Leaving money in trust for grandchildren UK

Leaving money in trust for grandchildren UK, with families increasingly dispersed, relationships between individual members grow more diverse and leaving money in trust or grandchildren (UK) becomes more popular.

 

  • Discretionary trusts give ongoing decision-making powers to trustees
  • Assets may be protected from bankruptcy and divorce
  • Trusts may persist for 125 years

 

At the broadest level a trust describes an arrangement in law where property is legally held by one group of people (the trustees) for the benefit of another (the beneficiaries). Trustees owe a fiduciary duty of care to beneficiaries and must act in their interests.

 

The type of trust likely viewed as most attractive for the purposes of leaving money to grandchildren is the ‘discretionary trust’. This is an arrangement by which, beneficiaries may be named by the party making the trust, but which gives trustees discretion as to how the trust’s contents are put to their benefit.

 

These trusts may be created in life or created by a will on death, and persist for up to 125 years, rendering their life span long enough to accommodate multiple generations. At the heart of these trusts’ operation is the notion that beneficiaries lack an absolute right to assets held by the trust (only having the hope thereof).

 

Two broad aspects of these trusts render them attractive for gifting to grandchildren, firstly the discretion conferred on trustees allows them to react to prevailing circumstances (potentially decades from the time the trust is made). Secondly, the nature of arrangement means that assets are not legally included in the beneficiaries’ estate. This separation offers a potentially significant level of protection.

 

Regarding the former, the trustees’ ongoing power to make decisions allows them to protect trust assets from misfortunes which may befall beneficiaries, such as divorce, bankruptcy, profligacy, alcohol or drug abuse. Resources may be directed to one (of several named beneficiaries) in particular need at a certain time. Rights to occupy property may be managed or withheld. Money might be released over time as beneficiaries mature.

 

The absence of absolute rights to trust assets, on the part of a beneficiary, excludes them from means testing for care home fees or benefit applications. These assets are also afforded protection in bankruptcy or divorce.

 

Leaving money in trust for grandchildren UK

With respect to inheritance tax, property passing into a discretionary trust are taxed as normal on entry i.e. assets above the Nil Rate Band (NRB) are taxed at 40%. In the case of lifetime trusts, IHT can become payable in life. Subsequently, anniversary charges (of up to 6% of assets above the NRB) may be levied against the trusts every 10 years. Exit charges on distribution of a trust fund are also charged (these are calculated with reference to the period of time since the most recent Anniversary charge, the maximum exit charge being 6% of assets over NRB). Being relevant property trusts, gifts to discretionary trusts are not eligible for inclusion in Residents Nil Rate Band calculations.

 

Income above £1,000 from trusts is taxed at 45% or 38.1% for dividends. Recipients are then supplied with a certificate by which they can claim the tax back (if they do not pay tax or do so at the lower rate). Exemptions & allowances (half the CGT allowance for an individual is available to these trust) notwithstanding, CGT is payable by the trusts at rates of 20% for non-residential property and 28%for residential.

Nothing included in this article must be taken as advice on taxation or finance, you should seek advice on all such matters from a professional. If you would like to discuss the use of discretionary trusts in your will visit www.confidencewills.co.uk now and book a free consultation.