Naming grandchildren as the beneficiaries of a trust, whether this is a lifetime trust or a trust within your will, is no different than naming children, save for (in certain circumstances) in relation to income tax. If you have not written a will, your children may be legally entitled to inherit your whole estate outright, so making a will is the only way to ensure that what you want to happen with your assets on death prevails.

There are various trusts that you can set up during your lifetime for the benefit of your grandchildren and there may be many reasons for you to do so. An example may be for Inheritance Tax planning and mitigation, both for your and for your children. Read on to learn more about which types of trusts may be best for your circumstances, and how to plan for tax.

Which trust is right for you?

Before taking action to set up a trust, you should be aware of the different types and what their benefits and potential drawbacks are, specifically when implementing these for your grandchildren. We can advise you on the most appropriate structure based on your family’s circumstances.

Bare Trust

A common trust structure when planning for grandchildren is called a bare trust. Assets under a bare trust are held in the name of the trustees (often you) and allow the trustees a level of control over the assets, while the beneficiary has no right to access the capital before they reach the age of 18, at which point, they will become entitled. Bare trusts allow you to make the transfer simply, without any added conditions or rules - this keep running costs down.

Bare trusts are rigid - the named beneficiaries and their proportion of the trust assets crystalise after the trust is established and cannot be charged, preventing future beneficiaries from being added. If your desire is to cater for all grandchildren, present and future, a bare trust may not be for you as you would need to create further trusts for unexpected or future grandchildren.

There are tax advantages to bare trusts, as the assets are deemed for income and capital gains tax purposes as the grandchild’s and therefore less, or even no tax will be paid on the income or sale of assets within the trust.

Interest in Possession Trust

Interest in possession trusts are similar to bare trusts or discretionary trusts with the exception that they entitle the beneficiary to any income/interest arising from the trust asset as soon as it is produced and the full value of the trust will be passed on to the named beneficiary, or held at the discretion of the trustee at the end of the interest in possession.

Discretionary Trust

A discretionary trust does not grant a beneficiary an immediate right to the present enjoyment of any income generated from the trust property. The trustee is at liberty to decide when payments are made, how much and to whom, at their discretion.

A discretionary trust structure allows a trustee to decide how a trust will be distributed and how the beneficiary can use it.

Discretionary trusts are appealing to many because the assets under them are ring-fenced from creditors - as none of the beneficiaries have an enforceable right to the trust assets, neither do their creditors. This structure also benefits from flexibility as the trustee can react to changing family circumstances. However, note that the added flexibility comes at a cost as this trust is more costly than a bare trust to administer.

How to Set Up Your Trust

To set up a trust, you should enlist the help of a professional solicitor with expertise in the wills, trusts and estate planning field to guide you through the best way forward. The process involves: 

• Declaring your beneficiaries - this can be named beneficiaries or a class of beneficiaries such as ‘grandchildren’. At this stage, you should also consider how/in what proportion and when you intend the beneficiaries to benefit from the trust.
• Planning the trust’s structure
• Appointing other trustees to maintain and organise the trust - as the legal owners of the trust property, trustees should be trusted individuals in your life, like spouses or close friends, or professionals

Plan for Tax

When your estate is transferred in your lifetime or on death, you or your trustees may have to pay Inheritance Tax (IHT). This can be a large sum of money - up to 40% of the value of the estate. However, there are a number of ways that you may be able to reduce the value of the Inheritance Tax you are required to pay, and this will be essential in ensuring your beneficiaries receive as much of it as possible. Our expert solicitors in this field can advise on the tax implications of each type of trust.

To learn more about how you can plan to avoid paying Inheritance Tax, read our guide on the subject.

Trusts for grandchildren can also be very income tax efficient. Anti-avoidance rules prevent parents from creating trusts for their minor children and achieving any income tax benefit (as income generated by the trust is taxed on the parent). The same rules do not apply to grandchildren, and hence it is possible to create a trust for minor grandchildren and utilise those grandchildren’s income tax allowances.