Trust in trusts for the sake of your children

THE coronavirus pandemic has hit the elderly hard but has resulted in one unexpected consequence – it has concentrated the minds of parents and grandparents on how best to cascade money down the generations.

For, with the national debt soaring, incomes flat and the threat of rising unemployment there are tough times ahead.

But how best to pass sums along the line while minimising inheritance tax (IHT)?

A warning at the outset: If you think you are going to need all your money – for care costs in your old age, perhaps – then do nothing.

But if you are fortunate enough to have more capital than you require there are various means of benefitting children and grandchildren.

You could just give it away.

Gifts of capital up to £3,000 a year can be made free of IHT and unlimited gifts from your surplus income can also be made IHT-free – so long as you can show that these don’t affect your standard of living. Smaller gifts of £250 per person are also allowable. And you can give away as much as you like free of IHT if you keep the Grim Reaper at bay for seven years from the date of the gift.

A further option, which many have taken advantage of, is to open Junior Individual Savings Accounts which are long-term and tax-free. In the 2020 to 2021 tax year, the savings limit is £9,000.

But there is a third way in which grandparents can give money to grandchildren to help with the likes of school fees, university, weddings and house deposits – by setting up a trust.

With careful tax planning you can drastically reduce the IHT liability on your future estate. So more money stays in the family rather than ending up with HM Revenue &

Customs. There are many different versions, but two main types.

A bare trust is one where the beneficiaries, and their share, are specified at the outset and cannot be changed, sometimes a good thing given typical family tensions. For example, parents, not confident about the security of their child’s marriage, might fear that money they worked hard to save and pass to a grandchild could be dissipated in a divorce settlement. With a bare trust that can be averted.

With a discretionary trust, no-one is automatically entitled. It is for the trustees to decide who will benefit and when. They retain complete control over the trust fund, how it is invested and how it is paid out. It avoids handing over valuable property, cash or investments whilst the beneficiaries are relatively young or vulnerable. Albeit, when you set up a trust you decide the rules about how it’s managed.

For example, you could say that your children will only get access to the trust when they turn 25 – in contrast to a bare trust where the beneficiaries can demand the money at 18 to do with as they please. Or you could just leave it up to the trustees to exercise flexibility in choosing beneficiaries and the timing of payments.

However, what you must remember is that if you put things into a trust then, generally, they no longer belong to you. That is the downside. The upside is that when you die their value normally won’t be counted when your IHT bill is worked out.

And tax aspects can be complicated.

Choosing the type of investment held inside the trust is crucial to avoid unnecessary tax liabilities. Very careful planning needs to be carried out to make sure that tax traps are avoided.

In short, this really is one where taking advice is essential.

Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk The views expressed in this article should not be construed as financial advice