A Look at Trusts for Bereaved Minors and 18 to 25s
The Finance Act 2006 introduced two new categories of special trusts: trusts for bereaved minors and 18-25 trusts. In this blog post, we take a look at both. This article is particularly relevant to the CII’s J02, R06, AF1, and AF5 exams.
This article is correct as at 21 November 2023.
Trusts for Bereaved Minors
These trusts can generally only be set up under the:
- Will (or intestacy) of a deceased parent, including under a Deed of Variation;
- Criminal Injuries Compensation Scheme; or
- Victims of Overseas Terrorism Compensation Scheme.
A bereaved minor is a person who:
- has not yet reached 18; and
- at least one of whose parents have died.
The definition of parent is broad and includes step-parents and anyone with parental responsibility for the minor immediately before their death.
These trusts must give an absolute interest (in the income and capital of the trust) by the age of 18. Before that age, the trust property can only be used for their benefit and no one else’s.
In terms of inheritance tax (IHT), there is no charge where the:
- bereaved minor is given absolute ownership of the trust property on or before their 18th birthday;
- trust property is applied for their maintenance; or
- bereaved minor dies before their 18th
Age 18-25 Trusts
Whereas the beneficiary of a bereaved minors trust must receive absolute ownership of the settled property on or before their 18th birthday, for an 18-25 trust, as the name suggests, it’s their 25th birthday.
Again, they can only be set up in limited circumstances. For 18-25 trusts these are through the:
- Will (or intestacy) of a deceased parent, including under a Deed of Variation; or
- Criminal Injuries Compensation Scheme.
These trusts must give an absolute interest (in the income and capital of the trust) by the age of 25. Before that age, the trust property can only be used for their benefit and no one else’s.
Where the trust property is settled prior to the age of 18, there are no IHT repercussions in line with the treatment of bereaved minor trusts.
However, an exit charge will be levied where the beneficiary becomes absolutely entitled to the trust property between the ages of 18 and 25 or if they die between those ages.
An 18 to 25 trust was created on the death of Pat for her son, Jon.
The absolute interest is given to Jon on his 21st birthday.
The value of the trust assets at that time is £425,000 and the IHT nil rate band is £325,000.
The exit charge is based on the number of quarter years between Jon’s 18th birthday
and when he becomes absolutely entitled, i.e. 12/40ths, and is charged on the difference between the value of the trust and the NRB:
(£425,000 − £325,000) × 6% × 12 ÷ 40 = £1,800.
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