In this next instalment of our back to basics articles series, we thought it would be useful to look at the bereaved minors and bereaved young person’s trusts which are both very common trusts. A will making a gift to children on the condition of them reaching a certain age (depending on the age) will either create a bereaved minor’s trust or a bereaved young person’s trust (otherwise known as an 18-25 trust).
Bereaved Minor’s Trust
A bereaved minor’s trust is a trust that is created if a gift is made to the testators’ children on the condition that the children attain the age of 18.
It is important to note that these trusts can only be created for the testator’s own children or stepchildren. A grandparent, for example, cannot include this trust in their Will for their grandchildren. Therefore, any money left to grandchildren or nieces as an example will create either a bare trust or a relevant property trust.
The following conditions must be satisfied in order for the trust to be treated as a bereaved minor’s trust:
- At least one of the minor’s parents must have died.
- The trust was created by the parent’s will, on intestacy, or under the Criminal Injuries Compensation Scheme.
- The trust must meet the conditions set out in section 71A Inheritance Tax Act 1984, which are:
- The beneficiary becomes absolutely entitled to the trust property no later than their 18th birthday
- Whilst the minor is under 18, if any capital is applied, it is applied for the benefit of the bereaved minor; and
- While the beneficiary is under 18, they are entitled to all the income generated by the trust, or if any income is applied, it is applied for the benefit of the bereaved minor.
On the death of the parent, the trust is created and assets are held in the trust. Whilst the child is a minor, the money can either be accumulated or alternatively used towards the child’s maintenance, education or other benefit as the trustees see fit. Whilst the child is under 18, the trustees can apply the income and capital directly for the benefit of the child or by paying the capital to the child’s surviving parent or guardian. Once the child attains the age of 18, they will become absolutely entitled to inherit the assets contained within the trust.
Taxation for Bereaved Minors Trust
Trusts for bereaved minors are not subject to the IHT charges that apply to relevant property trusts or to those that apply to qualifying interest in possession trusts.
In particular, there is no IHT charge when the minor becomes absolutely entitled to capital or dies before becoming entitled to it.
As this is not classed as a relevant property trust, no anniversary or exit charges apply. There is also no IHT charge when trust assets are advanced on new trusts for the benefit of the minor However, the new trusts will be relevant property trusts unless they qualify for a different status in their own right (for example, they may qualify as 18 to 25 trusts).
If a qualifying residential interest is left in this type of trust, the RNRB will apply.
Bereaved Young Person’s Trust
A bereaved young person’s trust is otherwise known as an 18-25 trust and is created if a gift is made to the testators’ children with an age condition that is above the age of 18 but below the age of 25.
As with a bereaved young person’s trust, it is important to note that these trusts can only be created for the testator’s own children or stepchildren. A grandparent, for example, cannot include this trust in their Will for their grandchildren. Therefore, any money left to grandchildren or nieces as an example will create either a bare trust or a relevant property trust.
The following conditions must be satisfied for the trust to be treated as a bereaved young person’s trust which are:
- At least one of the minor’s parents must have died.
- The trust was created by the parent’s will, on intestacy, or under the Criminal Injuries Compensation Scheme.
- The trust must meet the conditions set out in section 71D Inheritance Tax Act 1984, which are:
- The beneficiary becomes absolutely entitled to the trust property no later than their 25th birthday;
- While the beneficiary is under 25, if any capital is applied, it is applied for the benefit of the bereaved young person; and
- While the beneficiary is under 25, they are entitled to all the income generated by the trust, or if any income is applied, it is applied for the benefit of the bereaved young person.
On the death of the parent, the trust is created and assets are held in the trust. The money can either be accumulated or alternatively used towards the beneficiary’s maintenance, education or other benefit as the trustees see fit. Whilst the beneficiary is under 18, the trustees can apply the income and capital directly for the benefit of the beneficiary or by paying the capital to the child’s surviving parent or guardian.
Once the child reaches the age (which can be no later than 25 years old), they will become absolutely entitled to inherit the assets contained within the trust.
Taxation for Bereaved Young Person’s Trust
Trusts for bereaved young person’s trusts are not subject to the IHT charges that apply to relevant property trusts or to those that apply to qualifying interest in possession trusts.
There is no IHT charge when:
- a beneficiary becomes entitled to capital at or under 18;
- a beneficiary dies under 18;
- the trust becomes a trust for bereaved minors while a beneficiary is under 18; or
- trustees make an advance of assets for the benefit of a beneficiary at or under 18
Whilst there is no exit charge with bereaved minor trusts, there is an exit charge with this trust when assets leave an 18 to 25 trust in other cases. The exit charge that applies when a beneficiary is between the age of 18 and 25, is calculated in a similar way to an exit charge from a relevant property trust. The maximum rate of charge is 4.2% for assets that are above the nil rate band. There will be no ten-year anniversary charges during the trust period.
If a qualifying residential interest is left in this type of trust, the RNRB will apply.
