Gibson Kerr: inheritance trusts for children

When we hear talk about ‘trusts’ the word often conjures up thoughts of trust funds and inconceivably wealthy children who take gap years and never need to do a day’s work in their lives.

Trusts are often seen as an effective way both to put limitations on children's access to any early inheritance and to minimise inheritance tax payable by children

It’s true that trusts are typically seen as the preserve of the wealthy but they are actually used by a lot of us ‘ordinary’ families too and there is a good reason for that.

Despite seeming complicated to most, setting up a trust is an incredibly useful way to help keep control of more of your money or assets while you are passing it on for the benefit of children or grandchildren, ensuring it comes to them when they are in need of it and able to deal with the responsibility and potentially minimising tax liabilities for your family to pay after your death.

What is a trust?

A trust is a legal structure – a sort of ‘legal wrapper’ – that allows you to set aside an amount of money and appoint someone you trust to manage it for the eventual benefit of someone else.

One of the advantages of this is that you know that children (or grandchildren) don't end up having access to a large sum of money before you think they're responsible enough to manage it.

Instead, the trustees (the people managing the trust – which can include you) can choose how money contained in the trust is managed until the beneficiary (your child for example) reaches their 18th or 21st birthday for example.

A trust also allows rules to be put in place. The trustees can only use the money or assets within the ‘rules’ that you have set out in the trust deed. This may be that the funds can only be used for education or business purposes until the beneficiary reaches a certain age when it can be paid over to them outright. A charity trust could also be created, for instance, to pay financial support to exceptional scholars or only to pay out if the beneficiary meets certain criteria.

Trusts can also be used to protect money and assets for beneficiaries who are vulnerable in some way, possibly through an illness or disability, or for beneficiaries who struggle with issues like gambling or drug addiction. They can also be used to protect family wealth and business assets – for instance from claims by a child’s spouse during a separation or divorce.

Trusts are often seen as an effective way both to put limitations on children's access to any early inheritance and to minimise inheritance tax payable by children. While tax benefits are seen as a secondary motivation for setting up a trust, they are still an important factor.

What is inheritance tax?

Inheritance tax (IHT) is tax which is payable on an estate when someone dies. In addition, IHT is payable on certain transfers made during a person’s lifetime – gifts and trusts made up to seven years before death are still included in your estate for IHT purposes – so last-minute planning might not be effective.

It’s worth noting that not all estates have to pay IHT. The current basic inheritance tax threshold is £325,000 (£650,000 for a married couple), so if you don’t have an estate to that value you should be fine. There is also an extra IHT threshold for a family home being passed down to your direct descendants, which is currently £175,000 each (£350,000 for a married couple).

How do I know if setting up a trust is the right move?

Setting up a trust is a complicated legal procedure and it’s always best to discuss your options with a solicitor before deciding. For many, the benefits of setting up a trust are clear and people like to have the peace of mind that their money will go to the people they love at the right time, while minimising the effect of Inheritance tax on it.

At Gibson Kerr, our legal experts have many years’ experience in setting up trusts for families and can advise you on the best course of action. Get in touch today for a no-obligation chat about your estate planning on 0131 226 9162, or visit www.gibsonkerr.co.uk for more information.