Can I setup a trust for my children?
Our local solicitors for Wills know all too well that when making a Will it can be hard to think of what would happen if you died whilst your children or step-children are still minors; no one wants to think of leaving their children when they are still so young. However, it can happen, and therefore our expert Will drafters would also discuss with you when a child can legally inherit, and what options you have to protect their share of your Estate.
Below our expert Will drafting team have explained what an Estate is, when a minor can inherit from an Estate, and what this means for their inheritance.
What is an Estate?
A person’s Estate is made up of everything that they own at the date of their death, less any liabilities or debts that need to be paid out of the assets. For example, Mr A owns a property worth £200,000, has savings and cash worth £35,000, and has Premium Bonds of £15,000. His total Estate is therefore worth £250,000. In terms of debts and liabilities, Mr A has a credit card worth £5,000 and his funeral costs come to £3,000. His final Estate is therefore worth £242,000.
How old does a person need to be to receive inheritance?
Like a lot of other things in life, a child is classed as a minor until they attain the age of 18, and therefore, they cannot generally receive any inheritance until this age. This age limit is referred to under the Trustee Act 1925, and can be found in the Family Law Reform Act 1969.
There are some exceptions to this rule, for example, if a gift is left to a child upon them turning 16, however, if you want to make this kind of gift in your Will, you should always seek legal advice from an expert Will drafter to ensure that the gift is worded in the correct way. If it is not, it could create issues after you have died, with the gift.
How can I leave my Estate to my children?
If you want to make a gift to your children, or they are to be named as the beneficiaries of your whole Estate, you may decide to simply leave them everything, without specifying an age over 18.
If this is the case, it will depend on how old your children are when you die, as to what happens to your Estate.
If your children are over the age of 18, you may simply gift your Estate to them.
This is when a share of an Estate is left to any beneficiary, who is a minor at the date of death of the person leaving the share, and no specific age for the children to inherit is included in the Will. The money will be held by the Trustees for the child’s minority and, once they have turned 18, the money will be theirs to look after themselves, and any trusts come to an end. With this type of trust, the share of the Estate always belongs to the children, however it is held on their behalf.
Bereaved Minor Trusts
Where a Will leaves an Estate to children, on the condition that they attain the age of 18, this will usually create a “Bereaved Minor Trust”. This type of trust is also created if a child inherits under the Rules of Intestacy.
For the purposes of this type of trust, the child must be legally your own child or a stepchild, and would not include grandchildren, nephews, nieces or other minors who are to benefit under your Will.
18 to 25 Trusts
If you leave a gift or a share of your Estate to a minor upon them reaching a certain age, up to the age of 25, this can create an “18 – 25” trust. Again, only parents can create this type of trust for their own children or stepchildren. This type of trust means that the trustees are not obligated to pay the money to the children until they attain the specified age. In this case, the inheritance would not belong to the named children until they are the required age.
There are, of course, other trust provisions or methods of leaving your Estate to your children however, for the purposes of this blog, our expert Will drafters are only discussing the above trusts.
Will a trust effect Inheritance Tax payable?
Most types of trusts will have Inheritance (and other types of) tax implications. However, a Bereaved Minor Trust or an 18 – 25 Trust differs. Even if the value of the trust is over the nil rate band (currently set at £325,000 as of August 2020), there will be no assessment for inheritance tax when a distribution if made at age 18, or at ten yearly intervals during the period of the trust.
In an 18 – 25 trust, if a child over the age of 18 receives a payment from the trust, there may be a charge to inheritance tax if the trust fund exceeds any nil rate band. The charge will depend on how long after the age of 18 any payment is made.
For example, if a child receives inheritance at 21 years old, the tax rate would be 1.8%. At the age of 25, it would be 4.2%.
For more advice on whether inheritance tax is payable on payments made under a Bereaved Minor Trust or an 18 – 25 Trust, contact HM Revenue and Customs for advice.