount received and the individual’s needs and so it is important to take advice if you feel that any of the above may apply to yourself or a beneficiary of your estate.

If you would like to discuss the above points then please contact Ashley Minott on 01494 893518.