Questions of cash: The pitfalls of trust funds for children

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My husband set up a trust fund for his two children from his former wife. It expires when they are 25, in eight years' time. Can my husband cash in the trust early? He is not in contact with the children and does not wish them to have the money. Can he remove any assets from the trust and pass them to his two younger children?

SH, London

If the trust is just for your husband's children from his first marriage, they alone must benefit from the trust money, says Stephen Pallister, tax and trust partner at solicitors Charles Russell. It all depends on the terms of the written trust deed.

Your husband should get hold of a copy of the trust to check the terms. If the trust deed says the beneficiaries are only the first-marriage children, there is nothing he can do. But if the beneficiaries include any children of your husband, his other children could benefit, or it may be possible to add them as beneficiaries. It may be possible for the trustees to benefit them to the exclusion of the first-marriage children. The decision would almost certainly be down to the trustees.

Your husband should engage a solicitor with expertise in trust law. You can find a list of these on the Law Society's website - www.lawsociety.org.uk.

In 2000, I invested pounds 150,000 in a Pru bond. I plan to use the bond for some of my income when I retire in 10 years. Last year, while unemployed, I started the maximum monthly drawdown allowed without triggering an MVA [market value adjustment - the penalty for early surrender]. I am no longer unemployed and do not need the income, but as the bond is only returning 4 per cent, it seems better to reinvest the money, rather than cancel the drawdown. Are there any disadvantages to doing this?

BM, Hong Kong

Pru bonds are open-ended with-profits bonds issued by Prudential. Up to 5 per cent per annum can be withdrawn each year without triggering an MVA. After five years, a total of pounds 25,000 a year can be withdrawn without an MVA.

One option suggested by Adrian Douglas, a senior financial services manager at Moore Stephens accountants, is to increase your MVA-free drawdown by exercising your right for the period prior to that when you began the drawdown. Prudential has confirmed that this would be acceptable. Douglas suggests that if your money were placed in a better investment you might achieve a higher return, even taking into account the MVA on surrender. The level of MVA charged varies. You should take specific financial advice.

I opened a Smile internet bank account last October, giving authority to Smile to transfer direct debits from NatWest. Three requests by Smile were ignored. I spoke to NatWest, which confirmed that under the banking code of conduct it had to supply the information in two weeks. I am still waiting, and having to run two bank accounts to make sure all my bills are paid.

LD, Walsall

The information has now been passed to Smile. But NatWest says no initial request from Smile was received, and it had no response to an answerphone message it left asking you to arrange for a fresh request for the information. NatWest is sending you flowers as a gesture of goodwill.

Last year my wife and I took measures to maximise use of inheritance tax allowances, including severance of joint ownership of our pounds 450,000 house to become tenants in common, establishment of cash and investment assets in sole names, new wills creating discretionary trusts, and forgiving in our wills loans to children of pounds 30,000. However, our financial assets remain over the IHT threshold by pounds 42,000. It is our intention to swap current cash and investments into a second property. How may we further reduce IHT liabilities?

RH, Bromley

Roger Williams, partner at accountants Wilkins Kennedy, says: "Having written tax-effective wills, there is little else that can be done for estates of your size to further mitigate IHT. The main planning area would be to give assets away during your lifetime, using available exemptions.

"Your main concern should be to ensure you retain sufficient funds to live on, given the costs of possible healthcare. If you can afford to make lifetime gifts, then you and your wife can each make gifts of up to pounds 3,000 per annum free of IHT. You can also make gifts of any size free of IHT if you live for seven years afterwards. If you wish to make lifetime gifts, possibly the best one to make would be the loan to your children. This is still part of your IHT estate at the moment, but could be removed without any direct financial loss to you as you appear not to want repayment."

n If you have any queries, write to: Questions of Cash, The Independent, 191 Marsh Wall, London E14 9RS, or e-mail: cash@independent. co.uk. Please send copies, not originals.

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