Case Study 9

Securing future financial provision for a family with Special Needs

The situation

M r and Mrs “K”’s three young children include “L”, the youngest, who has learning and physical difficulties resulting from a genetic disorder. Mrs K has left employment to look after the children; Mr K’s career is going well and he is earning a good income.

Their shorter-term objective, as with many families, was to insure Mr K to protect the family’s financial position against his death. They also wanted to understand how to build up funds to assist their children in later life, particularly L, who will probably never be able to live independently.

They had been told that setting up Junior ISAs or pensions for the children were possibly the ways to do this.

The solution

The first thing we did was bring in a third party expert to review L and Mrs K’s state benefit entitlement – enabling her to claim Carer’s Allowance worth approximately £3,000 per annum. Our expert was also able to assist the family claim an increased rate of Disability Living Allowance for L.

We reviewed Mr & Mrs K’s wills and showed them a rearrangement that would provide far more protection for their children should their deaths occur before those children reached maturity.

We also pointed out that, even though Mrs K did not earn an income, she fulfilled a whole range of functions which freed Mr K up to focus on his career. If she was unable to fulfil those functions, either Mr K would have to reduce his working hours, or he would have to engage help.

We investigated Mr K’s life cover with his employer: he actually already had very significant cover which he wasn’t aware of, making it more important to insure Mrs K. We arranged a low cost term assurance policy to protect against Mrs K’s death or illness during that time.

Junior ISAs and pensions can both be viable ways to build up a fund in a child’s name, but after discussions it became apparent that funding Junior ISAs for the elder two children would achieve the parents’ objectives of making funds available to their children at age 18 to hopefully assist in funding higher education. Junior ISAs were arranged for them.

The parents initially wanted to treat all three children equally but, L’s special needs almost certainly meant that, unlike his siblings he will never be able to live independently. He will become eligible for means assessed state benefits and state funded care and support at some point.

Like many parents of children with special needs, Mr and Mrs K were very fearful about the level of support the state may be able to provide in the future: they wanted to provide L with some additional quality of life over and above what the state would probably provide. While they felt confident they could top up state support during their lifetimes, they were particularly concerned about providing him with some degree of financial security after their deaths.

Arranging a Junior ISA for L would have meant he owned money outright at age 18 when the entire ISA fund would be taken into account in calculating his entitlement to state funding. The end result would have been a loss of state funding and no net financial benefit to L. Arranging a pension for him would have had the same effect from age 55.

Instead of funding an ISA for L, the monthly amount set aside for him is paid partly into an Offshore Savings Account and partly into a second insurance policy. The Offshore Savings Account holds a relatively low risk, diversified investment portfolio and it is similar to a Stocks & Shares Junior ISA in many ways. The crucial difference is that, unlike an ISA, it can be held within a trust.

The trust achieves three critical things:

  • Because L is unlikely to be capable of managing it himself, the trust provides a mechanism for other people to manage to manage the money on his behalf
  • The particular form of trust used will not interfere with L’s rights to claim state benefits or state funded care and support now or in future
  • It enables all tax on investment returns to be deferred until such time as the money is actually withdrawn from the trust and enable L’s own unused tax allowances to reduce any tax due

The second insurance policy provides an additional safety net. Over time, assuming Mr K continues his successful career we anticipate the family’s overall wealth to grow and enable further provision to be made for L in due course. However, if either parents’ death or illness occurred in the short-term, the second insurance policy provides protection.

The outcome

The family are now claiming the increased state benefits to which they are entitled and have insured both parents’ lives. The two investments we recommended gives tax efficient provision for their two elder children’s university education.

We have arranged an investment and an insurance policy which will provide a financial safety net for L’s potential benefit at some future date. Both are held in a trust which will protect his rights to basic state financial support to provide L with a degree of financial independence and a few luxuries. The trust includes L’s siblings as potential beneficiaries so that, in the event of L’s untimely death, his brother and sister can potentially have the money instead.

The family’s financial situation, benefit entitlement and the arrangements we have put in place are all being regularly reviewed to ensure the strategy remains on track.