Using Trusts to Plan Inheritance for Grandchildren: Strategies for Grandparents
Trusts for grandchildren
Trusts can be divisive where they are misunderstood but, in essence, trusts offer a means of making a gift but retaining control over money before it is received by a recipient. The existence of that control introduces some scope for tax and estate planning for grandparents.
There are competing elements when helping grandchildren; the availability of funds with which to help, the age, nature and maturity of the grandchildren, the future planning required and the amount of control or input required by grandparents.
The best Inheritance Tax planning for grandparents could be achieved by making large gifts to grandchildren early on but this is rarely the approach used because it would leave younger people with a lot of money early on – that could affect any assessment on their funds for educational fees and it could also just be frittered away. Some grandparents will gift to their children to control the money instead but that now leaves money with children that could end up being used in a divorce for instance and not find its way directly to the grandchildren.
Making smaller more regular gifts is a common approach because it can be easier to find funds and they are more likely to be spent where needed rather than frittered. From an Inheritance Tax planning perspective though, this might allow grandparents to use the relief for ‘regular gifts from excess income’ but it will not help those with capital assets that they want to gift early. The risk here is also that if the grandparents lose capacity, the gifts may have to stop and that could be at just the wrong time for the grandchildren’s education.
This is where a trust can now offer effective compromises. Grandparents can make big gifts early if they are able; within the Inheritance Tax allowances, trusts can be settled without a tax charge. The money in the trust can be invested to grow and only distributed to the grandchildren as, and when required. This mitigates all of the risks of gifting to a grandchild too early whilst still achieving the same inheritance tax advantages of making large gifts early on.
Trusts are also useful receptacles of regular small gifting. This is particularly helpful where grandparents want to make provision for grandchildren earlier in life, whilst they are still working or perhaps have good pension income. Trusts can be set up even before grandchildren are born and receive regular small gifts from grandparents. These can be invested and grow over time whilst offering an immediate inheritance tax benefit to the grandparents. Then, when the grandchildren need the money in the future, it is ready and available for them.
With trusts, the trustees are in control of the funds. An advantage for grandparents is that they can appoint their children as the trustees so that they can manage the trust and control distributions without the grandparents having to get involved with the day-to-day management of this.
With the right understanding and advice, trusts can be used very effectively for inheritance tax planning and to look after grandchildren but they come with their own compromises – legal and tax advice should always be sought before embarking on creating a trust which introduces a modest expense; the greatest problem that we see in practice is people with trusts that were set up without proper advice and there was a clear lack of understanding exactly what a trust is and what it is not. Trusts also have their own tax compliance regime so there can be ongoing expenses to file tax returns – every year for income and capital gains, every ten years for inheritance tax and also potentially when assets are distributed.
For further information and to arrange a Complimentary Initial Consultation with one of our team, please contact us on 0800 999 4437 or click the link below to arrange your consultation via our website.
