Setting up a trust for a child

Trusts can be particularly suitable when the beneficiaries of the intended gifts are too young to be able to look after and manage the assets.  Instead, the assets can be managed inside the trust by the trustees to ensure they are property looked after.  

Additionally, trustees can also control the appointment of any income and assets to the beneficiaries, giving it to them at their discretion. 

It should be noted that trusts set up for the benefit of one’s own minor children are not typically advisable except in certain, specific circumstances as they will be deemed “settlor interested” and will suffer a particularly harsh tax regime accordingly. 

Bare Trusts 

A parent may just want to set up a simple bare trust arrangement so they can hold assets of their children’s behalf until they are 18.  This will usually be done whenever parents open bank accounts for their children and act as trustees.  However, if assets are sizeable, a parent may prefer to consider alternative trusts so that the children do not obtain control of all the assets at the age of 18. 

Interest in Possession Trusts 

It would be unusual to set up an interest in possession trust for a child as these trusts are usually used when a separation between the beneficiaries of the income and the beneficiaries of the capital is desirable.  It is rare to want to provide an income stream for a child and as such you rarely see Interest in Possession Trusts used in this way. 

Discretionary Trusts 

Discretionary trusts ensure that children do not obtain control of the assets when they turn 18.  The trustees look after the assets of the trust and apply the income and capital of the trust to the beneficiaries at their discretion.  Trusts like this one are often used to assist in the payment of school fees.  As mentioned, due to the way settlor interested trusts are taxed, trusts such as this are often settled by grandparents for their grandchildren.  Trusts used in this way can be a particularly tax efficient approach to providing for school fees, because the child is usually able to reclaim the tax paid by the trust on any income distributed. 

Trusts for a disabled person 

Parents may wish to set up trusts for a child that is disabled.  The children may not be capable of looking after themselves when they are older, and using a trust ensures that the trust assets can be used to benefit them throughout their lifetime.  The trustees may for example distribute money to pay for care fees or specialist equipment and treatments.  Disabled Person’s Trusts have favourable tax treatment. 

Bereaved Minor Trusts 

These are special forms of discretionary trusts where assets are held on trust for bereaved minors under the will of a deceased parent.  The beneficiaries will become entitled to the assets when they are 18, and until then the trustees look after the assets for the minor and make distributions as appropriate.  These trusts have beneficial tax treatment.  However, as children have entitlement at 18, some parents prefer to establish 18-25 trusts in their wills, discussed below. 

18-25 Trusts 

These are another special form of discretionary trust where assets are held on trust for bereaved minors under the age of 25 under the will of a deceased parent.  The beneficiaries will become entitled to the assets when they are 25, and until then the trustees look after the assets for the minor and make distributions as appropriate.  These trusts have beneficial tax treatment although not as beneficial as for bereaved minor trusts.  However, they do have the benefit that children will be older when they receive their inheritance. 

Trust best practice

Contact Menzies Trust services team