Cash clinic: Foreign citizenship no bar to setting up a trust for grandson

Published on Friday 20 November 2009 18:36

Q WE HAVE a one-year-old grandson who lives in the United States and is likely to remain there, as he is now an American citizen. But we would like to save money for him over the long term. Any ideas on the best way to do this? EB, Edinburgh

A Putting money aside for your grandson is a good way of avoiding inheritance tax (IHT). The simplest way to do this would be to open an account in his name, making it clear that it is held in trust for him. A declaration of trust to back this up would be helpful.

This would be a bare trust, which is essentially held to the order of your grandson, or his guardians acting on his behalf while he is under age.

If you would like to provide more protection for the funds, with a detailed remit, then it would be necessary to set up a more formal trust arrangement, under which you could set an appropriate age at which he would be entitled to the funds. This would require a specialised trust deed and would be more involved from an administration and tax perspective. You would have to weigh up the cost of managing the trust and its tax affairs against the benefits of clear management and control. Either way, it would be possible for your grandson to reclaim UK income tax, as a non-UK resident.

Your own IHT position would be the same, regardless of the fact that your grandson is an American citizen. If you are paying a lump sum, this would be a gift to your grandson or to his trust, and would become exempt from IHT were you to survive seven years.

However, if instead you want to make regular payments over time, perhaps a fixed amount each year, there are additional IHT advantages, in that once such a pattern is established, then the gifts would be fully exempt from IHT without having the seven year waiting period. In order to achieve this, it is essential to establish that you can comfortably meet the regular payments out of your free income.

With many other issues to consider, it is essential that you take legal advice before proceeding, especially in deciding the form of trust to take, or if a very large sum is involved. If the sums gifted are likely to take you above the threshold for IHT (currently 325,000), then there arises the possibility of IHT arising on the trust itself. You should seek specialist advice on these aspects.

&#149 Glen Gilson is a partner at HBJ Gateley Wareing

If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [e-mail].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.