Money left to under-18s in will

poseidon1

MBenn80 said:

poseidon1 said:

Please note I was somewhat hesitant in posting this response to your query, especially given the modest sums in question. However Keep_ pedalling has supplied you with a link to the College  of Will Writing dissertation  on the subject of testamentary gifts to minors so hopefully what follows helps place your predicament as trustees in this context. 



The gift is contingent on each attaining age 21. Age 18 is irrelevant in this regard (therefore no bare trust ) , since if one or other  beneficiary fails to reach that age their gift fails and either accrues to the survivor or falls back into estate residue depending on any additional wording of the will. One would have hoped to have additional trustees' powers outlined in the will to further clarify your options during the contingent survival period but I suspect a complex trust was never intended in the 1st place.

This contingent gift therefore forms a trust, which on its face, each beneficiary has no entitlement either to income or capital of their trust funds until attaining the requisite age ( this is by operation of trust law ). This is unfortunate in terms of the tax treatment of income and  gains during the respective trust periods for which professional advice will be required. A particular point to explore is whether, inadvertently, these trust funds have been exposed to 10 year iht reporting obligations, and indeed may fall to be registered on HMRC' s trust register. 

However, since it is fairly certain that your mother would not have intended such complexities arising on what she would have thought was a relatively  simply gift to her grandchildren ( given the modest amounts) , one therefore tends to conclude a degree of bad drafting of the will may have occurred, which if drafted by a solicitor leaves a question mark as to whether they are the best source from which to seek further guidance.
 That said if a solicitor was in error, in my view the firm are duty bound to provide advice for no charge even if this means them having to refer the matter to an external specialist.

If this was not a solicitor drafted document, this situation highlights the pitfalls of self drafting or allowing a non specialist to devise wording on one's behalf.

Irritatingly much of the  above could have been avoided if the will had stated:

' I give £25,000  free of inheritance tax to each of grandchildren x and y at age 21'  - thereby removing the  survival contingency and changing the tax position of income arising .

alternatively 

'I give £25,000 free of inheritance tax to each of my grandchildren x and y absolutely '   - this would have establish a bare trust at age 18, a much more straight forward outcome!


As to investment of the trust funds, these trusts appear to be ideal candidates for the use of  life company investment bonds since these products produce no taxable income or chargeable gains during the investment accumulation period, and can be passed to the beneficiaries at their vesting age (21).
The beneficiaries can then use their personal tax circumstances to mitigate or avoid  income tax on the accumulated bond gains. However, there is the vexed question as to who would be the life assured since these are policies of assurance, so a question for an IFA. 

What is important to note however, if the trustees choose instead to invest in conventional income producing assets such income is likely  taxable at the trust rate of 45% , whilst any realised trust gains, only attract 50% of the normal cgt allowance. Clearly, an undesirable administratively burdensome and costly obligation on the trustees.


:

Thanks for that. Quite in depth a d some good advice about life company investment bonds. 

One question about tax. My understanding is that this would be a discretionary trust, and as such income would be taxed at 8.75% of dividend income and 20% of other income, though this could be reclaimed if below annual amount.

Also, the CGT has an annual allowance of £3k. Is this yearly?

Where does the 45% figure come from?

The tax rates you quoted relate to interest in possession trusts ( where beneficiaries have an absolute entitlement to trust income as it arises). As advised, this is not the case here where the grandchildren are entitled to be nothing unless and until they attain age 21.

The 45% tax rate on income does actually apply to discretionary trusts, and to the contingent trust you are burdened with. Yes, the tax is recoverable in whole or in part by beneficiaries  in the event income is distributed to them, but in the present case you as trustees have no discretion to distribute anything until the contingency age is attained.

Re CGT, trustees only entitled to 50% of the annual personal allowance ( ie just £3,000 for 2023/24), as you know the primary annual allowance reduces to just £3,000 going forward, with the trustees allowance a meagre £1,500 annually as a result.  

Have noted the will was prepared by a will writing firm rather than a solicitor.  Your unfortunate situation should  be a warning against using such services especially where provision for minors is point. There are very subtle nuances involved which many of these firms simply do not have the expertise to properly address.

However, since  I understand you will be consulting a lawyer , consideration could be given to seeing to what extent statutory powers of appointment and advancement under the terms of the 1925 Trustee Act might be imported into this arrangement to ameliorate some of the disadvantages stated. Make sure the lawyer you consult is a member of STEP ( Society of Trust and Estates  Practitioners). Not all solicitors who draft and advise on wills are necessarily STEP members. STEP has an online directory of members.

Best of luck!

Keep_pedalling

I am wondering if a deed of variation might be possible here. Obviously the children can’t do one, but if the bequest goes to named adults or falls back to the residual beneficiaries if a child dies before their 21st birthday they are in a position to make one. Such a change does not disadvantage the children, a question for the solicitor perhaps?

Malthusian

Keep_pedalling said:

I am wondering if a deed of variation might be possible here. Obviously the children can’t do one, but if the bequest goes to named adults or falls back to the residual beneficiaries if a child dies before their 21st birthday they are in a position to make one. Such a change does not disadvantage the children, a question for the solicitor perhaps?

I agree. The wording seems clear that if a child dies before 21, their £25k falls back into the mother's estate. So if the OP and sister are the residual beneficiaries and are in agreement, they can DOV it to change it to an absolute entitlement and a bare trust, because they are the ones who potentially lose out from that change.

If, in the event of one child's death, their £25k went to the other child, there would be little point, as you could only DOV the scenario where they both die.

Although both OP and sister need to agree, the sister is the main person who stands to lose out. If either child dies as it stands, she receives half the £25k, whereas if they are changed to absolute legacies, the OP would get all of it under intestacy.

MBenn80 said:

No, not a solicitor. But it was a professional will writer.

AKA an amateur with some made-up letters after their name.