Supporting younger generations of the family financially into adulthood is a goal of many Courtiers clients. We know they get enormous pleasure and satisfaction from giving their children and grandchildren a financial leg up, be that to fund their time at university, purchase a big-ticket item like a car, or help with the deposit on a first home.
Although clients help their children and grandchildren financially in numerous different ways, one way in particular has proved particularly helpful. Bare trusts are a way for parents and grandparents to transfer assets to their children/grandchildren, the assets being held in trust until the beneficiary is deemed to be old enough in law to take ownership of them. The ‘age of entitlement’, as it’s called is 18 in England and Wales and 16 in Scotland.
Once the beneficiary reaches the age of entitlement, they have ‘absolute entitlement’ to the assets, which they can demand the trustee release to them. They can then use both the capital and the income in whatever way they choose. In practice, we tend to find that the right is used responsibly.
A common arrangement
A common arrangement we see among the families we advise is for contributions into bare trusts to be made by grandparents, with the parents as trustees. Contributions are made as cash, with the trustee giving Courtiers responsibility to manage the assets by investing in Courtiers Funds.
Through working closely with their Adviser, there are a number of features that have led clients to decide that bare trusts are suitable to meet their needs.
The person who creates the trust (the settlor) can choose the beneficiary. They can also contribute as little or as much as they like into the trust at a time or times of their choosing.
Contributions made into a bare trust, say 10 years ago, and invested in the Courtiers Total Return Growth Fund, would have grown as a result of the fund’s long-term performance, boosting the value of assets available to the beneficiary. Of course, past performance is not a guarantee of future returns.
Bare trusts can be tax efficient. As a separate legal entity from the estate of the person who sets the trust up (usually a grandparent or parent), if the value of the estate is above the IHT thresholds, as long as that parent or grandparent survives for seven years after making the gift the value is not counted for IHT purposes.
Before the child or grandchild reaches the age of 18 (England and Wales), the trustees, perhaps the grandparents can withdraw funds to be used solely for the benefit of the grandchild before they reach the age of entitlement. Some Courtiers clients have used this to pay for children’s or grandchildren’s medical bills.
Anyone can contribute to a bare trust, allowing a wide circle of people, for example, uncles, aunts and godparents to support younger family members.
Assets held in a bare trust usually avoid the need for probate, which means that parents, for example, who are often the trustees can deal with the assets immediately after the person who creates the trusts dies.
Any income received within the bare trust belongs to the child. As long as the assets are put into the trust by someone other than the child’s parents the income is taxed at the child’s marginal rate. Different rules apply where the settlor is a parent of the beneficiary. Capital gains tax can also come into play. Taxation of trusts can be a complex area. Please contact your Courtiers Adviser for more information, or if you would like to discuss the tax implications.
The question of suitability
Although bare trusts are appropriate for some Courtiers clients, they are not suitable for everyone. This will depend on their individual circumstances, their goals and objectives and their time horizons.
And as with all trusts, bare trusts come with their own costs and additional responsibilities, all factors that form part of the conversation when we discuss the suitability of bare trusts with clients.
It’s also important to say that bare trusts are just one of several different types of trust, each giving the settlor varying degrees of control over how trust assets are used and who benefits. Unlike bare trusts, discretionary trusts, for example, give the trustee(s) discretion to change the beneficiaries, a flexibility which some clients value.
For some clients, other ways of investing in the financial future of their family’s younger generation(s) may be more appropriate. The Courtiers Junior ISA, launched in 2019, can be an alternative, allowing a parent or legal guardian to invest up to £9,000 a year on behalf of a child. This is then either invested by Courtiers, or the client can choose the fund or funds themselves. Although the assets belong to the child, they can’t make withdrawals until they turn 18.
Bare trusts are established and effective ways used by Courtiers clients to support members of their family financially as they enter adulthood.
When considering how to support younger generations of your family financially as they enter this important phase of their lives, it’s vital to discuss all the available options and any implications with your Courtiers Adviser.