I’m trustee for my toddler grandson: I’m not taking a penny, however will I lose my advantages? HEATHER ROGERS replies

I am a trustee for my grandson. His mum died, my dear daughter. She left a will stating proceeds from the sale of her home should be held in trust for her son. He is currently three years old.

I had a local solicitor do probate for me as I was in no fit state to do it myself online. 

He also drew up a deed saying that I was trustee along with my cousin’s daughter who is a lot younger than me. It made sense as I am 63.

I recently spoke to my solicitor to ask about trusts, and he informed me it is already a trust held by me in my name, and I am looking after it in that I am moving it from account to account depending on the interest rate. It has always been a separate account, but is in my name.

Soon after my dear daughter died, I took all relevant documents regarding her death over to my local Job Centre for then to scan as I was worried the Department for Work and Pensions would think the money was mine.

I claim Personal Independence Payment, Employment and Support Allowance and Universal Credit as I had to give up work because of poor health and mental wellbeing.

I don’t – and won’t – take a penny from my grandson’s money. All interest is left in the account. But what are the financial implications of this?

Heather Rogers replies: I am very sorry to hear that you have lost your daughter. 

It must be a very difficult time for you all as a family and my heart goes out to you.

First of all let me reassure you that as a trustee, the funds in the trust should not in any way form part of your assets for any assessment to PIP or other benefits.

But there is a lot of responsibility involved in running a trust, which your solicitor can explain and help with so you can carry out your duties for your grandson.

Below I will run through the following important matters: the role and duties of a trustee; the different types of trust that apply in these circumstances; the tax rules that apply.

Then, I’ll cover a number of things I suggest you do now to ensure the trust is run properly in your grandson’s interests.

Why put assets into trust?

The main reasons are protection of family assets, to benefit someone who is too young to manage their affair or is incapacitated, and to pass on assets during life or after death in a way that the settlor can control.

Assets can be put in the trust during your lifetime or via your will.

A settlor is the person who puts the assets into trust and decides how they are used during the lifetime of the trust.

A trustee is responsible for managing the assets in the trust for the benefit of the beneficiaries of it in line with the wishes of the settlor.

This is usually all laid down in the trust deed if the settlor is a living person at the time the trust is created, or in a will if the trust is created on the settlor’s death.

What are the trustees’ responsibilities?

The trustees must prepare and file the tax returns for the trust and pay the tax liabilities relevant to the type of trust.

They must register and keep the trust up to date on the Trust Registration Service – this is very important.

They also must decide how best to invest or use the trust’s assets. Assets can be land and property, shares or cash.

You usually have more than one trustee and you can also have a professional, such as a solicitor or accountant, as a trustee.

Being a trustee is not something that should be taken lightly. It is a very responsible position.

There are two main acts which govern the role of trustees – the Trustee Act 1925, and the Trustee Act of 2000 which lays out the trustees’ responsibilities and duties of care.

Trusts set up to benefit minor children

There are lots of different types of trusts and the one you choose will depend on what you want it to do.

Sometimes, trusts are specialised due to certain complex circumstances. One of these is where a minor child (one under 18) loses one or both of their parents whilst a minor.

If a parent or both parents die with a minor child or children and their will makes a gift to the minor children conditional on them attaining a particular age, this will create either a Bereaved Minor Trust where they inherit at 18 or an 18-25 Trust where they inherit after 18.

When a minor child inherits from a parent who dies intestate, meaning without a will, this also creates a Bereaved Minor Trust .

With a BMT for a minor child, sometimes referred to as a ‘relevant minor’, the money can either be accumulated in the trust fund or used for the benefit of the child, however the trustees see as appropriate.

Once the child attains the age of 18, they will become absolutely entitled to inherit the assets contained within the trust.

With an 18-25 Trust the same rules apply, up to the age specified in the trust, at which time the young person will inherit. However, the taxation is slightly different.

How are trusts taxed?

BMTs: Income tax and capital gains tax 

The rates of tax that apply to the income received by the trust are 45 per cent for non-dividend income and 39.35 per cent for dividend income.

However, the trustees can apply for special tax treatment, called a vulnerable person’s election, which means that the rates that apply to the trust are the same as if the income was received by the beneficiary themselves.

That means that the personal allowances available to the child can be applied to the income from the trust, which reduces the tax liability.

Capital gains tax is levied on profits from assets, which can range from shares to second homes, buy-to-let properties and personal possessions.

For any capital gains tax, similar rules apply in that the gains can be taxed at the beneficiaries’ rates, meaning that a larger capital gains allowance is available – £3,000 as opposed to £1,500.

18-25 trusts: Income tax and capital gains tax

The tax on income is payable as described above – 45 per cent for interest and any other income arising and 39.35 per cent for dividend income. 

CGT will be payable on gains above £1,500 at 24 per cent (£3,000 if the beneficiary is vulnerable).

However, there are some instances where it is not due at all, for example, a house held in trust is the main residence of a beneficiary under the terms of the trust. 

When a beneficiary becomes entitled to the asset, the gain made on the asset can often be ‘rolled over’ until the beneficiary sells it. However, always seek professional advice in individual circumstances.

The tax is payable on 31 January each year along with the trust tax return. More on trusts and taxes can be found on Gov.uk.

Inheritance tax

Bereaved Minor Trusts and 18-25 Trusts differ from other trusts in the way that they are treated for inheritance tax.

Even if the value of the assets in the trust exceeds the nil rate band – the threshold of £325,000 where inheritance tax starts being due on an estate – there will be no inheritance tax charges on a distribution to the beneficiary at age 18.

There are no 10-yearly IHT charges during the trust period, which are imposed with discretionary trusts for example.

In an 18-25 Trust, when a beneficiary over the age of 18 receives a payment from the trust, there may be a small charge to inheritance tax if the trust fund exceeds the nil rate band.

The charge will be a fraction of 6 per cent, with the amount depending on how long over the age of 18 the payment is made to the beneficiary. The maximum charge is at 25 and is 4.2 per cent on assets exceeding the nil rate band.

What about gifts in wills from other family members?

A Bereaved Minor Trust can only be created by parents and step-parents for their own children and or/stepchildren.

Different types of trust can be created for minor children by other family members such as grandparents.

What action should you take now

In your circumstances I suggest doing the following to ensure the trust is set up and run well for your grandson.

1. Review the trust details with your solicitor to ask any questions and make sure you fully understand your role and responsibilities, and what you need to do from here.

2. Ensure that the trust has been registered on the Trust Registration Service and there is an annual confirmation of the trust being kept up to date.

The solicitor should have registered it, but it is worth checking it is being maintained.

3. If the income is over £500 a year, review whether trust returns have been prepared. There were different rules for earlier trust years, which might apply here.

You might want to take advice from an accountant, which may sound financially daunting if you are on a low income and receiving benefits.

However, the fees are paid by the trust and it can be worth the peace of mind to know that everything is being handled properly. My column on how to find a good accountant is here.

4. Speak to a financial adviser as to whether the trust investments are the right ones for the circumstances.

Although you are moving the income around to obtain the best interest rates, there are other investments available for trusts which you may wish to explore.

Again, the fees would come out of the trust and if you and your cousin’s daughter are inexperienced in investing it might be worth getting professional help.

You can ask friends and family for word of mouth recommendations, or your solicitor might refer you to someone suitable, or there are many search tools available for financial advisers.

Make sure you don’t fall foul of an unregulated adviser as there are many scammers about. You can check if an adviser is regulated by the Financial Conduct Authority here.