A trust can be a helpful and tax-efficient method of investing for your children’s future education. Setting up education trusts for children is not a complex task, providing you seek professional advice, are clear on how it all works, and are aware of the personal obligations of the trustees.
What are trusts for children?
A trust for a child is a legal structure where assets are held by nominated persons (trustees), for the benefit of the child (the beneficiary).
The people who put the money into the trust (the settlors), are usually the trustees, which means they get to control how the money is invested, and are in charge of when and who will receive the benefits.
What are the benefits of education trusts for children?
Children under the age of 18 years are not normally allowed to hold investments in their own names. Whilst there are a few investment products specifically for children, such as Junior ISAs, these are generally limited in terms of how much can be put into them. They also tend to have less investment choices and access will usually be limited.
Trusts for children on the other hand provide a greater degree of flexibility, as well as more fund choices, easier access and better protection of the assets from potential issues that may arise in their adult lives, such as bankruptcy or divorce, for example.
Also, if you wish to make a financial gift to a child, using a trust means you can make one of a significant size during your lifetime, and in doing so reduce your estate for Inheritance Tax purposes after seven years.
What are the different types of trusts for children?
Child Trust Funds, now known as Junior ISAs, are one of the most common types of trusts for children. Whilst they are not technically trusts, they are still investment vehicles for children.
You can invest up to a set amount into a Junior ISA every tax year. Any gains or income are tax free for everyone. Once the child reaches 18, they take control of the investment and can move the proceeds into an adult ISA.
No access is allowed to the money until the child reaches the age of 18, which means if you are looking for education trusts for children, this type will only work if you are thinking about funding higher education.
Junior ISAs must be set up by the parent or guardian of the child, although others may make contributions.
Bare trusts for children
A bare trust is more flexible than a Junior ISA, especially where someone other than the parent or guardian of the child wishes to make contributions.
Income Tax and Capital Gains Tax on bare trusts are taxable against the beneficiary, however if the beneficiary is the child of the person who makes the financial contributions, and the income from the trust exceeds £100, then the income is taxable against the parent.
This means that anyone other than a parent can invest for the child’s future education, using the child’s Income Tax and Capital Gains Tax exemptions. These exemptions usually completely remove any tax liability, so even quite sizeable investments can grow without any tax deductions.
Bare trusts for children have no limitations on size, and the money can be accessed for the benefit of the child at any point leading up to their 18th birthday.
When it comes to education trusts for children, bare trusts are usually the most suitable, especially if paying for private school fees is the intention, and if someone other than the parent of the child is making the contributions.
However, it is important to be aware that, when they reach 18, the child can request the money from the trust to use for whatever reason they wish. So if your intention was to fund their higher education, then you may be better off with a discretionary trust, which will allow you to retain control of the money after the child’s 18th birthday.
Discretionary trusts for children
Discretionary trusts are more often than not used for larger sums of money, and usually allow for more than one potential beneficiary, sometimes from multiple generations of a family.
Who receives the money from a discretionary trust and when are at the discretion of the trustees. Funds can be held for up to 125 years and, due to the discretion of the trustee, the fund is usually protected if a potential beneficiary faces issues, such as bankruptcy or divorce, or they do not have the capacity or experience to manage the money responsibly.
Discretionary trusts for children are usually more complex to administer than bare trusts, and the tax charged on the income and growth can be higher, although with sensible investment choices and good planning, such issues can often be avoided.
How do I set up a trust for a child?
A trust deed is usually used to create parental trusts for children, and it is usually drawn up by a legal expert.
It is vital to take independent advice when setting up a trust. Everyone involved should be aware of the terms of the trust, and should understand their responsibilities. It is also essential that advice is sought on the most suitable investments to use so as to meet the terms of the trust, and reduce administration costs and tax liabilities.
Setting up education trusts for children – tailored advice from Partridge Muir & Warren
There are various types of trusts, and it is vital that you choose the one that best suits your circumstances and goals.
Her at PMW, our experienced trust and investment experts will ensure that all parties involved understand their obligations, that the right type of trust is used, and that suitable investments are chosen so that your children can draw maximum possible advance from the funds, with minimal tax liabilities.
To learn more about setting up trusts for children, you are welcome to get in touch.