Trusts for Children
When you want children — your own, your grandchildren, or godchildren — to benefit from your estate, the question is rarely whether they should inherit, but when, and with what protection along the way. Eighteen is, for most families, too young to come into a meaningful inheritance outright.
The right trust gives the children the benefit of the money for education, growing-up costs and a sensible start in life, while postponing absolute ownership until they are old enough to handle it well.
The three trusts we use for children
The right structure depends on the size of the gift, who is making it (parent or grandparent), and the age at which the child should take outright.
SIMPLEST
Bare trusts
A bare trust holds assets for a named child until they reach 18, at which point they have an absolute right to the assets. Until 18 the trustees deal with the assets, but for tax purposes the income and gains are treated as the child’s from the outset (subject to the special rules where the settlor is a parent of the beneficiary, on which see below).
Useful where the gift is modest, the child is reasonably likely to be ready for outright ownership at 18, and the giver wants the simplest possible structure. Not the right answer where the inheritance is significant (handing a meaningful sum to an 18-year-old is rarely good for the 18-year-old), where the child has any vulnerability that would make outright inheritance risky, or where the giver wants any continuing say past the child’s 18th birthday.
A NOTE FOR PARENTS GIVING TO THEIR OWN CHILDREN
Where a parent gives assets into a bare trust for their own minor child, anti-avoidance rules in the Income Tax (Trading and Other Income) Act 2005 attribute the income back to the parent for income tax (with a £100 de-minimis per parent per child). Grandparents, godparents and others are not affected. We will tell you whether they apply in your case before we draft the trust.
VESTING AT 18, IN A WILL, TAX-EFFICIENT
Bereaved Minor’s Trusts (s.71A IHTA 1984)
Where the trust is created on death by a parent’s will and the child is under 18, a bereaved minor’s trust under section 71A of the Inheritance Tax Act 1984 holds the inheritance for the child until age 18, at which point the child becomes absolutely entitled.
The advantage over a standard discretionary trust is the IHT treatment. The trust is not subject to the normal relevant-property regime of 10-year periodic charges and exit charges, provided the strict statutory conditions are met (broadly, that the trust is created by a parent’s will, the child becomes absolutely entitled at 18 at the latest, and the trust assets are applied for the child’s benefit until then).
This is a useful structure for a parent setting up a will, where the family is clear that 18 is the right age for outright entitlement.
OUR MOST RECOMMENDED FOR PARENTS
18-to-25 Trusts (s.71D IHTA 1984)
For most families, 18 is too young. Section 71D of the Inheritance Tax Act 1984 allows a parent’s will trust to defer absolute entitlement up to age 25, with a more favourable IHT treatment than a standard discretionary trust:
- no 10-year periodic charges, because the trust is structured to come to an end at or before 25;
- a proportionate exit charge when the beneficiary becomes absolutely entitled, calculated by reference to the time between 18 and the actual age of vesting (no exit charge at 18, rising to a maximum at 25).
In practice this is the trust we recommend most often where parents want to delay absolute entitlement past 18 — typically setting age 21, 23 or 25 depending on the child and the size of the inheritance. We model the expected exit charge for you before you decide.
A 71D trust is only available where the trust is created by a parent’s will (or under the Criminal Injuries Compensation scheme); it cannot be used by grandparents or other settlors, who would need to use a different structure.
Choosing between the three
| If you want… | The right tool is usually… |
|---|---|
| The simplest possible structure for a modest gift | Bare trust |
| Inheritance to vest at 18, by a parent’s will, no periodic charges | Bereaved Minor’s Trust (s.71A) |
| Inheritance to vest later than 18 (up to 25), by a parent’s will, no periodic charges | 18-to-25 Trust (s.71D) |
| Inheritance for grandchildren with a delayed vesting age | Discretionary trust |
| Provision for a child or adult who cannot safely hold the assets even at 25 | Vulnerable beneficiary trust |
We will walk you through which of these fits your family before we draft anything.
Trustees
Trustees of a children’s trust have a real job — managing investments, making payments toward education and other costs, and keeping records for HMRC and ultimately for the child. We typically recommend a small mix of family trustees (often the surviving spouse plus a trusted relative) with a professional trustee for continuity. Where the family prefers, Clarke & Wright Trust Corporation Limited can be appointed for the long life of the trust.
What these trusts will not do
These trusts are designed to hold inheritance for children. They are not a route to:
- avoid foreseeable means-tested care charges of the settlor (deliberate deprivation under the Care Act 2014 / SSWBA 2014);
- shield assets from creditors of the settlor (Insolvency Act 1986);
- escape inheritance tax where the settlor retains the use or benefit of the asset (gift with reservation, s.102 Finance Act 1986);
- replace a properly drafted will.
Talk to us
If you would like to think through the right way to leave inheritance to children or grandchildren, we offer a no-obligation initial conversation.
📞 01743 387210
✉ info@clarkewright.co.uk
Nothing on this page is legal or financial advice. Trust law and the related tax rules are detailed and the right structure depends on your individual circumstances. Personal advice should be sought before acting.