Provision for children
The private client team at Clarke Willmott recently held a webinar looking at provisions for children included in a will when a parent dies. Associate Georgia Collier and Lifetime Executive Sarah Arkless share their expertise here.
Dying intestate (without a valid will) can have serious implications, particularly where there are minor children involved.
The first issue to look at is guardianship – who will have parental responsibility for your minor children on your death.
If no guardian is appointed, the Court will decide who to appoint. This is risky for a number of reasons. The decision may not accord with your wishes; it may mean your child ending up with someone they are not close to and would not want to be with; it could lead to family disputes; it could be a long drawn-out process, particularly if there is any contention between competing potential guardians and it is possible that your child may be taken into care temporarily until a guardian has been appointed.
When appointing a guardian, we suggest that parents create a separate letter of wishes to guide the guardians on how they should bring up your children. This letter does not become a public document, unlike the will, so its contents remain private between you and the guardians. The letter can include how children are to be educated, hobbies or clubs they should continue and relationships to be maintained.
Parents should also liaise where possible with a separated parent to ensure that both are in agreement on who the guardians should be if both have died.
Replacement guardians should be considered to cover the situation where your guardian has died or is unable or unwilling to take on the role and you are unable to change your will or have not done so.
You might also wish to consider financial provision for a guardian as a thank you. A legacy over and above the assets provided for the children which can be used to assist the guardians in raising them.
The next point of consideration for your will in relation to provisions for children is the appointment of trustees.
Trustees are people who look after funds for the benefit of the children until they reach the age of 18 or another specified age or contingent event.
A trustee can advance funds to a minor for their education, maintenance, or benefit. This can include regular payments to a guardian for increased living expenses or ad hoc payments for the child’s share of a family holiday, payment of school fees or uniform etc.
It is important to think carefully about whether you would want the guardian of the children to also be a trustee. On the one hand, this could ease the ability to access funds for the child’s needs. On the other hand, some people may consider it a conflict of interest and may want someone less involved with the child to manage the money. It could also mean that a guardian is reluctant to utilise money that they are legitimately entitled to for fear of reducing the inheritance of the children.
Although as a general rule anyone over 18 can be a trustee, careful thought should be given on who to appoint. Many people choose family or trusted friends in this role. You can appoint a professional, which can be useful given all the obligations, but this would lead to costs being incurred. It is possible for ley trustees (non-professionals) to take advice from professionals as and when is necessary.
Trustees must always act in the best interests of the beneficiaries. They must be clear on the terms of the trust and comply with those terms. They must act unanimously – where trusts for children exist there should be at least two trustees and a maximum of four, although too many could become unworkable.
Under a will it is common for people to leave assets to their children at a specified age, such as 21 or 25, where it might be more appropriate for them to have a potentially life changing amount outright.
Problems can arise when the child may not have reached an equivalent maturity level and are vulnerable or irresponsible. This is why it could be advisable to leave assets in flexible or protective trusts for children.
Another issue is protection of assets for children of a previous relationship. Firstly, it’s important to note that marriage revokes (cancels) a will (although you can make a will in contemplation of that marriage which would then not be revoked by the nuptials).
If you have made provision for children in a previous will and have not made a new Will following your marriage, or you did not make that prior will in contemplation of a later marriage, your children would be disadvantaged.
Where there is not a valid will the rules of intestacy would apply, significantly limiting the amount which would pass to your children. The statutory legacy passing to a spouse has been increased to £322,000 as of 26/07/23. Your spouse will also receive half of the remaining estate, leaving only half of the remainder for your children.
If assets pass to a new spouse, there is no guarantee they will leave them to your children. Likewise, any jointly owned assets would pass, outside of a will, to a surviving owner and may not pass to your children.
So how can you leave assets to children and also provide for your spouse or partner? You could create a life interest trust. This is where your spouse is entitled to the income from your assets for life – or a specified time period or a later event such as remarriage. This is called the trust period and capital passes to your children at the end of the trust period.
Moving on to Age Contingent Trusts and Discretionary Trusts.
Age Contingent Trusts include BMTs – Bereaved Minor Trusts, and 18-25 Trusts, both of which can only be created by a parent for their own child, stepchild or adopted child. For a BMT a child cannot give a valid receipt until attaining the age of 18 so funds will be held in trust until this age has been met.
An 18-25 Trust caters for a bereaved person under 25 and are used as a means to pass assets to a child whilst being able to specify the age at which the child becomes entitled to the whole of the assets, usually at 21 or 25.
With these types of trusts cash isn’t locked away indefinitely. While the minor is under 18 the trustees may accumulate income or apply income/capital for education, maintenance or other benefit as they see fit, by using it directly for the minor or by paying it to the minor’s surviving parent or guardian.
These types of trusts have favourable tax treatment for inheritance tax and do not form part of the relevant property regime so there are no ten yearly anniversary charges. Similarly, when the child becomes absolutely entitled at 18, there is no charge to IHT at that point, even if the value of the trust exceeds the nil rate band.
If a child is over 18 however, there may be a charge to IHT if the trust exceeds the nil rate band. The charge will be less than 6%, with the amount depending on how long after the age of 18 the payment is made. For example, if the child inherits at age 21 the inheritance tax rate will be 1.8%. If the child inherits at age 25 the inheritance tax rate will be a maximum of 4.2%.
If the testator wants to leave assets to their child at, say, age 30, then the trust would not benefit from the favourable tax treatment at any stage of its life (so would never be a BMT) and would form part of the relevant property regime straight away, not just the 5 years after age 25.
Looking one step further, we look to Discretionary trusts (DT). Here, the assets are not included in the taxable estate of any of the beneficiaries. The trust is known as a ‘relevant property’ trust and will be assessed to IHT every 10 years. This is known as the ‘periodic’, or anniversary charge. If a parent wanted to pass assets to a child whose estate is already approaching £325,000, there may be an argument to have assets pass into a DT; this being solely from an estate planning perspective, so here a beneficiary would need to outlive their parent by 60 years or more in order for a trust of this nature to be less tax efficient. The accumulation of assets simply aggregates when inheritance is received outright meaning that anything over and above the NRB would be charge to IHT at 40% on the child’s death, too. DTs are of course also helpful to protect assets for vulnerable beneficiaries over and above that of a BMT (above) or if the assets being bequeathed are not from parent to child. In a DT, trustees can manage monies on behalf of the beneficiaries and protect assets from third parties (such as on divorce). Care needs to be taken with regard to the residence nil rate band and when there is a married couple wanting to leave assets to their children, planning might be advisable on the first death in order to be within scope of being able to claim it on the second death.
It is advisable to get professional advice on all of these issues.