Trusts For Grandchildren: Are They A Good Idea?
As your parent gets older, it’s likely that they (and you) will be thinking about their finances. How can you ensure they have enough funds ring-fenced to support them through later life, whilst providing for their family too? Trusts for grandchildren are one such way.
To understand this more, we’ve spoken with Sebastian ElWell, the founder of Switchfoot Wealth and an accredited SOLLA advisor. He’s also got a fantastic surname which matches our website, but that’s purely coincidental!
There’s a famous quote from Einstein that says “compound interest is the eighth wonder of the world.” He could well have been speaking about the benefits of trusts – financial gifts which, when set up correctly can help provide for future generations long after the provider has gone. But when it comes to setting up a trust, what is there to consider and are they a good idea? We’ve got the detail here.
Where Can You Get Good Financial Advice?
First things first, if your elderly parents are considering any big financial decisions, it’s important to make a financial plan so that they don’t give too much money away (or keep too much ‘just in case’). For most people, this would involve speaking with a financial planner for sound, impartial advice.
What Is A Financial Plan?
Essentially a financial plan takes into account all income and expenditure, what is owned (the assets) and what is owed (liabilities). Having this detail means you can project forwards using reasonable and reasoned assumptions to try and forecast what the future might look like.
Think of a financial plan as a decision making tool for today, helping people understand what they can afford and what they should keep back. No one has a crystal ball (unfortunately!) so it’s important to remember that a financial plan will inherently be wrong but it’s the best guess you can make.
Any type of thinking ahead (whether that’s setting up a trust for grandchildren or looking at care home fees) should start with one. It helps one to map out how much they could need in the future and prepare for it. And it really is the case of the earlier the better.
Do You Need A Financial Planner?
According to Sebastian, everyone needs a financial plan but not everyone needs a financial planner. It really depends how good you are with taking the above into account and making a considered plan yourself.
For example, if your parent is trying to plan for care home fees, they need to have a good handle on the growth rates and inflation in this sector (fees on average increase at 5% per year). And if they want to set up a trust fund for grandchildren, they need to know how much they can afford to give away.
If your family would prefer to use the help of a financial adviser, make sure they find one who is SOLLA accredited. SOLLA is the Society Of Later Life Advisers, and provides independent advice that is purely for the benefit of the recipient.
Gifting Money To Grandchildren
Gifting is important for many grandparents, and having a considered financial plan allows them to put this into practice.
Trusts for grandchildren are the most tax efficient way to do this, whilst protecting your assets at the same time. It splits the legal ownership of the money from the beneficiary, and a number of parameters can be put in place depending on the type of trust chosen.
All trusts, regardless of type involve three parties: the settler (giving the assets), the trustee (overseeing) and the beneficiary (receiving the assets).
But unlike a gift in the most common sense, when a trust is created it hasn’t always been decided how much, when or even who will receive that gift. This may sound vague, but that’s because there’s a number of types of trusts.
Also known as a bare trust, an absolute trust is the closest to an outright gift that you can get. It’s known who the beneficiary is for certain (e.g. one of the grandchildren), which means that when they reach a certain age they can request the trustee stops administering it and they can access the funds.
With a discretionary trust, there’s a class of beneficiaries (e.g. all the grandchildren), so they’re not named individually. It’s at the discretion of the trustees who will benefit, and when.
This protects the assets for example from divorce or bankruptcy. This protection comes with a higher tax bracket however, but a planner can advise on this.
Disabled Persons Trust
One in five people will become disabled in their lifetime, so this trust is becoming ever more important. Applicable to people who receive certain disability benefits, this trust gives favourable tax treatments. It’s not counted as the disabled person’s money so isn’t factored into means testing.
It doesn’t end there – there’s more than one way you can gift each type of trust.
This is when the assets are given to the trust entirely. In the case of grandparents and grandchildren, it’s not the grandparent’s money anymore.
Like with any loan, this is the settler loaning money (zero interest) to the beneficiary and then can call it back at any time (for example, if they need help with care fees). The value of this trust (whether absolute or discretionary) on day one is zero and any growth over time is for the beneficiaries.
Discounted Gift Trust
This is the opposite of the above – in the case of our example, the grandparent makes the gift but retains right to its income for the rest of their life, so the value of the gift is discounted.
How To Choose A Trustee
As you have probably gathered, being a trustee is a position of great responsibility so choose wisely. Ultimately, you want someone who you can trust as they will be taking legal ownership for the trust and must act in the beneficiaries’ best interest.
Anyone over the age of 18 can act as a trustee but it’s important to consider whether they want to take on this responsibility and have the skillset required to administer it. You can appoint more than one trustee – this could be someone close to you personally as well as someone professional to work together in tandem.
If your parents are considering their financial future, then a trust could play an important role in their later life planning. Like we’ve learnt from Sebastian, the earlier they understand their financial situation (with a financial plan) and get the best route identified and set up, the better.
As with all aspects of finance, there’s never one clear answer but setting up trusts for grandchildren can be hugely beneficial from both a tax efficiency perspective and caring for future generations.