Estate Planning for Beneficiaries Who Don’t Have Mental Capacity

Estate Planning for Beneficiaries Who Don’t Have Mental Capacity

Every UK Financial Adviser is aware of the proposed changes to the Inheritance Tax (IHT) treatment of unused money purchase pension funds from 6 April 2027. While much attention has focused on the tax implications, some fantastic work by a Chartered Financial Planner, Rhiannon Gogh (CEO of SENDA), got me thinking about how families can provide for Beneficiaries who lack, or may never develop, the mental capacity to manage their own finances.

Young adults who lack mental capacity face significant barriers when accessing assets held in their name. This can include bank accounts, Child Trust Funds (CTFs), Junior ISAs, Junior SIPPs and inherited pension benefits. Once they reach age 18 (or 16 in Scotland), access to these funds may require an application through the Court of Protection, a process that can be both expensive and time-consuming.

This issue is particularly relevant given the scale of savings already held by young people. The Government has launched a taskforce to address approximately £1.6 billion in unclaimed Child Trust Funds. Around 6.3 million accounts were opened for children born between September 2002 and January 2011, with an average value of around £2,200. However, where the account holder lacks the mental capacity to claim their fund, access may only be possible through legal intervention.

Financial Planners should consider whether their fact-finding process goes far enough. Do you ask clients whether their children or grandchildren have Special Educational Needs (SEN), learning disabilities, or conditions that could affect future decision-making capacity? From a Consumer Duty and Foreseeable Harm perspective, this information may be crucial when recommending suitable planning solutions.

For example, contributing surplus income into a Junior ISA or Junior SIPP may appear highly tax efficient. Likewise, naming a vulnerable individual as the Beneficiary of a pension fund may seem sensible. However, without proper planning, those assets could become difficult to access when they are needed most.

The scale of the issue should not be underestimated. Government data shows that more than 1.7 million pupils in England have identified SEN, including those with Education, Health and Care Plans. In addition, NHS Scotland estimates that between 15% and 20% of the UK population is neurodiverse. While many of these individuals will have full capacity to manage their financial affairs, a significant minority may not.

Financial planners therefore need to understand not only the capacity of their clients, but also that of potential future Beneficiaries. Doing so helps ensure recommendations remain appropriate and reduce the risk of foreseeable harm.

The issue is particularly important for parents of children with significant special needs. Since 2015 pension funds have offered attractive estate planning advantages, but the Inheritance Tax position of unused pension funds is set to change from 6^th April 2027.

One of the most common concerns these parents express is simple: “How will my child be looked after when I’m gone?”.

For some families, a child may never achieve financial independence, accumulate substantial savings, or purchase their own home. As a result, parents often seek structures that can provide long-term financial protection.

Is There a Solution?

The simplest is legislative reform. The Government could simplify access to Child Trust Funds, Junior ISAs and inherited pension benefits where a Beneficiary lacks mental capacity. Until such reforms are introduced, however, Planners must work within the existing framework.

One potential solution is the use of a Flexible Reversionary Trust. These Trusts can help remove surplus income and, in some cases, capital from an individual’s estate while providing a long-term framework for supporting vulnerable Beneficiaries.

A Flexible Reversionary Trust allows Trustees to:

• Return funds to the Settlor if circumstances change.
• Defer reversions to future dates without immediate tax consequences.
• Loans or appoint capital to Beneficiaries when appropriate.Because these Trusts can potentially continue for up to 125 years, they can offer multigenerational protection for vulnerable family members.

A detailed Letter of Wishes can also provide Trustees with guidance on how funds should be managed. This may include instructions relating to:

• Ongoing care and accommodation costs.
• Day-to-day living expenses.
• The purchase of a property.
• Financial support for family members who provide care.

Importantly, distributions can remain under Trustee discretion. In certain circumstances this may help preserve entitlement to means-tested benefits or NHS Continuing Healthcare funding, although individual advice is always essential.

Some of these objectives can also be achieved through a Disabled Person’s Trust. However, such Trusts are generally less flexible and depend upon specific qualifying conditions.

A disabled person is broadly defined as someone who is unable to manage their affairs because of a relevant mental condition, or who qualifies for certain disability-related state benefits such as Personal Independence Payment (PIP), Disability Living Allowance or Attendance Allowance.

The challenge is that eligibility can be influenced by future legislative changes. Alterations to disability benefit rules could potentially affect qualification for a Disabled Trust, In addition, Disabled Person’s Trusts established after 8 April 2013 face restrictions on distributions to non-disabled Beneficiaries, generally limited to £3,000 per year or 3% of Trust assets, if lower.

Flexible Reversionary Trusts do not carry the same restrictions and may therefore offer greater planning flexibility for some families.

Although Disabled Person’s Trusts benefit from favourable tax treatment, Flexible Reversionary Trusts can also be structured efficiently. Gifts from normal expenditure avoid Entry Tax Charges when gifted via Flexible Reversionary Trusts, while careful planning can help manage future trust taxation.

Ultimately, some vulnerable Beneficiaries may not yet have developed capacity issues, while others may not even have been born. That is why flexibility is so important. Effective estate planning for families with vulnerable dependants requires Planners to think beyond tax efficiency alone and focus on long-term protection, adaptability and the practical realities Beneficiaries may face throughout their lives.

For those interested in learning more about planning for families with children who have Special Educational Needs, Rhiannon Gogh’s book Planning with Love is an excellent resource. SENDA also offer LIBF-accredited Adviser training on Special Needs Planning.

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