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Setting up a trust for children or grandchildren offers a way to pass on wealth while retaining control over how and when assets are distributed.
This structure can be particularly helpful for managing finances for those under 18 (or 16 in Scotland) and potentially offers inheritance tax advantages. If you put assets, such as property, shares or cash, into a trust, it means they no longer belong to you. This means that when you die, their value normally won’t be counted when your inheritance tax (IHT) bill is worked out – as long as you live at least seven years after giving the assets or money away.
But is a trust the right move for your family? Are they only for the wealthy elite or could they offer benefits to middle-income families too?
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A trust is a legal arrangement where one person (the settlor) puts assets aside to be managed by trustees for the benefit of others (beneficiaries). This structure can offer more control over when and how funds are accessed.
Ross Lacey, director of Fairview Financial Management, says he tends to see trusts set up by parents and grandparents for their children and grandchildren. “A discretionary trust offers flexibility in that the trustees (the people nominated to make decisions on how the money is used) can choose from categories of beneficiaries to pay money out to. These categories usually include children and grandchildren.”
There are several types of trusts, but the two most common for family planning are:
1. Bare trusts
2. Discretionary trusts
Bare trusts are often used to pass assets to young people. Assets are held in the name of a trustee, but the beneficiary (a grandchild, for example) has the absolute right to the assets once they turn 18 (or 16 in Scotland).
Trustees can withdraw money before then, as long as they can demonstrate it’s for the benefit of the child. In this way, a bare trust can offer more flexibility than a Junior ISA, where funds are typically locked away until the child turns 18.
Any income or gains in a bare trust are taxed as the beneficiary’s, unless the money has come from a parent. A bare trust can be opened by anyone for a child, even if you’re not the parent. So they can be opened and managed by a grandparent.
A discretionary trust offers more flexibility and can help protect assets in complex family situations, such as if a child or grandchild is vulnerable, going through a divorce, or struggling with money management.
A discretionary trust can be created during your lifetime or upon your death. Unlike with a bare trust, the beneficiaries do not automatically get access to the assets when they reach adulthood.
Discretionary trusts are sometimes set up to put assets aside for a future need or beneficiaries who are not capable or responsible enough to deal with money themselves. The trustees have discretion over how to use the trust income, and the payment of capital.
This can be useful if more grandchildren are born in the future, for example. The tax situation and management of discretionary trusts is complicated. The trust may be subject to IHT charges, potentially including charges of up to 6% on its value above a certain threshold every 10 years (periodic charges), so it’s best to get proper legal advice.
Other types of trust you might see mentioned include ‘interest in possession’ trusts. This gives a named beneficiary the right to receive an income from assets placed in the trust, but they are not entitled to the trust assets.
Most ‘interest in possession trusts’ are arranged as part of a person’s will and involve the family home – for example, allowing the surviving spouse to continue to live in the property, with it passing to children or other beneficiaries upon their death.
‘Trusts for vulnerable beneficiaries’ are used for someone under the age of 18 whose parents have died, or certain people with disabilities, including those who would not be able to legally take receipt of their inheritance.
These get special tax treatment. If you’re interested in setting up this type of trust, it’s a good idea to find a solicitor who specialises in wills and trusts for vulnerable people.
While trusts are often associated with high-net-worth individuals, they can be useful for a wide range of families – particularly relatively simple bare trusts. Rising property prices, university tuition fees and cost-of-living concerns have fuelled the use of trusts by grandparents who want to help their grandchildren.
And if you have a child or grandchild with special needs, a trust might be the best way for you to leave money to them. However, trusts can be complex and not always suitable. When it comes to estate planning, keeping it simple is the best mantra. So before considering a trust, explore simpler options.
If you have excess income, a highly effective IHT planning strategy is making regular gifts. This could be to pay school fees, fund university costs, or start a pension. Payments from income are not caught by IHT, so this is a great way to pass wealth meaningfully and without tax to grandchildren without necessarily needing to set up a trust.
Wildcat Law co-founder David Robinson says that unless you have significant wealth, trusts are unlikely to be a solution for you outside a basic bare trust written into your will for children under 18. “Due to the cost and complexity of operating a trust, they are best used where control of money is your priority. This might be because you are worried that a beneficiary may get divorced, for example. If you do want a trust, go to a specialist.”
He also advises caution over online adverts for trust solutions promising to protect property from care bills. “Many of these schemes are flawed and result in significant loss to the estate.”
Trusts are becoming more appealing for inheritance tax planning, ahead of changes to how pensions will be treated for IHT purposes. In the Autumn Budget 2024, Chancellor Rachel Reeves announced that from April 2027 pensions will no longer be exempt from IHT.
A trust can reduce the amount of IHT paid on your estate – but only if structured correctly. Transfers into a bare trust may be exempt from IHT, as long as the person making the transfer survives for seven years after making the transfer. Grandparents can place up to £3,000 per year into trust without affecting their IHT allowance, as long as they haven’t used the IHT gifting allowance elsewhere.
Larger sums might be taxed initially but could save money in the long run if they grow outside the estate and fall out of the IHT net after seven years. Using a discretionary trust can help protect family wealth from being unintentionally lost due to remarriage, divorce, or creditors.
However, when setting up a discretionary trust, IHT can be payable at the outset, every 10 years (known as ‘periodic charges’), or in the event of trust assets being paid out to beneficiaries. So setting up a trust doesn’t necessarily mean you will save on inheritance tax and it’s worth getting specialist advice.
It’s important to remember that tax rules can be complicated and can often change. Getting it wrong can result in unexpected tax bills, so it’s important to get professional advice before setting up a trust. Riz Malik, director of R3 Wealth, says this is important if you’re thinking of trusts as part of your IHT strategy. “When it comes to trusts, it is not a case of one size fits all. Poor planning could leave your estate with some big financial consequences.”
A solicitor or financial adviser who specialises in estate planning can help weigh up whether a trust is appropriate for your family, and structure it in a way that avoids pitfalls. They can also ensure the trust is registered with the HMRC Trust Registration Service (TRS). All trusts must be registered here.
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