Using trusts to pass money to your children

Posted on: May 6th, 2015

Trusts are not just the preserve of the super rich; they are a useful way to pass money or assets on to your children or grandchildren. Roz Wyeth explains how. 

It is normal that a person who owns an asset benefits from that ownership. Trusts are used to separate ownership and benefit and can be used for many legitimate purposes. One of the most common is to pass on assets or money to children or grandchildren in a controlled way.

There are many reasons for wanting to do this. It may be that the children are not yet old enough to look after significant amounts of money. It may be that they do not have the mental capacity to manage their own affairs, or that you believe they would act in an irresponsible way.

Perhaps the most common approach is to settle any funds that you intend to pass to that person into a trust that is included within your Will, with appointed trustees using their discretion to distribute the fund. This is known as a discretionary trust.

Discretionary trusts are particularly helpful if you wish to pass on assets or money to more than one beneficiary. They could, for example, be used to help fund a child’s education or perhaps for a deposit on a future home. If the beneficiary’s circumstances change over time and the trustees feel it appropriate to distribute the trust assets outright they can bring the trust to an end at any point.

Consideration does need to be given to the appointment of trustees, particularly as they have considerable power and influence over the distribution of the trust’s funds. You will, obviously, want to appoint someone who can be trusted to make sensible decisions in the best interests of the beneficiaries.

It is usually appropriate to appoint two or three trustees, or perhaps consider a professional trustee.

Trustees also have a responsibility to manage the trust’s funds. They have a legal responsibility to invest the trust’s assets in a diverse and responsible way. Trustees are required to take expert advice before making investment decisions.

Whoever you appoint it will be necessary to check that they are happy to take on this role.

There can be tax advantages for those creating a trust, including the potential for reduction in exposure to inheritance tax on death. It is important, however, for anyone creating a trust to take professional advice.