Vulnerable beneficiary election qualification

Vulnerable beneficiary election qualification

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Just received a brief to assist with an individual (over 18) who has been awarded a substantial pay-out as a result of road traffic accident that has left the victim disabled.  The proceeds of claim have been placed on trust for the benefit of the disabled victim.

The disabled victim is the only beneficiary, and the only funds in the settlement are those arising from the award.

But I think that I have a problem.  Hope not (not really my problem but even so ..)

The trust deed names the disabled victim as settlor.  I think that this is a killer.  It seems to disqualify the trust from the vul beneficiary provisions. Worse than that, any income tax recovered by the beneficiary by reason of a 45% tax credit on an R185 certificate would have to be paid back to the trustees (at least so I read it)

Tell me I am wrong?

Could it ever have been structured differently? I have in mind that the individual is the beneficiary of the award, so even if it were paid directly into a trust by the insurance company it would still be a deemed settlement by the beneficiary. Or would it?

Thanks

Clint Westwood

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By ChrisMartin
09th Feb 2015 14:58

You are correct

These trusts are often self-settled by the beneficiary (possibly to preserve entitlement to means-tested benefits). A settlor-interested trust results in the vulnerable beneficiary election becoming unavailable. Income is assessed on the trust initially (without deduction of trust expenses) then on the settlor, with a tax credit being available for the trust tax suffered. A subsequent tax refund to the settlor is payable to the trustees to the extent that it relates to the trust income.

I have to say I'm not sure about the insurance company question; I was wondering this myself recently. Most trust capital for these types of trusts comes from insurance companies ultimately after all. 

A side issue to be aware of - lump sum payouts are often invested in non-qualifying insurance bonds. You'll be aware of the chargeable events regime, but note that as a general rule, where the settlor is still alive (as in your case) such gains are taxed on the settlor directly; the trust is bypassed altogether. 

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