Posted in Legal News
A Grandad came to Bharat for advice on reducing his estate.
He mentioned that he recently became a granddad again. He now had two grandchildren and wished to set aside some funds for his grandchildren’s education. He wanted to leave some money for them in his Will.
Bharat suggested he set up a trust for each of his grandchildren. There would be no limit on the amount he can give to them in the trust.
Granddad wanted to pass on his money before the grandchildren were old enough to be given the money directly and at the same time for inheritance tax planning solicitors he can make gifts now so it can reduce the value of his estate and thereby reduce the amount of IHT paid upon his death.
Bharat set up two bare trust’s one for each grandchild.
He put £300,000 cash into each trust.
Granddad then got financial advice to invest the monies into income generating bonds and unit trusts with different risk profiles.
As a result of the bare trust, grandad has by giving away early the funds made an effective gift s so for Inheritance Tax purposes if lives longer than 7 years it will not be part of his estate.
The income generated by the investments belong to the respective grandchildren and not granddad nor would it be count as part of the parents (grandchildrens parents) income.
Assuming granddad survives for more than seven years after the asset has been transferred into the trust, the gift will not be taken into account when the estate is valued for Inheritance Tax purposes.
A bare trust is a simple trust and when each of the grandchildren reach the age of 18 years of age they have an immediate and automatic entitlement to the trust fund.
Granddad cannot extend the age of entitlement of the capital unlike a discretionary trust.
The main advantage is that
- Granddad has reduced his estate for IHT purpose in his case £600,000 (£300,000 per grandchild).
- The assets are secured for up to 18 years even after the granddad’s death. The grandchildren at the age of 18 are absolutely entitled to control and own the trust assets if they demand so to do but are entitled to leave the assets with the trustees, however, the income and capital gains will continue to be taxed as their own.
- The granddad can appoint a co-trust such the parents of the grandchildren to be co-trustees
- The income generated from the trust’s assets belong to the grandchildren at the beneficiary rates making it tax efficient for income tax purposes. Different rules applies if parents set up bare trust for their immediate children.
- Granddad retains control of the trust assets until the grandchildren each turn 18 years of age.