Grandchild inheritance - check my thinking
Discussion
Sadly, my mother is terminally ill with cancer. As such she is getting a will in place and sorting out affairs. My father died six years ago leaving everything to her (joint tenancy on house so was all straightforward.) I'm the only child. The estate will be dominated by the house which let's say is £250k. The rest (savings etc) is relative peanuts. There's a combined IHT allowance of 650k. Let's assume for now that care doesn't come into the picture and no charge on the house will exist from the LA.
I'm independently very comfortable and whilst if all left to me it would certainly be helpful, my mother and I are in agreement that the house should benefit my daughter, currently 5 years old (and she will be the only child I have.)
So, that's the broad situation. At this point it's worth saying that we are engaging solicitors to draw up both the will and any trust arrangements, and I'll take other professional advice as needed. The rest of the post is really just to get feedback on our thinking and if this is all overcomplicating things.
Firstly, through probate I'll want to sell the house. No interest in living in it or maintaining it as an asset.
I've also no massive desire to see my daughter get automatic access to 250K + 13 or so years of growth (hopefully higher than inflation...) at 18. At 5 years old the cone of uncertaintly as to who she'll grow up to be is too large, so a bare trust arrangement doesn't seem the right approach. She already has cash savings, Junior ISA and a SIPP we are funding as well.
Instead, we (my mum, I) would like the house moneys to be used as and when it makes sense for my daughters benefit. This could include school fees (she is in private education and will likely remain so), seeing through university education, and potentially when the time is right, a lump sum of what remains to help with house etc, or even to be given to her eventual children.
So all this leads to a discretionary trust appearing to be suitable. It will incur more overhead and for example the solicitor is advising that it couldn't be myself as a sole trustee (they've offered their services...)
The tax implications are the main thing I'm trying to wrap my head around. As I understand it:
- There won't be any IHT implications at transfer in
- Income generated is taxed against the trustees (interest 20% on first £1000, 45% after; dividends 38.1%) but if paid to a beneficiary can be reclaimed by them against their personal allowance/dividend allowance
- Capital gains realised are taxed against the trustees at 20% after a £6150 allowance
- There's IHT assessments at evey 10 year anniversary or when capital is released, but these should only become an issue if/when the value of the trust rises above the £650k IHT allowance...
So...
Broadly I think the aim would be to use income out of the trust to (part) fund school fees by releasing income to my daughter (allowing tax to be optimised using her allowances) and then the capital may hopefully grow reasonably over time and we can assess if/how we realise any of that to manage any IHT risk if it really grows, and/or release lump sums for uni, house deposit, or just get the whole lot at the right age.
However in my research I've also come across how utilising an investment bond within the trust may make things significantly simpler to manage (no income) and allow up to 5% per annum withdrawl, which seems to nicely fit the school fee usage.
Thank you if you've got this far. Thoughts? My mother would trust me implicitly to do what's best for my daughter so there's a bit of me that wonders if this is all too complex (and potentially expensive) and that it should all be left to me and I'll just invest it for her (and use it for school fees) but that opens up it's own can of worms in terms of tax efficiency.
I'm independently very comfortable and whilst if all left to me it would certainly be helpful, my mother and I are in agreement that the house should benefit my daughter, currently 5 years old (and she will be the only child I have.)
So, that's the broad situation. At this point it's worth saying that we are engaging solicitors to draw up both the will and any trust arrangements, and I'll take other professional advice as needed. The rest of the post is really just to get feedback on our thinking and if this is all overcomplicating things.
Firstly, through probate I'll want to sell the house. No interest in living in it or maintaining it as an asset.
I've also no massive desire to see my daughter get automatic access to 250K + 13 or so years of growth (hopefully higher than inflation...) at 18. At 5 years old the cone of uncertaintly as to who she'll grow up to be is too large, so a bare trust arrangement doesn't seem the right approach. She already has cash savings, Junior ISA and a SIPP we are funding as well.
Instead, we (my mum, I) would like the house moneys to be used as and when it makes sense for my daughters benefit. This could include school fees (she is in private education and will likely remain so), seeing through university education, and potentially when the time is right, a lump sum of what remains to help with house etc, or even to be given to her eventual children.
So all this leads to a discretionary trust appearing to be suitable. It will incur more overhead and for example the solicitor is advising that it couldn't be myself as a sole trustee (they've offered their services...)
The tax implications are the main thing I'm trying to wrap my head around. As I understand it:
- There won't be any IHT implications at transfer in
- Income generated is taxed against the trustees (interest 20% on first £1000, 45% after; dividends 38.1%) but if paid to a beneficiary can be reclaimed by them against their personal allowance/dividend allowance
- Capital gains realised are taxed against the trustees at 20% after a £6150 allowance
- There's IHT assessments at evey 10 year anniversary or when capital is released, but these should only become an issue if/when the value of the trust rises above the £650k IHT allowance...
So...
Broadly I think the aim would be to use income out of the trust to (part) fund school fees by releasing income to my daughter (allowing tax to be optimised using her allowances) and then the capital may hopefully grow reasonably over time and we can assess if/how we realise any of that to manage any IHT risk if it really grows, and/or release lump sums for uni, house deposit, or just get the whole lot at the right age.
However in my research I've also come across how utilising an investment bond within the trust may make things significantly simpler to manage (no income) and allow up to 5% per annum withdrawl, which seems to nicely fit the school fee usage.
Thank you if you've got this far. Thoughts? My mother would trust me implicitly to do what's best for my daughter so there's a bit of me that wonders if this is all too complex (and potentially expensive) and that it should all be left to me and I'll just invest it for her (and use it for school fees) but that opens up it's own can of worms in terms of tax efficiency.
We could all wish that someone was putting this much thought into making our lives good. Not an experience I had myself.
But since you're in that position, why not try to perfect it?
To me, you seem a bit focussed on trying to second guess every eventuality. You're spot on when you say "moneys to be used as and when it makes sense for my daughters benefit", but you can't say right now what will be for your daugher's benefit. Things change. Stay flexible.
But since you're in that position, why not try to perfect it?
To me, you seem a bit focussed on trying to second guess every eventuality. You're spot on when you say "moneys to be used as and when it makes sense for my daughters benefit", but you can't say right now what will be for your daugher's benefit. Things change. Stay flexible.
It seems to me that for the amount of money involved your possibly overthinking this? If it were multimillions involved then fair enough but £250k barely get you on the housing latter in the south east these days!
You dont mention a wife but if divorce is unlikely then I would be inclined to max out your childs ISA for when they're 18, and the rest of the lump would be invested in your own name (in a different account in trust maybe) for you to pay education/allowance as you see fit, and then transfer the balance when your child shows she can manage money sensibly.
You dont mention a wife but if divorce is unlikely then I would be inclined to max out your childs ISA for when they're 18, and the rest of the lump would be invested in your own name (in a different account in trust maybe) for you to pay education/allowance as you see fit, and then transfer the balance when your child shows she can manage money sensibly.
Have you created an investment / drawdown plan?
In my experience school fees average £20k per year and rise well above inflation. Are you sure the pot won't be depleted before university?
In summary, on it's own, I don't believe this is a large enough sum of money to consider a trust arrangement due to the cost of setup and ongoing accounting / tax complexity.
However, depending on your own plans and circumstances it may make sense to look at this from a wider family perspective eg. IHT planning. If so then getting the right advice is critical to ensure the benefits outweigh the risks, restrictions and costs of any new arrangements.
In my experience school fees average £20k per year and rise well above inflation. Are you sure the pot won't be depleted before university?
In summary, on it's own, I don't believe this is a large enough sum of money to consider a trust arrangement due to the cost of setup and ongoing accounting / tax complexity.
However, depending on your own plans and circumstances it may make sense to look at this from a wider family perspective eg. IHT planning. If so then getting the right advice is critical to ensure the benefits outweigh the risks, restrictions and costs of any new arrangements.
otherman said:
To me, you seem a bit focussed on trying to second guess every eventuality. You're spot on when you say "moneys to be used as and when it makes sense for my daughters benefit", but you can't say right now what will be for your daugher's benefit. Things change. Stay flexible.
Personally (and I appreciate in the OP's situation this is a deeply personal matter) I would want to be more specific and say that the inheritance will be used to give her granddaughter the best possible education.LeoSayer said:
Have you created an investment / drawdown plan?
In my experience school fees average £20k per year and rise well above inflation. Are you sure the pot won't be depleted before university?
In summary, on it's own, I don't believe this is a large enough sum of money to consider a trust arrangement due to the cost of setup and ongoing accounting / tax complexity.
However, depending on your own plans and circumstances it may make sense to look at this from a wider family perspective eg. IHT planning. If so then getting the right advice is critical to ensure the benefits outweigh the risks, restrictions and costs of any new arrangements.
I appreciate it isn't a lot of money in the grand scheme of things.In my experience school fees average £20k per year and rise well above inflation. Are you sure the pot won't be depleted before university?
In summary, on it's own, I don't believe this is a large enough sum of money to consider a trust arrangement due to the cost of setup and ongoing accounting / tax complexity.
However, depending on your own plans and circumstances it may make sense to look at this from a wider family perspective eg. IHT planning. If so then getting the right advice is critical to ensure the benefits outweigh the risks, restrictions and costs of any new arrangements.
I have not drawn up a drawdown plan, but I would not hope/expect to fund all school fees out of this. It can help though if/as needed. So for example if at the outset there is 250k and we withdraw 5% per annum to help towards school. Assuming conservative growth of the investment of 1% pa then that leaves about 150k left at the time of going to uni which seems reasonable.
So we'd be utilising my daughter's allowances for the tax on those withdrawls, not mine (additional rate income tax payer and my CGT/dividend allowances are likely to be used up elsewhere)
We might not want to use it for that purpose at all, but knowing it could be is reassuring.
As you say, and I said at the outset, the right advice is absolutely needed. The problem is more one of time. We need to get the will sorted out asap and I don't want to be in the situation where we've painted ourselves into a corner either way.
Thank you for all the replies so far!
drmotorsport said:
It seems to me that for the amount of money involved your possibly overthinking this? If it were multimillions involved then fair enough but £250k barely get you on the housing latter in the south east these days!
You dont mention a wife but if divorce is unlikely then I would be inclined to max out your childs ISA for when they're 18, and the rest of the lump would be invested in your own name (in a different account in trust maybe) for you to pay education/allowance as you see fit, and then transfer the balance when your child shows she can manage money sensibly.
In all honesty I'm caught wanting to give my daughter the best support I can, whilst also not wanting to make it too easy. I'm fine with her having a healthy deposit for a property at some point, but not necessarily with her being able to buy anything outright You dont mention a wife but if divorce is unlikely then I would be inclined to max out your childs ISA for when they're 18, and the rest of the lump would be invested in your own name (in a different account in trust maybe) for you to pay education/allowance as you see fit, and then transfer the balance when your child shows she can manage money sensibly.
My concern around the simpler approach of inheritance going to me and using it as needed to support her is really around IHT/tax planning. We certainly would be affected by IHT if I were to go pop.
Your thinking could work but if I was you I’d always have a plan B.
It’s every parents dream for their child to have a good education but college (sometimes even school) it’s up to them, all we can do as parents is encourage them.
So whilst your plan is good, have a plan B in place.
None of us can predict the future.
It’s every parents dream for their child to have a good education but college (sometimes even school) it’s up to them, all we can do as parents is encourage them.
So whilst your plan is good, have a plan B in place.
None of us can predict the future.
In the situation you describe the Will can always be adjusted by Deed of Variation when the time comes.
Discretionary Trust is the technical answer although as has already been said there's significant faffing and cost on an ongoing basis.
Most fundamentally, bear in mind that the Chancellor can change the rules on trusts and on IHT at a moment's notice.
Try not to let the tail wag the dog. Decide what you Want to do and then do it as tax efficiently as makes sense against a constantly changing system. The various advisers always love this sort of thing - for them it's the gift that keeps on giving. From your point of view and looking at those numbers it would be a good idea to keep things as simple as possible.
Discretionary Trust is the technical answer although as has already been said there's significant faffing and cost on an ongoing basis.
Most fundamentally, bear in mind that the Chancellor can change the rules on trusts and on IHT at a moment's notice.
Try not to let the tail wag the dog. Decide what you Want to do and then do it as tax efficiently as makes sense against a constantly changing system. The various advisers always love this sort of thing - for them it's the gift that keeps on giving. From your point of view and looking at those numbers it would be a good idea to keep things as simple as possible.
I'd prefer to have everything left to myself so that I could then control how the money is invested, dip into it if needed, but always with a view to ensuring your dughter eventually becomes the beneficiary.
You could sell the house, invest the money, put some in her name, some in trust for her, put a lump sum into a pension for her along with a small amount each month, and then later in life make plans for handing it all over to her.
If you leave it all to her now, what if she falls in with the wrong crowd, gets hooked up with a no good boyfriend, starts taking drugs......Having it in your name puts you in full control.
You could sell the house, invest the money, put some in her name, some in trust for her, put a lump sum into a pension for her along with a small amount each month, and then later in life make plans for handing it all over to her.
If you leave it all to her now, what if she falls in with the wrong crowd, gets hooked up with a no good boyfriend, starts taking drugs......Having it in your name puts you in full control.
Edited by LeadFarmer on Sunday 16th May 09:47
LeadFarmer said:
If you leave it all to her now, what if she falls in with the wrong crowd, gets hooked up with a no good boyfriend, starts taking drugs......Having it in your name puts you in full control.
Exactly. It should be in your name and you decide what it funds as sometimes the world isn't perfect in how you expect children to grow up.I didn't pay my daughter's univeristy tuition fees (most Adviser's say not even if you can afford it) as it was her decision to go. OK I paid the accommodation - that was bad enough at £6kpa.
Everyone else has made some good points. I'll just add on the basic, has your lawyer given you an idea of what he would charge to administer a trust (of whatever sort)? I'd suggest £10k a year is minimum you should expect to pay so it's really going to eat into any returns you manage to make. Without wanting to be rude, the professional trustees I work with would suggest a minimum trust size of £2.5m these days once you take into account all the running costs.
I've done something similar for my kids....although the gift was from me not my mother. They have assets in their name which are now funding their education (they're 10 and 12)....there is enough there that they will have a decent sum of money left once their education is finished...but not enough for it to be a life changing sum of money. There is no trust arrangement as the amount of money involved isn't enough to justify the admin cost/ball ache...I do not feel totally comfortable about them having access to a six figure sum when they are older but I hope my parenting is good enough that they will be sensible when the time comes !
We do have a trust arrangement in place for our wills.
We do have a trust arrangement in place for our wills.
drmotorsport said:
It seems to me that for the amount of money involved your possibly overthinking this? If it were multimillions involved then fair enough but £250k barely get you on the housing latter in the south east these days!
You dont mention a wife but if divorce is unlikely then I would be inclined to max out your childs ISA for when they're 18, and the rest of the lump would be invested in your own name (in a different account in trust maybe) for you to pay education/allowance as you see fit, and then transfer the balance when your child shows she can manage money sensibly.
I'd go with this. You don't have siblings who could make trouble, so you're your own boss when it comes to using the money for your daughters benefit. Divorce would be a risk, but hopefully your Mrs wouldn't screw her daughter out of the money.You dont mention a wife but if divorce is unlikely then I would be inclined to max out your childs ISA for when they're 18, and the rest of the lump would be invested in your own name (in a different account in trust maybe) for you to pay education/allowance as you see fit, and then transfer the balance when your child shows she can manage money sensibly.
Use the money to pay school fees - she will burn through the lot assuming she stays until 18. You can then deploy your own funds (that you have saved) as you see fit.
With my kids, my view is that if I turn out 18 year olds who would blow the whole lot up their nose, I've failed as a parent, and got bigger issues to solve than money.
I would mention that in all the similar cases I've seen, giving kids a large sum of cash doesn't end well,
Kids have sued their parents, it had to be used to buy a house, so it was, the house was then sold and the money spent, marriages came and went - with half the cash
Keep it simple - rent the house and use the income.
She can live in the house or use the income but can't sell or borrow against the house etc
If the house is far away then sell it and buy a suitable rental home yes it's a simple approach but I find simple is best
Kids have sued their parents, it had to be used to buy a house, so it was, the house was then sold and the money spent, marriages came and went - with half the cash
Keep it simple - rent the house and use the income.
She can live in the house or use the income but can't sell or borrow against the house etc
If the house is far away then sell it and buy a suitable rental home yes it's a simple approach but I find simple is best
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