Trust for Grandchildren

PHOTO: ElspethTalbot, Consultant.

This article appeared in the Mearns Press in November 2006.

Question:

We wish to set up trust-funds for our 5 grandchildren…what’s the best way to go about this?

Answer:

Trusts can be useful for grandchildren for several purposes; payment of school fees, a nest egg for the start of married life, to fund a gap year, to provide a deposit for a house. Giving money outright to young beneficiaries is not always desirable, since it may be that the money is not put to the intended purpose!

You can set up a trust for grandchildren either during your lifetime or in your Will, to operate after your death. There are however no longer any inheritance tax advantages for trusts set up for grandchildren in a Will; the Finance Act 2006 removed the previously generous treatment for such trusts.

Assuming you want to set up the trust after death (in order to keep control and use of your money in the meantime), the way to do this is to incorporate trust provisions in your Will. You can decide in advance at what age you want your grandchildren to inherit the funds, such as at age 21 or age 25, but it is more flexible if you leave this decision to your Trustees’ discretion, since they will be able to control when a young person should benefit from the funds and may be in a better position to judge whether or not the beneficiary is able to deal with a substantial sum of money and put it to an appropriate age. They can also control the fund by making payments on behalf of a beneficiary rather than to the beneficiary themselves.

A Trust Deed normally contains wide and flexible powers for your Trustees to invest the funds on behalf of the beneficiaries. Trust investments will vary according to the length of time which the funds may be invested for, but stocks and shares, investment bonds and National Savings are all popular trust investments. The Trust Deed also details exactly who the beneficiaries are, such as your grandchildren and remoter issue, but can name anyone else you wish, possibly beneficiaries such as spouses, step children and charities.

Any money or other investments put into a trust for grandchildren is subject to payment of inheritance tax, if it is in excess of your nil-rate band (currently £285,000). Thus, provided you have not used up your nil-rate band elsewhere (such as other lifetime gifts within 7 years of death), you can establish a trust after your death, of up to £285,000, for your grandchildren, without paying inheritance tax. During the lifetime of the trust, the funds will be subject to inheritance tax every 10 years and when funds leave the trust, but provided the fund does not exceed the nil rate band, no actual tax is payable (i.e. the fund is taxed at a rate of 0%).

If you would like to put money into a trust for your grandchildren, now or in your Will, seek specialist advice form your Solicitor.

Article complied by Elspeth Talbot.

Posted by on Nov 17, 2006

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