Setting Up Bereaved Minor Trusts & 18-25 Trusts

Setting up bereaved minor trusts and 18-25 trusts is a crucial step in ensuring a child’s financial security after the loss of a parent, as these trusts are established to manage a deceased parent’s estate for the benefit of their child.

These trusts are specifically designed to manage and protect the parent’s estate, ensuring that the money and assets left are used for the child’s benefit.

This article will be your guide through the entire process, taking a close look at the legal requirements & trustee duties that will help you manage these trusts effectively and ensure a child’s financial needs are always met.

Key Takeaways

Bereaved Minor Trusts keep providing financial support for kids until they reach a particular age specifically 18 at which point the beneficiaries become absolutely entitled to the trust assets. 18-25 Trusts extend this support up to a particular age of 25, allowing beneficiaries more time to learn how to properly manage assets before becoming absolutely entitled. And let’s not forget about Bare Trusts – they’re a no frills setup where assets are held by the trustees for the beneficiaries, who become absolutely entitled and get full control when they hit the particular age of 18.
To set these trusts up, you’ll need a will or a Deed of Variation, and you’ll need to make sure you comply with the Inheritance Tax Act 1984.
Trustees play a huge role in managing trust assets, keeping an eye on tax regulations, and making sure the beneficiaries get what they’re entitled to, all as laid out in the trust deed.

Understanding Bereaved Minor Trusts and 18-25 Trusts

Bereaved Minor Trusts and 18-25 Trusts are a lifeline for children who have lost one or both parents they provide the financial support and stability that a child really needs during a tough time. A Bereaved Minor Trust is:

Set up for a minor child, with the assets and money left by the deceased being held and managed by the trust until the child inherits it at age 18.
Can benefit the deceased’s own kids or step-parent, so their financial needs are taken care of.
Allows the assets in the trust to be built up or used to cover the child’s living costs, education or other benefits.
Offers a flexible way of giving support.

When a child inherits through these trusts, the process is governed by trust law, which ensures the assets are managed and distributed according to legal requirements.

An 18-25 Trust, also known as a bereaved young person’s trust, keeps managing assets and any money left until the beneficiary reaches 25. This kind of trust can only be set up through the parents’ will, or via a Deed of Variation that meets certain legal conditions. The main difference between these trusts is how long they last and when the beneficiary gets control of the assets.

Guardians and trustees need to understand just how important these trusts are? they’re not just about managing money, they’re about making sure a child has a secure future after losing a parent. And they provide a legal way to protect a child’s inheritance and make sure the assets are used responsibly.

Compared to other trusts, Bereaved Minor Trusts and 18-25 Trusts have unique features designed specifically for children who have lost parents, offering specific protections and tax advantages under trust law.

Key Legal Requirements

Setting up Bereaved Minor Trusts and 18-25 Trusts means understanding all the legal requirements:

Only the deceased’s own kids or step-kids can benefit from these trusts – not their grandkids.
A Bereaved Minors’ Trust needs to be set up through a will that clearly sets out how the child’s inheritance will be looked after.
The assets placed into the trust are considered settled property, and the trust has to comply with the Inheritance Tax Act 1984 for inheritance tax purposes to avoid any tax problems.

Trustees are super important in managing these trusts they should be trustworthy and know their stuff when it comes to money. Their job is to manage the trust assets and make sure they’re used for the child’s benefit like paying for education or healthcare expenses.

Trustees have to keep a record of all transactions and file their tax returns so they’re in compliance with the law.

Tax Treatment of Bereaved Minor Trusts and 18-25 Trusts

Guardians really need to understand how these trusts are taxed. The rates mentioned apply to income tax on gross income, including gross non dividend income. For the 2023-2024 tax year, gross non dividend income over £1,000 is taxed at 45%, while income not exceeding £1,000 is taxed at 20% & 8.75%. Trust dividends are taxed at 39.35%. Tax rates and thresholds may change each tax year, so trustees should check the latest figures.

Bereaved Minor Trusts receive favourable tax treatment because they’re not subject to inheritance tax charges when the minor gets their entitlement or if they die before getting it. Plus, a Vulnerable Persons Election can qualify the trust for special tax treatment, so the trustees only pay as much income tax as the property would have paid out for the benefit of the child.

For capital gains tax purposes, if trust assets are disposed of or transferred, the trust may be liable for capital gains tax, so it’s important to consider this in estate planning.

It’s a good idea to get expert advice to navigate the tax implications of different trusts – understanding tax treatment can make all the difference in making sure trust funds are used to the child’s best advantage.

Setting Up a Bereaved Minor Trust

Setting up a Bereaved Minor Trust starts with drawing up a will that includes provisions for the trust, specifying how the assets should be applied for the benefit of the child, including for the child’s maintenance. This ensures that funds can be used to support the child’s living expenses, education, and overall welfare during the trust period, providing a safety net and making sure the assets are managed responsibly until the child is an adult.

Choosing decent and financially savvy trustees is vital – they can be:

Family members
Friends
Professionals

Trustees have the job of managing the trust assets, investing wisely, and using funds for:

The child’s education
Healthcare
Living expenses
The child’s maintenance.

Solicitors can help draw up wills that include trust provisions – they’ll make sure the trust is set up correctly and complies with the law, giving everyone involved peace of mind.

Setting Up an 18-25 Trust

An 18-25 Trust or a trust for a bereaved young person – is set up when a testator writes in their will that a gift for a child is meant to kick in between the ages of 18 and 25. The trust period for an 18-25 Trust lasts until the beneficiary turns 25. This trust gives a longer window of financial control compared to a Bereaved Minor Trust but could mean you incur exit fees if you move the cash to the beneficiary before they’re 25.

Setting up an 18-25 Trust entails:

Writing a will (or Deed of Variation) that lays out the trust rules.
Finding trustworthy Trustees to manage the trust funds.
Making sure the trust money is available for the beneficiary till they hit 25.

Getting the right Trustees is vital, they’re the ones who will be in charge of the trust – and they need to be up to the job of managing the finances, making smart investments and using the cash responsibly. During the trust period, trustees pay any taxes due, such as Inheritance Tax, and handle all tax obligations related to the trust.

Managing Trust Money and Assets

The job of the Trustees is to make sure the trust is working the way it was meant to. This means:

Being super careful with the trust fund and managing the assets within the trust.
Spreading the income or capital so the beneficiary benefits until they reach 25.
Coming up with an investment plan that fits both the beneficiary’s needs and the trust’s financial goals, while preserving and growing the trust capital.

Spreading your investments can help protect against risks and get a more stable return. Keep a record of every transaction to make sure the money is being used as planned.

Trust management can get really complicated, so having a pro on hand can be a real help. A professional advisor can make a big difference in how well the trust is run, keeping the beneficiaries safe and supported.

Distribution Rules and Beneficiary Entitlements

The rules for when and how the trust money gets to the beneficiary are set out in the trust deed. When the child reaches the age of 18, the Bereaved Minors Trust money gets handed over, and the child becomes absolutely entitled to the trust assets. At this point, the beneficiary becomes absolutely entitled to both the capital and any accumulated income held in the trust.

In an 18-25 Trust:

The Trustees have to make sure the beneficiary becomes absolutely entitled to the money by the time they’re 25.
The trust deed sets out the rules for how and when the cash gets to the beneficiary, including any accumulated income.
All this is supposed to help the beneficiary understand when they can get their hands on the trust money.

It is a good idea to keep the beneficiaries involved in the process – and to make sure they know exactly what’s going on and when they can expect to get the cash.

Inheritance Tax Implications

When it’s time to sort out the inheritance tax, the people setting up the trust need to know what they’re getting themselves into. Bereaved Minor Trusts don’t get hit with an IHT charge when the money gets handed over at 18—and the same goes for 18-25 trusts. However, a chargeable event occurs when assets are distributed or the trust is wound up, which can trigger tax paid calculations.

18-25 trusts have the following tax rules:

No ten year anniversary charges apply.
An IHT charge or exit charge may apply if the trust fund exceeds the nil rate band or when assets leave the trust.
Exit charges are calculated based on the value of relevant property within the trust.
The size of the bill depends on when the money was paid out.
Residential property and other assets within the trust are considered for inheritance tax purposes.

Getting the trust set up under the Inheritance Tax Act of 1984 avoids any nasty tax surprises when moving the cash around. Relevant property trusts are subject to different rules and charges for tax purposes, including periodic and exit charges. Understanding these tax implications—and the advantages of putting property in a trust lets you plan ahead and avoid any nasty surprises.

Tax Reports and Compliance

Every year, the Trustees have to send off all the forms to HMRC to get the trust tax reporting sorted. Trustees must report trust income and any capital gains for each tax year, including any capital gains tax due. If you dont get it done on time, you can expect to get a fine for being late.

Failing to register the trust at all can get you in a world of trouble – with fines of up to £5,000 if you deliberately dont declare the trust. You need to keep on top of your tax reporting to avoid getting in trouble.

When the Beneficiary Dies

If a beneficiary dies before they become entitled to the trust cash, any remaining asset in the trust, such as money, land, or buildings, stays in the trust until the rules are met or the trust is wound up. The Trustees need to follow what’s set out in the trust deed for handing over the remaining asset this might mean giving it to someone else or holding onto it until the rightful beneficiary comes along.

The trust might be hit with inheritance tax—it’s all about the value of the assets in the trust and what tax exemptions are in place. You need to figure out what the situation is and what tax might be due.

Professional Help and Support

If you need to set up a trust for a bereaved child, it is a really good idea to get some professional advice. Working with a pro can help you make sure everything is done right and the trust is run in a way that will benefit the child in the long run.

Some resources to help are:

Lawyers who can write up the trust documents so they meet all the right rules.
Financial advisors to help with the money side of things.
Tax specialists who can help with the tax implications and get you on the right side of the law.

Summary

Setting up a Bereaved Minor Trust or an 18-25 Trust is a complex business, but its an amazing way to make sure your child is financially safe even if you arent there to look after them. From getting the trust set up to sorting out tax compliance, its all about being careful and making sure you do things the right way.

By following the guidelines in this guide, you can be sure you are making the right decisions for your child and that they will be provided for into the future.

Frequently Asked Questions

Who can set up a Bereaved Minor Trust?

A Bereaved Minor Trust is usually created by the person leaving it in their will or through some other specific arrangement – and only for the benefit of their own kids or step kids.

What are the tax benefits of a Bereaved Minor Trust anyway?

A Bereaved Minor Trust gives you some serious tax breaks – like being completely free from inheritance tax if the kid does end up inheriting the cash when the time comes, or even if they kick the bucket before they are meant to get it. It means you know that the trust’s assets are there to support the kid, without getting hit with loads of tax.

Who do you choose as the trustees for one of these?

Typically you pick people from your family or close friends who are basically rock solid financially, or you go for some other professional type who can be trusted to do the right thing with the money. The thing is, you really need to pick someone who is reliable and can keep an eye on the trust’s finances without messing things up.

What happens if the kid dies before getting the cash?

If a kid does die before they are officially entitled to the cash in the trust, it usually just stays in the trust until the rules are met or the trust gets wound up. Any rights that might have been passing to the kid will then get passed on to their next of kin or whatever the will says.

Are there any consequences if you fail to register a trust?

Failing to register a trust can get you into a lot of trouble – up to £5,000 in penalties if you actually knew you were supposed to do it and just didn’t bother.