There are Trusts which can be set up specifically for the benefit of vulnerable beneficiaries and which can offer considerable tax advantages. A vulnerable beneficiary would typically include:
A person who is under the age of 18 and has lost a parent through death.
A person who is defined as mentally or physically disabled.
Trusts for Children
Prior to legislation changes in 2006, Accumulation and Maintenance Trusts (known as A and M Trusts) were commonplace and were designed to favour relatives who were minors. These Trusts were treated favourably for Inheritance Tax purposes, however, since 2006 no new A and M Trusts can be created and new tax-efficient Trusts were introduced.
Bereaved Minors Trust
A Bereaved Minors Trust can only be set up by a parent, either via Will or intestacy or the Criminal Injuries Compensation Scheme. The Trust will therefore only become effective following the death of a parent and must meet the following conditions:
The bereaved minor must become absolutely entitled on or before attaining the age of 18.
Any of the settled property that is applied for the benefit of a beneficiary must be applied for the minor.
Either the bereaved minor must be entitled to all the income arising from the settled property, or no such income may be applied for anyone else
A qualifying Bereaved Minor's Trust will mitigate the relevant property tax charges for Inheritance Tax, namely there will be no exit charges or 10-year anniversary charges. The Trust will (largely) be taxed as if income and capital gains were the bereaved minors'.
The downside to this trust is that the minor beneficiary inherits by the time they are 18 and this will be off-putting for some who may have concerns about a young person receiving a large inheritance by their 18th Birthday.
The availability of this Trust helps alleviate the concerns highlighted above. They are similar to Bereaved Minors Trusts and are created in the same way. But this time, the beneficiary must become absolutely entitled by the age of 25 years rather than 18 years.
The Trust is taxed slightly differently in as much as it receives the same treatment up until the beneficiary reaches 18 and after this time there are fewer tax benefits. The 10-year anniversary charges will not apply, however, exit charges will apply and the beneficiary will lose the favourable income and capital gains tax treatment as outlined above.
Trusts for the Disabled
Special tax reliefs apply to Trusts which are created for the benefit of disabled beneficiaries. Disabled beneficiaries are defined by reference to their mental capacity or by their entitlement to certain state benefits relating to their disability (regardless of whether or not they receive them).
If you would like to find out more, then please feel free to contact us.