There can be a number of reasons why grandparents want to invest for their children’s future. Usually, the motivation is to help ensure they start their adult life off with a helping hand. However, reducing your own estate for Inheritance Tax Purposes can also be a nice added benefit.
One of the ways grandparents can get both of these benefits is by setting up a trust. This isn’t the only option available and when discussing ways in which you can invest for grandchildren and reduce your own estate, we will always consider all options available.
What are the benefits of putting money into trust?
Usually, it is control. If you put money into trust you can act as a trustee. In this role you have a say in how the invested money is managed and distributed in future. If doing this, we normally advise adding others as trustees in case something happens to you, and you need someone else to distribute the proceeds as you would wish.
Another element you can control is the timing of distributing money to your grandchildren. It might be for help with university fees, or to buy their first car or put towards a deposit on a house. You may not feel like you can trust them with a large amount of money before they need it or are mature enough not to waste it!
With other options like Lifetime ISAs, Junior ISAs and Pensions, the timing of when they can access the money is taken out of your hands – normally earlier than you would like in the case of Junior ISAs and Lifetime ISAs or too late in the case of pensions.
You may also want to create a grandchildren’s trust fund now, as it suits you to do so now, but perhaps there is likely to be more grandchildren to come along in future, and as such you can’t name all the grandchildren you want to benefit at this point. There is the option to create a trust that can facilitate future grandchildren being added.
For some people these can be quite compelling benefits, but what are the potential drawbacks?
With all types of trust you will need to live for 7 years from the point of putting money into trust, before it is completely outside of your estate. This is the same for gifting money outright, but you should be aware that putting money into trust does not shorten the time it takes.
With some types of trusts you will need to pay tax depending on the amount of money you put into them and if the trust is held for 10 years or more. These are the most flexible types of trust in terms of who can benefit from them, but with this flexibility comes potential tax consequences.
All trusts now need to be registered via the government’s Trust Registration Service web portal, irrespective of how big or small the trust is. Any future changes to the trust also need to be updated via the same web portal. This creates an administration burden that doesn’t exist for an individual holding money.
In addition, you need to find people who are prepared and capable to act as trustees. Not everyone wants this responsibility or fully appreciates what the role entails when taking it on. If you cannot find someone you know who is prepared to undertake the role, you will need to pay for professional trustees to fulfil the responsibility.
If there a tax liability arises in any year, for example if some assets are sold and a capital gain arises or dividends are produced over and above allowances, then you will need to file a trust tax return, in much the same way you would as an individual.
A trust has reduced tax allowances compared with that of an individual or a couple holding an investment.
As you can see from the list above, we believe there can often be more drawbacks than benefits to setting up a trust. Often trusts add complexity where it isn’t needed, and a simpler solution would work better on balance. That isn’t to say that a non-trust solution will always be perfect, but when all aspects are considered, we usually advocate more straightforward solutions.
That said, there are sometimes situations where a trust is suitable and if so, we will not shy away from recommending that a trust is set up. Should we do so, we will properly explain the benefits and drawbacks, as well as the responsibilities of all parties involved.
Gifting for grandchildren and estate planning are areas we cover with lots of our clients who this is relevant for. Should this be something you’d like to discuss or better understand, please get in touch and we’d be very happy to discuss this with you.
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