A trust is a legal arrangement in which property or money is entrusted to the care of one or more trustees. The contributor of assets is the settlor. A trust’s assets are dispersed according to the terms of the trust deed, which is a legally enforceable document. The trustee is given discretionary authority over the trust’s assets in the trust deed. They are responsible for seeing to it that the terms of the trust deed are adhered to.
The trustees will give the money to whatever the Will specifies to use it for. The purpose of some parents’ bequests is to help their offspring gain an education, a foothold in the housing market, or a career start. It’s common to hear “trust” and “educational trust fund” used interchangeably, but the latter phrase only specifies the trust’s intended use. In this article, Trust For Child’s Education, we take a look at these issues in more depth.
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Educational trust fund
The education of the beneficiary’s children is a typical application of discretionary trusts, hence the name “educational trust fund” has come to be used interchangeably. The Trustees of a discretionary trust are free to decide how the trust’s assets, including income and principle, will be invested and distributed. This allows parents and grandparents to keep the assets they possess while using the income to pay for things like college.
Benefits:
In establishing a trust fund, you can take advantage of the different tax rates that apply to each of your children. This means that your children, if they are of age and have sufficient income, can pay their own college expenses and spare you the associated tax bill.
If you are helping a student pay for school, the money you are giving them has probably already been taxed. You can do this in a number of ways, such as by taking money out of your company’s dividends or by using the net pay from your salary. By diverting funds from other purposes, a trust fund can help you provide for your children. Their earnings from those sources are subject to taxation when they’ve used any applicable exemptions.
If their primary source of income is from dividends, they are also entitled to a further £2,000 allowance. The trustees can pay for your child’s education in a tax-efficient manner to the tune of approximately £15,000 per year (at the time of writing and for a non boarder).
The trustee is free to spend the trust’s earnings for any purpose, including sending the beneficiary off to college when the time is right.
Drawbacks:
One big disadvantage is that the trust’s settlors and trustees will no longer have access to the income they gave to the trust. In other words, once the funds are deposited into the trust, you no longer have any legal right to them.
The amount of money that is put into the trust may be managed, therefore this is rarely an issue.
Nonetheless, a payment of inheritance tax would be required if the value of the transferred asset, whether it be real estate or money, exceeded the £325,000 threshold. Twenty percent of the sum above the “nil rate band” is subject to this so-called “lifetime inheritance tax”.
Are there alternatives to setting up a discretionary trust?
When a trust’s beneficiary reaches 18, he or she is able to take full control of the trust and all of its assets. The wisdom of this plan depends on the minor’s level of responsibility and maturity, but it’s worth considering. They’re more adaptable than traditional educational trusts. No requirement is placed on the recipient to use the funds for education, but they are free to do so if they choose.
With a bare trust, the beneficiary child is considered the only owner of the trust funds as soon as they are placed, which is beneficial for tax purposes. It is commonly assumed that no income tax or capital gains tax is owed in such a situation. Each transfer of funds into a bare trust will also generate a Potentially Exempt Transfer. Gifts are not subject to Inheritance Tax as long as they remain out of the donor’s estate for seven years.
It may surprise you to learn that pension plans can be initiated on the day of your birth. A pension account for a child can be opened by anyone, including the child’s parents, grandparents, or other relatives. To the tune of 20%, taxpayers can deduct up to £2,880 per year in charitable contributions. Hence, if the full sum is given, the child will receive an extra £720 every year. In addition to providing substantial tax benefits, it is also a great strategy to safeguard your children’s or grandchildren’s financial future.
How we can help
We have a proven track-record of advising upon all aspects of private client work. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.to incorporate, what kind of ownership
How to Contact Our Private Client Solicitors
It is important for you to be well informed about the issues and possible implications of setting up a trust for a child’s education. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Trust solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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