How best should I save for my vulnerable grandson?

I am already giving £200 per month to each of my three grandchildren through investment trust children's savings schemes. My fourth newly-born grandchild has Down's syndrome and I am concerned that he might not be mentally capable of deciding what should be done with the money he acquires at the age of 18.

What is the best way to save for him? Can the government or local council refuse to help him financially or give support if he has money of his own - as is the case in France at the moment? Would a separate trust be a sensible way forward, so that only he benefits from the money and doesn't get disadvantaged by "owning" it?

Sandra Brown, partner at Michelmores, says you are correct to have concerns about the impact your gifts may have on your grandson's ability to claim means tested benefits in the future.

However, the amount you are proposing to gift to your grandchild - £200 a month - will not have any serious impact on means tested benefits for some time. Although the gifts would be taken into account by the local authority, your grandson is currently permitted to have savings of up to £16,000 before he ceases to be entitled to means tested benefits.

Any amount of money between £6,000 and £16,000 will also have some influence, as the local authority will assume that a certain amount of income is being generated from the money.

If you are concerned about your grandson's capacity to manage the money when he is older then you may wish to direct your monthly gifts into a trust.

This does not have any advantages from the point of view of means testing, but it would ensure that the trustees (of which you could be one) remain in control of the assets. If your grandson at age 18 had the capacity to look after the money himself then he could simply ask for the assets to be transferred into his name at that stage.

Once the total amount of your gifts approaches the thresholds above, you may wish to reassess how those gifts are being made. Perhaps the simplest solution would be to gift the money to his parents and trust them to use the funds for your grandson's benefit.

However, you may feel that this is unsatisfactory because you cannot impose any formal obligation on the parents and, in addition, the money would be theirs and so vulnerable in the event of divorce, bankruptcy or death.

As an alternative, you may wish to direct your gifts into a discretionary trust. Discretionary trusts are a relatively common form of trust in which the named beneficiaries do not have any form of fixed entitlement to trust assets.

This means that, provided the trustees do not develop a regular pattern of making distributions to your grandson, the value of the trust assets should stay out of account when assessing the capital available to him. There would be professional costs associated with setting up and running a discretionary trust, which you should take into account before making any decisions.

In addition, you should be aware that discretionary trusts are subject to the highest rates of income and capital gains tax. However, trustees of discretionary trusts do have an annual income tax free allowance of £1,000 and an annual capital gains tax free allowance of £5,500. In light of the sums you are hoping to gift, these allowances should be sufficient to help minimise the amounts of tax actually becoming payable.

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A discretionary trust or a Disabled Persons Trust would alleviate your concern that your grandson may not be capable of dealing with the assets once he becomes 18 years old. By directing the assets into a trust, the responsibility for managing the assets falls on the trustees, who would initially be chosen by you.

The advice given is specific to the questions posed. Neither the FT nor the contributors accept liability for any direct or indirect loss arising from any reliance placed on replies.

An FT reader, via email: I have a son with Down's syndrome. He has a child trust fund and my solution to the issues of capability and state support disadvantages will be to transfer his money into a junior Isa and continue to fund this account as previously.

At 18 years old I will apply for power of attorney to manage these savings and transfer the accrued sum to a disabled person's discretionary trust which has more favourable tax treatment than other trusts.

The trust is not considered an asset of the disabled person, so this means it will not disadvantage them in reference to receiving continued state support. Parents as trustees can then ensure income distribution levels do not affect state support entitlements.

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