Setting up a bare trust account for child

itwasntme001

Hello,

We are looking to setup a bare trust dealing acccount with AJ Bell.  Donors would be grandparents of the beneficiary (who is 5 years old).

Questions I have:

1) is it best to go to a solicitor to draw up the bare trust deed to make it bona fide a bare trust or is the aj bell form together with TRS registration good enough?

2) Any particular care needs to happen in terms of the trustees being set?  We are thinking of having one of the settlors (grandad) and me (uncle) and one parent as the trustees.  I imagine any income would be taxed on the child and the funds are on the child's estate?

3) We understand that the money can only be withdrawn and spent solely for the child's benefit.  AJ Bell allow withdrawals to a trustee's account to then be spend.  They do not ask questions on how it is spent, but what do we need to be careful of when spending this money and from which trustee can it be spent from, for example paying for child's school fees?  If the school fee bill is in the parents name, would the money paid say by the grandparent or parent or me as uncle be fine to settle the bill?

We obviously want to comply by the legal obligations of spending the money for the child's benefit only, and wondering how can this be done exactly, whether school fees are ok (it could be argued that the parents benefit by not having to pay the fees themselves) etc.

Thank you.

Keep_pedalling

I don’t think a bare trust is suitable for things like school fees and other things that the parents would normally pay for such as riding lessons.

I would also question the wisdom of putting money in equites when access is likely to be needed well before their 18th birthday. If part of this gifting is to reduce IHT then why not gift to the parents so that they can pay for these things? Gift a smaller amount to the child to be invested in a JISA so that they can splurge it once they reach 18.

itwasntme001

Keep_pedalling said:

I don’t think a bare trust is suitable for things like school fees and other things that the parents would normally pay for such as riding lessons.

I would also question the wisdom of putting money in equites when access is likely to be needed well before their 18th birthday. If part of this gifting is to reduce IHT then why not gift to the parents so that they can pay for these things? Gift a smaller amount to the child to be invested in a JISA so that they can splurge it once they reach 18.

Of course the sums required within a medium term timeframe would be invested in safe assets like gilts.

From what I read and have been told, the bare trust can be used for things like school fees, because it is of the benefit of the child.  But then I read somewhere else online on another forum think that the fees out of bare trust actually help the parents.

It would be good to get clarification on this and the rest of my questions from people knowledgeable and experienced in bare trusts.

poseidon1

I have considered your objectives on behalf of the child and I am assuming for this purpose that the sums to be gifted are in line with your separate thread on discretionary trusts  ( ie potentially up to   £300k per grandparent ).

 So assuming the amounts to be gifted are approaching this order of magnitude,  then answers to your questions  as they arise, follows: 

1 ) Short answer, yes to a solicitor drafted bare trust document.
Why so? Firstly, you have expressed the intention to potentially advance /utilise capital and income of the trust for the child's benefit during its minority. This in my view requires express trustee powers to do so.  

Secondly, A J Bell does not provide an all singing all dancing trust document that addresses trustees'  requirements in this regard. Their 'Bare Trust dealing Account application'  form merely has a sparse reference to an ' Election for a Bare Trust  ' at page 9 of the application form. A J Bell concede their ' Election' may not suit your circumstances ( it does not) and you should therefore seek appropriate professional advice before creating the trust.

Contrast this with Hargreaves Lansdown 's version   (download the pdf form at the bottom of the link below ). Their trust template extends  from pages 8 to 12 of the application form, with explanatory notes at page 7. This document package was evidently put together by a trust draftsman which impressively  appears to cover most eventualities in terms of likely trustee powers required over the life of the bare trust ( see especially clause 7 at page 9).Your solicitor may find the Hargreaves document a useful template or aide memoir.

https://www.hl.co.uk/investment-services/investing-for-children/bare-trust-account


Also note, both A J Bell and Hargreaves indicate, that a bare trust will have to be registered with HMRC within 90 days of creation. No doubt a task you may delegate to the solicitor dealing with the trust deed.


2) The choice of trustees seems to make sense at this point. Certainly inclusion of Grandfather (the settlor ) should ensure during his trusteeship, that he is satisfied  any funds advanced for the child's benefit in later years ( prior to age 18) is truly for the child's benefit. However, at the point Grandfather retires, is incapacitated or dies, one assumes you as the uncle will ensure the child's interests are properly protected in this regard?  Some forward guidance from the solicitor may well be helpful. In passing, I would venture the view  that since it was open to Grandfather to gift direct to his children monies to pay school fees, or pay them himself as they arise, I see no inconsistency or potential conflict where such fees are eventually met from the bare trust funds. Indeed he could include an expression of wish letter to that effect ( non binding of course) to accompany the trust document. Again all to be discussed with a suitably qualified solicitor.


3) This question, highlights the need for trust accounts preparation at the point advances are made for the child's benefit. Prior to that, A J Bell's statements , year end valuations and tax summaries will serve a dual function  of assisting in annual personal tax compliance  on behalf of the child whilst tracking the progress of the trust funds by way of investment growth, reinvested income and any  additional gifts.  Once advances are made in the future for the child's benefit, ideally payments should be made  direct from AJ  Bell to the service provider concerned ( private school, riding school etc). If AJ Bell's systems are not up to the task, then monies should be chanelled via  a dedicated trustee bank account, established for the purpose,  to ensure a coherent paper trail is in place should there be need to justify to the beneficiary how their trust funds have been  applied (for their  benefit ) during their minority. I think you can see the scope for future confusion if payments are instead passed through personal accounts of either  you, the parent or grandfather.


As you will see from the above, the intention of investing for the child via a bare trust with a view to later utilisation of funds for the child's benefit does create a fair amount of initial work  ( and perhaps costs)  to get the arrangement right, together with intial and future tax compliance and trust accounts administration to keep things on track. You may well become lead trustee in the fullness of time and possibly shoulder much of the work at inception, so a bit of an  unpaid  burden, and only worthwhile if substantial  amount at stake from outset.

Needless to say, if another grandchild comes along, they would be shut out from this particular trust, and Grandfather would need to establish another one. A point worth thinking about when sat with the solicitor, and germane to the discussion on your previous discretionary trust thread.

Having regard to all this therefore, investing in JISAs for the child eliminates all of the above points. JISAs cannot be the subject of a bare trust and therefore not registrable with HMRC on the trust register. Monies therein can only accumulate. By the same token, JISAs cannot be accessed by anyone but the child for any purpose, and devolves absolutely into their possession at age 18. 

 Perhaps a combination of the two  might be appropriate with  the JISA element effectively becoming an untouchable advance legacy for the child,  if much of the primary  bare trust funds is ultimately disbursed in future on  private schooling and the like?  Anyway, food for thought.

Reaper

I disagree with some of the answers above.

I would say a Bare Trust IS a good option for school fees because trustees have the ability to do this, as compared to a JISA where no money can be withdrawn.

I disagree a solicitor is needed to draw up the trust. The ability to remove money for the child's benefit is inherent. As long as you trust the trustees a simple Bare Trust is all you need. If a solicitor starts specifying what they are allowed to spend the money on you are back in discretionary trust territory.

The only issue is tax. With capital gains tax allowances shrinking the trustees should look to bed & ISA each year to make use of them, whereas that's not a problem with a JISA.

I also disagree paying school fees benefits the parents when everything they enact is to do with the child. Besides, the parents can certainly argue they are only enrolling a child in private education because the Bare Trust allows them to afford it.

With regards to money for the child being withdrawn via a parental bank account I also don't see that as a major issue. I have done so as a Bare Trust Trustee. The important thing is paperwork. Such as keeping a bank statement showing the money going in and a matching amount going out for the child. Also keep any letters/emails between trustees agreeing to the withdrawal.

A major advantage of Bare Trusts is simplicity and I see no need to complicate them.

itwasntme001

Reaper said:

I disagree with some of the answers above.

I would say a Bare Trust IS a good option for school fees because trustees have the ability to do this, as compared to a JISA where no money can be withdrawn.

I disagree a solicitor is needed to draw up the trust. The ability to remove money for the child's benefit is inherent. As long as you trust the trustees a simple Bare Trust is all you need. If a solicitor starts specifying what they are allowed to spend the money on you are back in discretionary trust territory.

The only issue is tax. With capital gains tax allowances shrinking the trustees should look to bed & ISA each year to make use of them, whereas that's not a problem with a JISA.

I also disagree paying school fees benefits the parents when everything they enact is to do with the child. Besides, the parents can certainly argue they are only enrolling a child in private education because the Bare Trust allows them to afford it.

With regards to money for the child being withdrawn via a parental bank account I also don't see that as a major issue. I have done so as a Bare Trust Trustee. The important thing is paperwork. Such as keeping a bank statement showing the money going in and a matching amount going out for the child. Also keep any letters/emails between trustees agreeing to the withdrawal.

A major advantage of Bare Trusts is simplicity and I see no need to complicate them.

Thanks for this.

I appreciate posidon1's comprehensive reply, but feel what he suggests is quite over kill.  So agree with what you say.  I do not think a solicitor would really add much to what is a pretty common trust setup and seems tried and tested - everywhere online it suggests that bare trusts can be used to pay for school fees, with only a handful of posts on various forums I have seen questioning this.

We intend to expressively make clear amongst the trustees, via emails, about any funds that are going to be spent on the beneficiary, stating exact amounts withdrawn for this purpose and corresponding invoices (if applicable) showing the same amount attached to the emails.  We also will have an "expression of wish" letter written somewhere by the grandparents as to the purpose of gifting the money, to include things like school fees and topping up JISA every year.

MY follow up questions are as follows:

1) is the concern around paying for beneficiary before 18 only challenged by the beneficiary himself once he turns 18?  So there can not be any other authority challenging or questioning payments made?

2) if the parent is made a trustee and sole receiver of funds from the bare trust account for spending on behalf of the beneficiary, would:

    a) the money be safe in the event the parents were to divorce/separate from his partner?

    b) it be better to have another trustee as receving the funds instead, and if so for what reason would it be better?

    c) it be ok for the parent to then pay things like schools fees, or would the school fees need to be paid direct from the bare trust account (I suppose by seting up a bank account the child's name)?

LHW99

To open a bare trust account at AJBell you need a reference which is obtained by setting up the trust itself at HMRC.

Reaper

Keeping things simple I believe you won't go far wrong if you are genuinely intending to run this for the benefit of the child and your trustees can be trusted.

On that second point some years back a Bare Trust beneficiary reported on this forum that a trustee had a falling out and went no contact. This caused a surprising amount of difficulty. They could not be replaced without their agreement and the investment company would not hand over control even when the beneficiary came of age.

I am not sure how it ended but I believe it had to go to court.

Reaper

Following on from my previous post it leads to another controversial benefit of Bare Trusts. When I set one up for my child the form said I could choose what age the child would get control. I queried this with the company but they confirmed they only release the money when the trustees authorise it, not automatically when the child reaches 18. So if it turns out that your child is spending everything on drink and drugs at 18 you could simply refuse to hand it over for a few years. The child can still get the money but it would take a court order to release it, and if they are that switched on maybe they are more responsible than you thought.

Highly controversial as I say since you are deliberately ignoring the rules.

itwasntme001

[Deleted User] said:

Reaper said:

Following on from my previous post it leads to another controversial benefit of Bare Trusts. When I set one up for my child the form said I could choose what age the child would get control. I queried this with the company but they confirmed they only release the money when the trustees authorise it, not automatically when the child reaches 18. So if it turns out that your child is spending everything on drink and drugs at 18 you could simply refuse to hand it over for a few years. The child can still get the money but it would take a court order to release it, and if they are that switched on maybe they are more responsible than you thought.

Highly controversial as I say since you are deliberately ignoring the rules.

Nothing controversial if you choose to do that when you set up the trust.  It just means it is not a bare trust for tax purposes. So you get into all the issues around it being a chargeable lifetime transfer (subject to limits), the trust paying income tax at 45%, what happens when income is allocated, ten year and exit charges, etc. 

What would be "controversial" is ignoring the tax rules that go with the decision you made 

But are you sure this would be the case?  Could it not simply still be a bare trust, and the child has the power, by legal means if necceassary, for the bare trust to operate as a bare trust, i.e. child getting access to all the money from 18?

Your previous post is appreciated, but you are comparing dodgy schemes and such to tried and tested bare trust accounts.  Is there actual court cases of bare trusts not actually being bare trusts, or money not actually being removed from settlors estates etc?

It seems to me farfetchd that bare trusts need to be very carefully thought out in the way we intend to use them.  Because many providers offer them and there does not seem to be anything online about being careful using bare trusts in this way.

This mse thread for example mentions about accessing the money before 18 to pay for the child's fees and no one questioned this at all, including Malthusian who seems very respectable and knowledgeable on this forum:

https://forums.moneysavingexpert.com/discussion/6437442/bare-trust-multiple-beneficiaries/p1

Everywhere I have seen it say that the funds can be spent if solely for the child.  Any argument against this suggesting it is actually the benefit of the parent who does not have to pay for it themsleves, implies that you literally can not spend anything on for the child.  I find that hard to believe given it is so widespread and commonnly held belief that money can actually be used to pay for school fees etc without issues.

Reaper

[Deleted User] said:

Nothing controversial if you choose to do that when you set up the trust.  It just means it is not a bare trust for tax purposes. So you get into all the issues around it being a chargeable lifetime transfer (subject to limits), the trust paying income tax at 45%, what happens when income is allocated, ten year and exit charges, etc. 

What would be "controversial" is ignoring the tax rules that go with the decision you made 

My understanding is Bare Trusts do not automatically end when the child reaches 18. If the child does not or cannot end it then trustees become nominees and are expected to carry out the beneficiary's wishes. 

I am not a tax expert but I see no tax issues. Whether the trust continues or not the proceeds are taxed as if it is the child's money (which it is).