Even in these difficult financial times or perhaps even especially in these times, many grandparents will want to help out the younger generation financially. Sometimes this will be with the cost of education to help out with university expenses and sometimes it will be with ordinary living costs. Either way, it is a fact of life.
When I talk to people about Inheritance Tax, one aspect of the conversation is always about how much the individual can afford to give away. Sometimes, it transpires that the desire to hold sums back is so that they are available to use later for younger members of the family.
In cases like this it is often better for the grandparent to go ahead and let go of the money or assets now but for the immediate recipient to be a trust rather than a particular family member. The trust can be designed so that all of the family (except the person actually providing the funding) can benefit from it as and when required.
The benefit of this is that the gift is established straight away for Inheritance Tax purposes and should, therefore, be out of the donor’s estate after seven years. If the money is retained and doled out only as and when required, then the bulk of it might always be within the Inheritance Tax net.
Of course, a trust can be a complicated document and Inheritance Tax also has potential pitfalls – this is particularly the case if, for instance, a husband wishes to include his wife as a beneficiary (or vice versa). It is not something to be embarked upon without taking specific advice relevant to your own situation. This should include Income Tax and, sometimes, Capital Gains Tax implications as well as Inheritance Tax.
The trust fund could be invested in much the same way as one might invest personal money – or assets could be placed into the trust which had already been invested. This could include stocks and shares, bonds or even properties.
Once established, the trust would be able to distribute its after-tax income to beneficiaries who would receive credit for the tax paid by the trustees. Distributions could also be made of capital and the trustees could even be permitted to make loans if that was what suited the circumstances at the time. In short, the arrangement could be very flexible indeed. If additional funds become available they can be added at a later stage.
It is not necessary to treat all beneficiaries the same way. Grandparents almost always want to be fair between children and grandchildren but the circumstances and needs of the younger generations will vary.
Perhaps the most attractive practical feature of this for many grandparents is that they can also retain control of what was, after all, their money. They have to appoint trustees (normally at least two) to look after the trust fund but, provided the trust is properly established, they can also be the original trustees and appoint any successors.
A trust can be a very useful way of supporting your family tax efficiently.
If you like this article and would like our FREE updates sent straight to your inbox then subscribe to our monthly newsletterSubscribe