If you are planning to set aside money for the long term future benefit of your children, you may want to consider a trust fund. In this blog, Acumen talks you through the various options available, as well as their strengths and weaknesses.
A trust is basically a way for a group of trustees (who could include you) to hold investments or other assets for the benefit of some other people, known as beneficiaries. Using a trust can also assist inheritance tax planning by allowing you to transfer the assets outside your taxable estate. A trust can also control when the children have access to the funds.
There are several types of trust, with different tax and legal characteristics. Here we explain the different advantages and drawbacks of the two main kinds of trust funds.
The difference between Bare Trust and Discretionary Trust
Bare trusts, also know as simple or absolute trusts, are the most commonly used trusts for gifts to children. The beneficiary – in this case the child – is absolutely and immediately entitled to the income and capital held in the trust. The assets are held in the name of the trustees, who manage and make decisions about the trust until the beneficiary reaches the age of 18 in England and Wales or 16 in Scotland. At this point beneficiaries can demand that trustees transfer the trust fund to them.
With Discretionary trusts the trustees can decide how much income and/or capital each beneficiary should receive and when. Discretionary trusts are sometimes used to provide for future needs that might not yet have developed or for beneficiaries who are not capable or responsible enough to deal with money themselves.
Bare trusts are generally more tax efficient than discretionary trusts, but are rather rigid and inflexible. By contrast, discretionary trusts often involve additional tax costs, but provide greater flexibility. In particular, an important advantage of discretionary trusts is that you do not have to pass over assets to children when they reach the relatively young age of 18 (16 in Scotland).
Trusts can help to ensure your money is used in the ways you intend for the benefit of the children or grandchildren. However, they do not necessarily reduce overall tax liabilities and in some cases a trust might increase the amount that has to be paid. Which is why it always worthwhile to discuss your options with an Independent Financial Adviser.
How Acumen can help
Planning for your child’s future is one of the most important things you will ever do and we are here to advise you about the best way to achieve your aims and to help ensure that your investments produce the outcomes you want for your children. We can help in a range of ways. We are very willing and prepared to work with your other professional advisers.
The scope of our work can include:
- Comprehensive financial planning for your family’s finances and estate planning.
- Investment planning for yourself, your family and any trusts, from asset allocation to investment selection.
- Inheritance tax mitigation.
- Advice on the choice of appropriate trusts.
- School fees and other educational costs planning.