When it comes to securing your children's future, your Will is one of the most powerful tools you have. As a parent, it's essential to ensure that your children are cared for and their inheritance is managed responsibly if something unexpected happens to you. In this blog post we'll explore the key aspects you should consider when drafting a Will which will ultimately protect your children.
Appointing Guardians and Trustees: Protecting Your Children by Planning for their Care and Financial Wellbeing
Choosing who will care for your children and manage their inheritance is one of the most critical decisions you will make in your Will. This involves appointing both Guardians and Trustees to fulfill these roles effectively.
Guardians:
Role: Guardians are individuals appointed in your Will to take care of your minor children if both parents pass away. Their responsibilities include your child's day-to-day care, education, health, and general welfare. This is a deeply personal choice that should reflect your values and expectations for your children's upbringing.
Considerations for Choosing a Guardian:
Think about the person’s relationship with your children, their values, lifestyle, and willingness to take on the role.
Discuss the responsibilities with potential guardians to ensure they are prepared and agreeable.
Consider appointing a backup guardian in case your first choice is unable to take on the responsibility.
You can only appoint guardians by writing your Will, if you die without leaving a valid Will then the consequences can have dire implications for your children.
Consequences of Not Appointing a Guardian:
Court Involvement:
If you and the other parent both pass away or are unable to care for your children, the court will decide who should become their guardian. This process can be lengthy, costly, and emotionally challenging for your loved ones.
The court will consider the best interests of the child, but there is no guarantee that their decision will align with your wishes or those of your family.
Potential for Family Disputes:
Without a clear guardian named in your Will, there may be disagreements or disputes among family members or others close to your children over who should assume responsibility. This could lead to strained relationships or even legal battles.
Uncertainty for Your Children:
During the period when a court determines guardianship, your children may experience uncertainty and instability, adding stress to an already difficult situation.
Your children may temporarily be placed into the care of social services or foster care until a permanent guardian is appointed, which can be distressing for them.
Possible Unfavorable Placement:
If no guardian is appointed, there is a risk that the court could choose someone you wouldn't have wanted to raise your children. This could include someone with different values, lifestyle, or parenting style from what you would have preferred.
Loss of Your Say in Their Future:
By not naming a guardian, you lose the opportunity to ensure your children are raised by someone who shares your values, beliefs, and approach to parenting. You also lose the chance to provide guidance on how you would like them to be raised.
Financial Implications:
A lack of a designated guardian may also complicate the management of your children’s inheritance. Trustees and guardians often work together to ensure that the financial needs of your children are met. Without a named guardian, this coordination can become more complex and problematic.
Different Types of Trusts
Bereaved Minors Trusts and 18-25 Trusts are specific types of trusts in the UK designed to manage the inheritance of children in the event of a parent's death. They have distinct rules and tax implications, making them suitable for different circumstances when planning for a child’s financial future.
Bereaved Minors Trusts
Definition: A Bereaved Minors Trust (BMT) is a type of trust that is specifically designed to provide for children who have lost a parent or both parents. The trust must meet specific conditions to qualify for certain tax advantages.
Key Features:
Eligible Beneficiaries: The trust is set up for the benefit of a minor child (under the age of 18) who has lost at least one parent. The child must be entitled to the assets in the trust outright when they reach the age of 18.
Use of Trust Assets: The trust's assets can be used for the child's maintenance, education, and general benefit before they reach the age of 18.
Ownership at Age 18: Once the child turns 18, they become absolutely entitled to the trust assets, meaning they receive both the income and the capital.
Tax Treatment:
Inheritance Tax (IHT): Bereaved Minors Trusts are generally exempt from Inheritance Tax as long as the trust is created under a parent's Will and meets the criteria set out in Section 71A of the Inheritance Tax Act 1984.
Income Tax: The trust’s income is taxed as if it belongs to the child. This means it benefits from the child’s personal allowance, and the starting rate for savings and dividend allowance, making it potentially tax-efficient.
Capital Gains Tax (CGT): There is no special CGT treatment for Bereaved Minors Trusts; however, trustees can use the child’s annual CGT exemption to offset any gains.
18-25 Trusts
Definition: An 18-25 Trust (or Age 18-to-25 Trust) is another type of trust designed for young beneficiaries, allowing for more flexibility in when they receive their inheritance. It is typically used when a parent wants to delay a child’s access to their inheritance beyond the age of 18 but no later than age 25.
Key Features:
Eligible Beneficiaries: The trust is set up for a child or young adult who has lost at least one parent. The child must become entitled to the trust assets by the age of 25 at the latest.
Flexible Distribution: The trust allows for a delayed distribution of assets, offering more flexibility than a Bereaved Minors Trust. The child does not receive outright ownership of the assets until a specified age between 18 and 25.
Use of Trust Assets: Trustees can use the trust’s assets for the child’s maintenance, education, and general benefit until the beneficiary reaches the designated age (up to 25).
Tax Treatment:
Inheritance Tax (IHT):
The trust will be exempt from the 10-yearly periodic charges and exit charges usually associated with discretionary trusts if the assets are distributed before the beneficiary reaches 25.
However, an IHT charge may apply if the child becomes absolutely entitled to the trust assets after the age of 18 but before 25. This charge is 4.2% on the value of the assets at that time.
Income Tax: Trust income is taxed at the trust rates, but trustees can use the beneficiary's personal allowance, starting rate for savings, and dividend allowance, potentially reducing the income tax liability.
Capital Gains Tax (CGT): Trustees can use the trust’s annual CGT exemption to reduce any CGT liability on gains realized within the trust. The CGT liability may be lower if the trust is dissolved before the beneficiary turns 25.
When to Use an 18-25 Trust:
When you want to delay a child’s access to their inheritance beyond the age of 18, perhaps to ensure they are more mature or financially responsible.
When you want to provide for a child’s maintenance and education but allow for greater flexibility than a Bereaved Minors Trust.
When minimising Inheritance Tax charges is less critical than retaining flexibility and control over the timing of distributions.
Key Differences Between Bereaved Minors Trusts and 18-25 Trusts:
Feature | Bereaved Minors Trusts | 18-25 Trusts |
Age of Beneficiary | Under 18 | Between 18 and 25 |
Distribution of Assets | Must be given outright at 18 | Can be delayed up to age 25 |
IHT Charges | Exempt from periodic and exit charges | Possible IHT charge if assets pass after 18 but before 25 (4.2%) |
Tax Advantages | Inherits child’s personal tax allowances | Flexible distribution but with potential IHT implications |
Control Over Assets | Limited control, assets pass at 18 | Greater control, delayed distribution possible |
Both Bereaved Minors Trusts and 18-25 Trusts provide valuable ways to manage and protect your children's inheritance, but they have different implications in terms of control, flexibility, and tax treatment. When planning for your children's future, it's important to consider which type of trust best aligns with your wishes and circumstances.
Trustees:
Role: Trustees manage the financial assets left to your children in your Will until they reach a specified age (minimum of 18 but can be older). Trustees have a legal duty to act in the best interests of your children, and their role can be complex, involving careful decision-making and financial management.
Duties: Trustees must follow the terms of the trust, invest assets prudently, act impartially among beneficiaries, keep accurate records, and not profit from their position unless expressly allowed.
Considerations for Choosing Trustees:
Look for individuals who are financially savvy, trustworthy, and understand their legal responsibilities.
You may choose professional trustees (like a solicitor or accountant) to ensure impartiality and expertise, especially if the estate is substantial or complex.
Consider appointing more than one trustee to ensure balanced decision-making.
Trustee Powers and Responsibilities: What to Expect
Choosing the right trustees is crucial, as they play a vital role in managing your child’s inheritance. Trustees have several powers and responsibilities under law, including:
General Duty of Care: They must exercise the same care and skill as a prudent person would when dealing with the administration of the trust.
Duty to Invest: Trustees are required to invest the trust’s assets in a way that yields a reasonable return, considering the need to diversify investments.
Duty to Act in the Best Interests of the Beneficiaries: They must always act in the best interests of both current and future beneficiaries.
Duty to Follow the Terms of the Trust: Trustees must adhere to the terms set out in the trust deed.
Duty to Act Impartially: They must balance the potentially competing interests of different beneficiaries.
Duty to Keep Accounts and Provide Information: Trustees must maintain accurate records and provide information to the beneficiaries upon request.
Duty Not to Profit from the Trust: Trustees cannot benefit personally from their position unless expressly permitted by the trust deed or law.
Duty to Take Advice: Trustees should seek professional advice when making significant decisions.
Practical Considerations for Drafting Your Will: Making the Right Choices
Regularly Review Your Will: Life circumstances change, such as births, deaths, marriages, or changes in financial status. Regularly review your Will to ensure it still reflects your wishes.
Communicate Your Wishes: Talk to your chosen guardians, trustees, and even your children (if appropriate) about your plans and their roles. This transparency can prevent disputes and ensure everyone understands your wishes.
Consider a Letter of Wishes: While not legally binding, a Letter of Wishes can accompany your Will to provide further guidance to your trustees and guardians about how you would like them to act. This can include preferences regarding your children’s upbringing, education, and use of the trust funds.
Ensuring Your Children's Future: Key Takeaways
By carefully considering these elements, you can provide for your children in your Will and ensure they are cared for in the event of your passing. Appointing the right guardians and trustees, choosing the appropriate type of trust, and planning for tax implications will help protect their inheritance and provide them with financial security.
Need Help Drafting Your Will?
Protecting your children’s future through your Will is a significant decision, and it can feel overwhelming. We're here to guide you through every step of the process, providing you with tailored advice and support to ensure your wishes are carried out as you intend.
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