Beware of setting up unnecessary trusts for children

6 Jul 2021 | Jenny Walsh

Parents making a will should beware of setting up unnecessary trusts for their children which could see them paying more in tax and place an administrative burden on trustees.

Experts at London law firm Osbornes Law warn that setting up a trust for your children, to come into effect after your death, is only worthwhile in limited circumstances, such as where you have a child who has disabilities or is otherwise vulnerable, or if your children might be expected to inherit a large amount of money at an age when they may not manage it well.

Jenny Walsh, a lawyer specialising in wills and trusts at Osbornes Law, says, “We see a lot of people coming to us convinced they need to set up a trust for their children. For many it is simply not worth the trouble and expense and is invariably not the tax break they think it is.

“We also see situations where beneficiaries to a will find a parent been advised to set up a trust where one really wasn’t needed, making it harder for them to access their inheritance and placing an unnecessary administrative burden on executors, trustees and the beneficiaries themselves.”

When under-18s inherit money, it is automatically held in trust for them until they reach their 18th birthday when it transfers to them. Usually, the trustees are a parent or guardian, and the trust is a default that does not need to be specified in your will.

There are circumstances where setting up a trust to come into effect if your children inherit money is worthwhile, or even critical. If you have a child who has a disability or is otherwise vulnerable and is not going to have the ability to manage their financial affairs once they are an adult, then you can set up a vulnerable beneficiary trust (VBT) overseen by trustees who have discretion as to how the assets are managed and used.

If you are very wealthy and your children are set to inherit large amounts of money, there may be a case to delaying them receiving their inheritance until they are 21 or 25 by setting up a trust to hold the money until they reach that age.

Jenny says, “There are situations where creating a trust is important, to protect a vulnerable person from misspending their inheritance or from being taken advantage of by others. If you child is set to inherit millions and you are concerned that at 18 they may make poor decisions with the cash, there is a case for keeping it in trust until they are older.”

Trusts are required to pay tax annually on their income and gains. In addition, trusts worth over the inheritance tax threshold of £325,000 are also subject to a further charge every ten years and when money is taken out of the trust, it incurs an ‘exit charge’ up to a maximum of 6% of the assets taken out.

A VBT is not subject to the same tax regime, provided it has been proven that the beneficiary qualifies as vulnerable.

Jenny explains, “Parents often get the idea that setting up a trust for their children will have tax advantages and protect them against inheritance tax charges. The reality is, that for those without large fortunes and years of tax planning behind them, trusts can have negative tax consequences, with beneficiaries losing money through fees, and trustees, who are usually unpaid friends or family, finding they have to take on the burdensome admin associated with managing a trust and ensuring all appropriate taxes are paid out.

“That being said, some trusts do have clear advantages and this is why it is important to take advice when preparing your will. An experienced solicitor will be able to advise you whether a trust is suitable and what the advantages and disadvantages may be.”

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