Trust in your Childrens Future

You don't have to be super-rich to set up a trust fund.

There is a myth that you have to be super-rich to set up a trust fund. This is most definitely not the case. There are many different types of trust that can be started with affordable sums, enabling you to provide your children or grandchildren with a financial start in life. You can also use trusts to safeguard long-term investments – and to save tax.

What is a trust?

A trust is a legal arrangement whereby one person (the settlor) gives assets to another person (the trustee) to be looked after for a third person (the beneficiary). When you put the assets into the trust, they are no longer legally yours. And this means you may be able to avoid paying tax on them. In fact, different trusts can be used to reduce inheritance tax, income tax and capital gains tax. Depending on the kind of trust you choose, you may also be able to control what happens to the assets either during your lifetime or after your death.

Which trust?

There are a number of different types of trust with different objectives and different tax treatments. And some are better than others for making a gift to a child. So to work out which might suit your purposes, here's a quick description of suitable trusts for parents' or grandparents' gifts.

Absolute trusts

These trusts, also called bare trusts, are simply a way of giving the assets to the beneficiary while he or she is too young to hold them personally. An asset can be held in a bare trust until a child is 18. You could also be the trustee, with the sole duty of handing the asset over to your child when he or she is old enough to receive it. But once your child is 18, he or she can demand the asset.

Interest in possession trusts

These are trusts where a specific beneficiary is given the right to receive a certain benefit, and can demand that benefit from the trustees. There are variations on this theme, and some kinds of interest in possession trusts give the trustees more flexibility than others.

Discretionary trusts

These are trusts where the trustees have the power to decide who receives what, and when. So trustees may decide not to give benefits to anyone for a period, or to add new beneficiaries. Beneficiaries cannot claim income or capital as of right.

Accumulation and maintenance trusts

These are some of the most commonly known types of trust. Before the beneficiaries reach the age of 25, the trust can be managed at the trustee's discretion, using either income or capital to assist one or more of the beneficiaries for purposes such as education. If the money is not needed, it can be accumulated (hence the name). But at least one of the beneficiaries must get either the trust capital or the income as a right by the time they are 25.

Choosing a trust

You can use our flow diagram as a guide to help you assess which type of trust might be suitable for your child or grandchild. Work your way through the questions, following the arrows.

Tusts are worth considering as a way of making investment gifts to children, providing financially for a minor child and ensuring assets pass to your intended beneficiaries at an appropriate time. If you would like to discuss how setting up a trust could be suitable for your own situation, please e-mail or contact us to arrange a meeting.

Do you want to set up a trust fund for your own minor child?

Do you want to be able to change the beneficiaries in the future?

Do you wish to restrict the time at which the beneficiaries become entitled to Income/capital?

An absolute trust may be appropriate.

YES

Take advice on tax-efficient investments.

An accumulation and maintenance trust will be appropriate where the right to income and/or capital will not exist until a chosen time between 18 and 25

Is it likely that income will be required for the child's benefit before the child is 18?

Consider an accumulation and maintenance trust or an absolute trust (an absolute trust could offer additional tax advantages if the right to income is granted at the outset but income/capital is not payable to the child until after age 18).

YES

Do you want the child to have a right to income from the outset?

Consider an interest in possession trust (with power to appoint capital) or an accumulation and maintenance trust where income can be applied for the child's benefit.

YES

Do you want the child to have the right to income at a chosen time from age 18 but not later than 25?

Consider an accumulation and maintenance trust where the income entitlement is given between ages 18 and 25 (but income can be applied for the child's benefit before then).

YES

Consider a fully discretionary trust (but remember that putting in more than £234,000 could count as a taxable transfer).

Trust and taxation advice are not regulated by the Financial Services Authority . The past is not necessarily a guide to future performance. Levels and bases of, and reliefs from, taxation are subject to change. Tax reliefs referred to are those currently applying and their value depends on the circumstances of the individual investor or fund involved. The value of the units in these investments, as well as the income from them, can fall as well as rise. These investments are intended as long-term investments. If you withdraw from these investments in the early years, you may not get back the full amount invested.