CHILDREN’S PROTECTIVE TRUSTS
Planning for a Worse-Case-Scenario in Which You Never Live to See Your Child or Children Grow Up
Bereaved Minor Trusts
Clients with small children often realise the value of planning to provide those children with the financial support they would need in the event of the likely or untimely death of a single parent or both. We all know such tragedies occur. We all think they won’t happen to us but the graveyards are full of those who never saw their demise coming. Or thought about how to best provide for their kids in their absence. Hence the core purpose of children’s protective trusts (also known as ‘bereaved minor trusts’) is to prudently enable offspring to be beneficiaries-with-safeguards.
A trust will normally hold an entire estate after the demise of the single parent or both parents (for the record, this can include a step-parent), overseen by trustees whose responsibility it is to utilise capital or revenues to a child or children until they achieve maturity. This is often taken to be when the youngest is 25 (at which point they’d normally have earned a first degree or finished an apprenticeship). But it can, instead, be at 18 or 21.
Importantly there are implications in respect of that age, as far as inheritance tax is concerned. See below.
A children’s protective trust works in a discretionary way, that is to say that it should protect children from wasting funds or doing anything harmful (an example might be to refuse to pay for a ‘swim-with-sharks’ experience). So the trustees can say ‘no’ in the same way that parents could, would or might do. And they’ll ring-fence the funds.
Yet parents should not worry that, having passed on, they will have no lasting influence. The trustees are obliged to be guided in their decisions by ‘letters of wishes’. These often accompany wills; they are usually informal narratives from the parent or parents, outlining what they would prefer to occur.
How Does this Impact on Inheritance Tax, 10-Yearly Charges and Exit Charges?
There is no inheritance tax to pay if the assets are only intended for a bereaved minor and that minor becomes fully entitled to the assets by the time they’re 18. The child has to get the assets by the time they are 25 in any event. And for any beneficiaries aged between 18 and 25 inheritance tax exit charges can apply though 10-yearly charges will not.
This is all rather complex. Obviously! Yet a capable solicitor (like somebody at Goodwills) will be able to explain how it all works and advise you.
Teaching Kids to Be Responsible (in Your Absence)
The trustees act as guardians and will disburse funds to cover the costs of living, education and/or training, holidays, treats and more. Their approach has to be conservative in every sense, conserving what they can of the estate (since the balance is handed over when the offspring are deemed to have achieved adulthood) and conserving the child’s (or children’s) life, health, liberty, morals and more. So the trustees are, in a very real sense, in loco parentis – standing in for parents.
What Happens When Children Reach the Age of Majority (or Adulthood)?
The age of majority in most states around the world is 18 years. Children’s protective trusts might deem that to be the age at which the trust is effectively wound up, but arrangements may be guided by a number of considerations including how many offspring there are and not only their ages but the difference in their ages. Yet on a predetermined date each trust is inevitably wound up as the assets are handed to the hopefully-mature beneficiary or beneficiaries.
Saving Your Kids from Themselves
Of course not having parents can create enduring emotional, psychological, social, behavioural and even physical problems for children. Orphans are disadvantaged, no matter how much their parents loved them and provided for them. And part of the responsibility that trustees assume is to do their best as overseeing adults to keep their charges on straight and level courses.
With that in mind, if bereaved children encounter difficulties such as indulging in deviant or criminal behaviour, if they have marital difficulties or problems with drink, drugs or gambling, the trustees can temporarily – or even permanently – tighten the purse-strings to protect assets.
This protection means that, deprived of income, the children may be entitled to state or charitable assistance. And that would protect their inheritance.
Where Can You Find Out More about Children’s Protective Trusts?
You can find out more on children’s protective trusts at Goodwills though the British government’s website will tell you a little at www.gov.uk/trusts-taxes/trusts-and-inheritance-tax (yet sadly there’s not a lot of information there). Self-evidently this really is technically complex so, whilst children’s protective trusts are a great idea, anyone who is even thinking of setting one up should avail themselves of the expert help that’s available and which should be considered to be indispensable.