Creating trusts for children and grandchildren
Following in our series of articles in relation to trusts, this article comments on the creation of trusts for children and grandchildren, when they may be appropriate, and some of the pitfalls that may arise—including a provision which relates to the recent resignation of Deputy PM Angela Rayner.
What are trusts?
Trusts are essentially a mechanism to allow someone to make a gift, but also to control that gift in some way. We use the term ‘control’ with trusts a lot and, whilst there are often connotations around control, it is usually entirely appropriate for many circumstances.
A child or grandchild may be too young to deal with substantial sums, or be affected by some issue that means they are less likely to make appropriate choices, or choices that a parent or grandparent would wish for them to make. Children with disabilities or addictions for instance may need support and guidance in the application of funds, which is where a trust can be used to great effect.
Similarly, where someone wants money to be used in a particular way, such as only for education or the purchase of a property, a trust can provide that protection and comfort.
What do I need to create a trust?
Whilst the concept of a trust is reasonably simple, there is a lot of detail and planning that goes into their creation. One of the most important considerations for a trust is the identity of the ‘trustees’.
These people are those who are appointed to look after the trust, to fulfil all of the tax and compliance obligations, and usually to make decisions over the payment of the trust’s assets to the beneficiaries. The identity of the trustees is something to take very seriously, as they should generally be people who are trusted absolutely to be responsible with the trust’s funds, and to make decisions in the same way as the parent or grandparent who has created the trust.
As most trusts of this type can technically persist for up to 125 years, it can be important to consider the longevity of the trustees; and also the type of relationships that may exist between not only the trustees (as we would usually suggest having at least two and no more than four), but also between the trustees and the beneficiaries.
Some people have trusted friends and relatives to act as trustees, but many do not. For those who do not, the appointment of professionals is often a reassuring approach, because professionals are far more likely to take care with a trust and to follow the wishes that are left. As professionals are paid for their time and cannot benefit from the trust, they provide a greater degree of confidence than trustees who are also beneficiaries.
We also offer the security of a Trust Corporation, which may be appointed to act as a trustee and is able to provide far more continuity than appointing an individual.
What do I need to know about tax?
Tax on trusts is an extremely complex topic, and far outside of the scope of this article! We provide individual advice, as small changes in circumstances can have wide-ranging implications for the tax on trusts.
In the main, however, we consider four primary taxes with trusts:
Inheritance Tax
This is a tax on gifts and, as the creation of a trust is a gift, is often the tax discussed first of all when creating a trust. Gifts from ‘excess income’ into trusts can be a very effective planning tool.
Income Tax
Something with which we are all familiar! Trusts are taxed on their income, but they are generally taxed at the very highest rates. There are different rules for trusts created for those who qualify as ‘disabled’ under the legislation, and there are pitfalls when created by parents for their own minor children.
Income tax on many lifetime trusts can be relatively complex, and many trustees choose to appoint accountants to file tax returns for them.
Capital Gains Tax
Capital Gains Tax is a tax on the increase in value of capital assets. While it is similar to income tax for individuals, trustees usually pay this tax at a higher rate.
Stamp Duty Land Tax
Stamp Duty Land Tax is a tax on the acquisition of land and, as Angela Rayner has discovered recently, is complex in its operation. Different types of trusts will apply this tax differently and the outcomes can vary dramatically depending upon the circumstances.
In many cases, the higher rates of Stamp Duty Land Tax will apply to properties within trusts but, again, there are different rules for qualifying beneficiaries and trusts, such as those set up to allow occupation of a property.
What are the pitfalls?
As with any gift, once it has been made it cannot simply be reversed. This is a common question we are asked (“can I change my mind later?”), to which the answer is always the same. The same is true of “If you make a gift to a friend, can you undo the gift later?”, with the answer usually being “only if they choose to give that gift back to you”.
The difficulty with trusts is that, if the trust is able to benefit the person who set it up, they are generally taxed less favourably. This is because the trust could be used to ‘shelter’ assets, and this is generally frowned upon by those in government.
Owing to this ‘self-settlement’ limitation (whereby gifts into a trust that can benefit oneself are taxed less favourably), if a parent gifts into a trust for their own minor children or spouse, the same rules apply. Minor children and spouses are so closely connected to someone that the tax provisions still treat such a gift as benefitting the person who created the trust. We typically address these issues by ensuring that children (who are not ‘disabled’) cannot benefit whilst they are under 18.
It appears that these ‘self-settlement’ provisions were the cause of the issues for Angela Rayner, as they can treat the settlor as still owning the assets that are held by the trust – potentially even where the settlor has no direct benefit.
Trusts for grandchildren are however not treated the same way, and grandparents have more flexibility when creating trusts for education and house purchases, something which can be very effective.
Should I make a trust?
Having read the above, if you can see the advantages to having a trust for your child or grandchild, then we would be delighted to help. We will run through the specifics with you, and provide clear and understandable advice that’s tailored to your circumstances.
We invite you to take advantage of our complimentary initial consultation & speak with one of our legal experts today to discuss your needs, and find the best solutions for your situation. Call us at 0800 999 4437 or click on the button below – we look forward to assisting you.
