My son has health problems and receives benefits: how can I leave him money without having his benefits cut?

I am in my 80s, have a house worth around £450,000 and about £100,000 in cash savings.

My husband died 18 years ago. I have two children and six grandchildren. When my husband (their father) died, I placed £200,000 of my estate into a trust for my children, which was approximately 50 per cent of the value of our house at the time.

In my will, I will leave 50 percent of my remaining estate to my children and divide the remainder among my grandchildren.

My problem is this: my son has health problems and lives on social benefits. This is very unlikely to change. His house is rented. I was hoping that his inheritance would allow him to buy a small house so that he would always be safe.

However, I was recently told that if you receive a sum of around £175,000, your benefits will be reduced or suspended, to the point where you will only have around £16,000 of capital left.

If you bought a house, you would be seen as denying yourself capital and your benefits would still be cut.

I’m wondering if I can or should put the money that would otherwise have gone to him into a trust, asking that the trust purchase a house for him to live in rent-free, but that after his death the ultimate beneficiaries would be his grandchildren.

Is this a good idea or even possible? He knows my concerns and thoughts and is happy for me to do what I think is best. SS, via email

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This is Money’s Harvey Dorset responds: Feeling like you can’t leave money to your child without losing your access to benefits puts you in a tough spot.

To ensure that your child can continue receiving his or her benefits, you cannot simply give him or her the money.

Using a trust will allow you to protect your child’s benefits while also giving him or her access to the money you have left him or her.

Trustees can use your child’s inheritance to pay for things he or she needs or wants, without the money being taken into account in the means test.

It is important to consider who you want to name as trustee, not only because administering the trust can be a significant task, but also because your instructions for using the money are not legally binding.

This is Money spoke to two financial advisers to find out what you need to consider to ensure your child gets the support they need.

Discretionary trust: Liviu Ratoi says creating one could protect this reader’s child’s future

Liviu Ratoi, independent financial advisor at Flying Colours, answers: It sounds like you have quite a dilemma on your hands. Unfortunately, there is no simple, straightforward solution.

As your child is heavily dependent on state benefits due to his poor health, giving him money as a gift or inheritance could jeopardise this support.

Placing money in a trust to purchase property for your benefit, along with that of other beneficiaries, could result in a more positive outcome. Some of the benefits of using a trust include:

• Separate legal entity: If the trust owns the property, the principal belongs to the trust and not directly to your child, which could protect your eligibility for benefits.

• Home Security: Since one of your primary concerns was ensuring that your child continued to have a place to live, the trust will be able to provide a permanent home for your child without the fear of losing this benefit.

• Future planning: The trust will also allow for future planning opportunities, keeping the property in the family and allowing other family members to benefit from the asset or its capital later on.

Despite the benefits described above, the solution is not without its challenges. The following areas must be considered:

• Legal and tax implications: Setting up a trust involves a high level of tax complexity that must be taken into account before embarking on this path. Professional advice should be sought to navigate this minefield.

• Trust Administration: Trustees have a duty to manage the trust effectively, ensuring compliance with the law and the terms of the trust. I would recommend that you appoint people you trust and can rely on to take on this role; you may also hire professional trustees.

• Justice and family dynamics: I strongly recommend that you clearly communicate your plan to all family members to avoid misunderstandings or disputes in the future.

Another option to consider is a discretionary trust. This type of trust will allow your child to benefit from the asset during his or her lifetime, while maintaining direct control and oversight of the asset or funds in the hands of the trustees.

Upon death, the assets may be sold and the proceeds of the sale may be given to the beneficiaries.

While I completely understand your desire to help your son, I think it’s also important to be aware of his potential long-term care needs and make sure you don’t put yourself at risk by giving away too much of your assets.

As you can see, this is a very complicated matter. I strongly recommend that you consult with a financial advisor or attorney to ensure that the solution you are seeking meets your needs and that the trust is structured and managed correctly.

Enough cash: Sarah Hollowell warns that buying a property might not leave enough money in escrow to pay insurance costs and taxes

Sarah Hollowell, Head of Tax and Trust Services at Killik & Co, replies: A trust could be a good solution, but only if it is created correctly.

To ensure that your child’s means-tested benefits are not affected, a discretionary trust would probably be most appropriate.

Beneficiaries of a discretionary trust are not entitled to income or capital, but they do have the potential to benefit. This means that the sum of the capital is not taken into account when assessing the benefits.

Similarly, income payments cannot be taken into account. Trustees decide how much and when a payment should be made to a beneficiary, but a well-written letter of wishes can provide them with guidance on how the trust should be used and who in particular should benefit.

However, this guidance is not legally binding, so it is important that you think carefully about who should act as trustees.

Managing a discretionary trust can be an onerous task for trustees if they have little or no understanding of their obligations. The trust must be registered with HMRC and annual tax returns are likely to be required.

You mentioned the possibility of the trustees using the trust fund to purchase property for your son to live in.

While this is a possibility, there are factors that must be taken into account, the main one being that enough cash must be held within the trust to cover insurance costs, taxes and other expenses.

This can be difficult if the trust does not own any other assets.

If trust funds are invested to produce income, these could be used to cover rental costs.

Income payments from a discretionary trust are made net of tax, and the trust pays tax at a rate of 45 percent on that distribution.

The trustees would then have to provide the beneficiary with a tax certificate and, if applicable, they could then claim a refund of the tax.

In summary, while a discretionary trust is possibly a good solution, the costs of running the trust, who the trustees are, whether the property is in fact a suitable trust asset, and the tax consequences must be assessed.

We strongly recommend that you arm yourself with as much information as possible and seek professional advice.