Setting Up Bereaved Minor Trusts & 18-25 Trusts

Setting up a bereaved minor trust or an 18-25 trust is an important step in securing a child’s financial future after the death of a parent. These trusts hold and manage a deceased parent’s estate so that the money and assets left behind are used for the child’s benefit. This guide explains the process, the legal requirements and the duties of trustees, so you can manage one of these trusts effectively and meet a child’s financial needs.

Key Takeaways

A Bereaved Minor Trust supports a child until they reach 18, at which point they become absolutely entitled to the trust assets.
An 18-25 Trust extends that support to age 25, giving the beneficiary more time to prepare for managing the assets before becoming absolutely entitled.
A Bare Trust is a simpler arrangement: the trustees hold the assets for the beneficiary, who takes full control at 18.
Setting up either trust requires a will or a Deed of Variation and must comply with the Inheritance Tax Act 1984.
Trustees are responsible for managing the trust assets, meeting tax obligations and ensuring beneficiaries receive their entitlement, as set out in the trust deed.

Understanding Bereaved Minor Trusts and 18-25 Trusts

Bereaved Minor Trusts and 18-25 Trusts provide financial support and stability for children who have lost one or both parents. A Bereaved Minor Trust:

Is set up for a minor child, with the money and assets left by the deceased held and managed by the trust until the child inherits at 18.
Can benefit the deceased’s own children or stepchildren.
Allows the assets to accumulate or be used for the child’s living costs, education or other needs.
Offers a flexible way to provide support.

When a child inherits through one of these trusts, the assets are managed and distributed in line with trust law.

An 18-25 Trust, also known as a bereaved young person’s trust, continues to manage the assets until the beneficiary reaches 25. It can only be created through a parent’s will or through a Deed of Variation that meets the relevant legal conditions. The main difference between the two trusts is how long they last and when the beneficiary takes control of the assets.

For guardians and trustees, these trusts protect a child’s inheritance and ensure it is used responsibly after the loss of a parent. Compared with other trusts, they have features designed specifically for bereaved children, including particular protections and tax advantages under trust law.

Key Legal Requirements

Setting up a Bereaved Minor Trust or an 18-25 Trust involves several legal requirements:

Only the deceased’s own children or stepchildren can benefit — not grandchildren.
A Bereaved Minor Trust must be created through a will that clearly sets out how the child’s inheritance will be managed.
The assets placed into the trust are treated as settled property, and the trust must comply with the Inheritance Tax Act 1984.

Trustees are central to running these trusts and should be trustworthy and financially capable. Their role is to manage the trust assets and ensure they are used for the child’s benefit, such as paying for education or healthcare. They must also keep records of all transactions and file the necessary tax returns to remain compliant with the law.

Tax Treatment of Bereaved Minor Trusts and 18-25 Trusts

Guardians should understand how these trusts are taxed. The following rates apply to income tax on trust income. Under current rules, the old £1,000 standard rate band has been removed. If a trust’s total net income is £500 or less, no income tax is due. If it exceeds £500, the whole amount not just the excess is taxed at the trust rates: 45% on non-dividend income and 39.35% on dividend income. Tax rates and thresholds can change each tax year, so trustees should check the current figures.

Bereaved Minor Trusts receive favourable treatment because they are not subject to the standard inheritance tax charges when the minor becomes entitled to the assets, or if they die before receiving them.

For capital gains tax, disposing of or transferring trust assets may create a liability, which is an important consideration in estate planning. The annual exempt amount for most trusts is currently £1,500. Gains above this are taxed at 24%, whether they arise on residential property or other assets.

It is sensible to take expert advice on the tax implications of a trust, as the right approach helps ensure the funds are used to the child’s best advantage.

Setting Up a Bereaved Minor Trust

Setting up a Bereaved Minor Trust begins with drawing up a will that includes provisions for the trust, specifying how the assets should be applied for the child’s benefit, including their maintenance. This allows the funds to support the child’s living expenses, education and overall welfare during the trust period, and ensures the assets are managed responsibly until the child reaches adulthood.

Choosing suitable, financially capable trustees is essential. They can be:

Family members
Friends
Professionals

Trustees are responsible for managing the trust assets, investing prudently and using the funds for the child’s:

Education
Healthcare
Living expenses
General maintenance

A solicitor can draw up a will that includes the trust provisions, making sure it is set up correctly and complies with the law.

Setting Up an 18-25 Trust

An 18-25 Trust, or trust for a bereaved young person, is created when a testator states in their will that a gift to a child should vest at an age between 18 and 25. The trust period lasts until the beneficiary turns 25. This gives a longer period of protection than a Bereaved Minor Trust, but it can result in inheritance tax exit charges if capital is distributed between the ages of 18 and 25.

Setting up an 18-25 Trust involves:

Writing a will (or Deed of Variation) that sets out the trust rules.
Appointing trustworthy trustees to manage the trust funds.
Ensuring the funds remain available for the beneficiary until they reach 25.

The choice of trustees is important, as they will manage the finances, make investment decisions and use the funds responsibly. During the trust period, the trustees deal with any tax due, including Inheritance Tax, and handle the trust’s other tax obligations.

Managing Trust Money and Assets

Trustees are responsible for administering the trust correctly. This means:

Managing the trust fund and its assets prudently.
Applying the income or capital so that the beneficiary benefits over time, up to age 25.
Setting an investment strategy that suits the beneficiary’s needs and the trust’s goals while preserving and growing the capital.

Diversifying investments helps protect against risk and provides a more stable return. Keeping a record of every transaction ensures the money is used as intended.

Trust management can be complex, so professional guidance is often worthwhile and can improve how well the trust is run.

Distribution Rules and Beneficiary Entitlements

The rules for when and how the beneficiary receives the trust funds are set out in the trust deed. With a Bereaved Minor Trust, the funds are distributed when the child reaches 18, and the child becomes absolutely entitled to both the capital and any accumulated income held in the trust.

In an 18-25 Trust:

The trustees must ensure the beneficiary becomes absolutely entitled to the assets by the age of 25.
The trust deed sets out how and when the funds, including any accumulated income, are distributed.
These rules help the beneficiary understand when they will receive the assets.

It is good practice to keep beneficiaries informed about the process and when they can expect to receive distributions.

Inheritance Tax Implications

Anyone setting up one of these trusts should understand the statutory inheritance tax rules. Bereaved Minor Trusts do not attract an IHT charge when the assets are distributed at 18, and the same applies to 18-25 trusts where capital passes out before age 18. However, a chargeable event arises when assets leave an 18-25 trust between the ages of 18 and 25, which can trigger an exit charge.

The inheritance tax rules for 18-25 trusts are:

No ten-year anniversary charges apply.
An IHT exit charge may apply if the trust fund exceeds the nil rate band when assets leave between ages 18 and 25.
Exit charges are based on the value of the relevant property in the trust and the number of complete quarters since the beneficiary turned 18, up to a maximum of 4.2%.
The amount due depends on when the assets are distributed.
Both residential property and other assets in the trust are taken into account for inheritance tax.

Setting the trust up correctly under the Inheritance Tax Act 1984 helps avoid unexpected tax when administering the estate. Relevant property trusts are subject to a different regime, including periodic and exit charges, so understanding how the rules apply allows you to plan ahead effectively.

Tax Reports and Compliance

Each year, the trustees must complete and submit the necessary forms to HMRC to keep the trust’s tax reporting up to date. They must report the trust’s income and any capital gains for the tax year, along with any tax due. Late filing can result in a financial penalty.

Failing to register the trust can also lead to penalties, including a fine of up to £5,000 where there is a deliberate failure to register. Staying on top of tax reporting is essential to remain compliant.

When the Beneficiary Dies

If a beneficiary dies before becoming entitled to the trust assets, any remaining assets — such as money, land or buildings — stay in the trust until its terms are met or it is wound up. The trustees must follow the trust deed when dealing with the remaining assets, which may mean passing them to a secondary beneficiary or holding them until entitlement is determined.

The trust may be assessed for inheritance tax, depending on the value of the assets and any exemptions that apply, so the position should be reviewed to establish what tax may be due.

Professional Help and Support

If you are setting up a trust for a bereaved child, professional advice is strongly recommended. Working with the right advisers helps ensure everything is done correctly and the trust is run in the child’s long-term interests.

Useful sources of support include:

Trust Expert, who can prepare the trust documents so they meet the legal requirements.
Financial advisers, who can help with investment decisions.
Tax specialists, who can advise on the tax implications and help you stay compliant.

Summary

Setting up a Bereaved Minor Trust or an 18-25 Trust can be complex, but it is an effective way to secure a child’s financial future if you are no longer there to provide for them. From establishing the trust to meeting your tax obligations, the key is careful, accurate administration.

By following the guidance set out here, you can make well-informed decisions for your child and help ensure they are provided for in the years ahead.

Frequently Asked Questions

Who can set up a Bereaved Minor Trust?

A Bereaved Minor Trust is usually created by a parent through their will or a Deed of Variation, strictly for the benefit of their own children or stepchildren.

What are the tax benefits of a Bereaved Minor Trust?

A Bereaved Minor Trust offers significant tax advantages, including freedom from inheritance tax periodic and exit charges when the child inherits, or if they die before reaching the age of entitlement. This means the trust assets support the child without being reduced by unnecessary tax charges.

Who should you choose as trustees?

Many people choose financially responsible family members or close friends, or appoint a professional trustee to manage the funds. The key is to choose someone reliable who can manage the trust’s finances carefully.

What happens if the child dies before receiving the assets?

If a child dies before becoming absolutely entitled to the trust, the assets usually remain in the trust until its terms are resolved or it is wound up. They then typically pass to secondary beneficiaries or next of kin, as set out in the will or trust deed.

Are there consequences for failing to register a trust?

Yes. Failing to register a trust can lead to financial penalties of up to £5,000 where there is a deliberate failure to register it on the Trust Registration Service (TRS).