Trusts for bereaved children and young people
Posted on 29th December 2020
If you make a gift to a young person in your Will which they receive when they reach a certain age you will create either a bereaved minor’s trust or a bereaved young person’s trust, depending on their age.
A bereaved minor’s trust
A bereaved minor’s trust is created if you make a gift in your Will to your children on the condition that they reach the age of 18.
These trusts can only be created for your children or stepchildren. A grandparent, for example, can’t create this type of trust in their Will for their grandchildren.
The following conditions must be met:
at least one of the child’s parents must have died
the trust must have been created by a parent’s Will, intestacy, or under the Criminal Injuries Compensation Scheme
the trust must meet inheritance tax (IHT) conditions so that the child becomes absolutely entitled to the trust assets no later than their 18th birthday and, before then, the child benefits from any capital growth and income generated.
While the child is under 18, money generated by the trust can be saved or used for the child’s maintenance, education or other benefits. Trustees can therefore use any income and capital directly for the child or by paying the child’s surviving parent or guardian.
Taxation – this type of trust isn’t subject to IHT, even when the child reaches 18. However, new trusts will be considered ‘relevant property trusts’ unless they qualify as 18 to 25 trusts, for example.
A bereaved young person’s trust
A bereaved young person’s trust is sometimes called an 18 to 25 trust. It is created if you make a gift to your children in your Will that they will receive when they are above 18 but below the age of 25. This type of trust must meet the same conditions as a bereaved minor’s trust and can be managed in the same way while your child is under 18. Once your child reaches the age you have specified in your Will, which can be no later than 25, they will inherit the assets you have left for them.
Taxation – in the same way, these trusts aren’t subject to IHT when the child is entitled to capital at 18 or younger, if they die before they reach 18, if it becomes a trust for bereaved minors while your child is under 18 or the trustees advance assets for the benefit of your child at or under 18.
However, in other cases there will be an exit charge when your child is between 18 and 25, which is calculated in a similar way to an exit charge from a relevant property trust.
The maximum rate of charge is 4.2% for assets that are above the nil rate band but there won’t be a ten-year anniversary charge during the trust period.
If you would like to know more about trusts for bereaved minors and young people, please get in touch.
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