Parents and grandparents find that putting aside wealth for when children grow up is as powerful a motivation for saving as is providing for their own old age.
The financial advantages of placing assets with those least affected by the tax system have led to a variety of children's accounts and savings arrangements becoming available. A bare trust is one of the simplest.
At a basic level, a parent or grandparent might consider establishing and managing a bare trust containing cash or investments, to provide a nest-egg. While the child is a minor, an adult will normally be required to undertake this function. It is not necessary in law that the account holder is a parent or guardian, although this is often the case. Frequently it is another relative (such as a grandparent) who provides the funds and indeed if this is the case, tax advantages accrue. If grandparents (or other relatives) contribute the funds then it is possible to take advantage of the child's own income tax and capital gains tax allowances and their lower taxable rates. On the other hand, if the bare trust is set up by the child's parents, the fund will still be taxed for income tax purposes as if it were the parents' income. In this instance, it is worth considering different options in order to avoid potentially punitive income tax charges.
Although a bare trust is a simple structure and mostly transparent for tax purposes, it is still a valid and real trust in the legal sense, so the account holder (trustee) still owes the serious duty of care to the beneficiary to treat the fund with prudence, diligence and honesty. They effectively hold the fund on behalf of the beneficiary.
This is not to say that the funds must be locked away until the beneficiary reaches majority and is thus able to deal with it himself or herself. In the absence of any restriction to the contrary, the fund can be applied to benefit the child before he/she reaches majority. So when, and for what purpose, should funds be paid out of such a trust? This can be an interesting question, perhaps more so in difficult economic times when parents may be finding it harder to support children from their own resources. A golden rule is that the funds must be used for that specified beneficiary and the benefit cannot be extended to siblings or his or her wider family.
The key is that a payment must be for the "benefit" of the child, although that is given a wide meaning - arguably wider than some parents would prefer! School and college fees: school and club trips; private lessons; specialist equipment for say music or sport and private medical treatment can all qualify as appropriate advances from these trust funds.
However, trust law does create one fly in the ointment: a bare trustee must never make an advance from which he or she derives any personal benefit. Where the trustee is also the parent or guardian of the beneficiary, conflict is easy to envisage. A payment from a trust fund could easily benefit the parents by saving them from having to make a payment which the law would expect any parent to make. There are few reliable definitions available, as these change over time but a useful rule of thumb is what the state would be obliged to do for a child if it were the legal guardian: food, shelter, normal clothing and access to the state provision of education and medical care are the basic liabilities of parenthood. However extras such as private education or medical treatment, expensive school trips, sports and music lessons should qualify.
Judgment, conscience and an overarching duty of care to the beneficiary are the fundamental principles for all trustees - parents are no different, not in trust law at any rate. Let us hope that the children are neither bitter about what is left when they reach adulthood, nor what was not done for them in childhood.
If you would like further information relating to the ways in which you can save for your children, or if you would like specific advice, please contact the Wills and Probate team at Wake Smith on 0114 266 6660.
