YOUR MONEY: If your child is wild, put the money on hold
Rebel without a cause? Then make him a rebel with a trust fund.
Sunday 03 November 1996
Be it sects, drugs or rock'n'roll, if you believe your progeny cannot cope with running their own affairs, establishing a trust may be the answer.
Trusts are a common and sometimes tax-efficient way for parents with capital to make arrangements for children they believe cannot look after themselves. They guarantee that funds are available while ensuring someone else controls the money, now or after the settlor, the giver, dies.
A discretionary trust, such as the viscount's, gives trustees total discretion over how they manage the assets. They can hand back responsibility for the estate to the beneficiary if they see fit. If the beneficiary is hooked on heroin, however, pumping large amounts of cash into his or her bank account is not going to help anyone. In which case trustees must reconsider how they use the money.
Moira Elms, the personal finance planning partner of Coopers & Lybrand, says conspicuously wealthy heirs or heiresses often have their money put into trust to protect them from gold-diggers.
If the money is held in a discretionary trust the beneficiary has no absolute entitlement to capital or income, so the money cannot be assigned to the former spouse on divorce.
Moreover, Ms Elms says if an individual receives money from a trust fund there is little visible evidence to outsiders of the existence of large amounts of money because the income can be a tiny proportion of the capital.
Trusts may also be used to keep aside someone's inheritance until they have come of age, or they have made their own way in life. Funds could be withheld until the beneficiary is 30, when he or she has children to educate.
Geoffrey Shindler, chairman of the Society of Trust and Estate Practitioners (Step) and partner at Halliwell Landau, a firm of Manchester solicitors, says trusts can be used to stop a widow or widower who has remarried leaving everything to the second husband and cutting out the deceased's children.
In many cases husbands form trusts to stop their widows from bequeathing the estate to children from the wife's first marriage, passing over the deceased's own brood.
Often in these circumstances, the trust deed gives the widow a lifetime interest in the income from the capital left in the estate, and the capital goes to the deceased's children after , too, dies.
If the income is not enough for her to live on, the trustees must make a decision whether to eat into the capital earmarked for the husband's children.
Mr Shindler says: "There is a risk trustees can be more concerned about the wife marrying the milkman than about her starving to death." If trustees err too much on the side of the widow, however, they may be sued by the children. Often, the trustees will look to the letter of wishes for guidance. This is the expression of intent from the settlor that often accompanies the trust deed.
Discretionary trusts are also used as a mechanism to make provision for mentally handicapped people after their parents die. Trustees become responsible for the person's whole welfare, rather than just the financial side.
A trust relieves the beneficiary of the task of investment. It also gives the trustees power to make payments to third parties, such as carers, and to purchase items. Money need not be paid directly to the adult concerned if inappropriate.
Trustees must be careful to provide in ways that do not affect entitlement to state benefits. Regular payments for specific purposes are treated as capital and ignored by the benefits agency. Regular payments made to a claimant for unspecified purposes covered by income support are treated as income and reduce the claimant's benefits.
Mencap publishes a free booklet entitled Leaving Money to People with Learning Disabilities. Anthony Quinn & Co, a firm of solicitors, also offer a free information booklet.
To set up a trust you should find a lawyer, accountant or bank. Step can give you names of a trust and estate practitioner in your area. It may cost hundreds or it may cost thousands of pounds to establish and run a trust, depending on the complexity of the case. Mr Shindler says it is probably not worth setting up a trust for much under pounds 100,000 because the beneficiary does not get much of an income below this level. Costs also eat into the capital.
q Society of Trust and Estate Practitioners (Step): 0171 408 1080; Anthony Quinn & Co: 0171 242 3332; Mencap: 0171 454 0454.
q Dido Sandler writes for 'Financial Adviser', a specialist magazine.
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