What happens when an heir is underage? The Significance of 18-25 Trusts.

Trust for Bereaved Young Persons age 18-25:

When it comes to testamentary trust clauses, there's this interesting legal setup known as the Bereaved Young Person's Trust, or the 18-25 trust. These trusts come into play when a gift is given to the testator's kids, but only if they hit that age milestone between 18 and 25.

Your kids will automatically inherit your estate when they reach 18 if you pass away. Sometimes, this might not be the best choice since they might lack the life experience needed to handle a big inheritance. We really shouldn't overlook the emotional toll that losing one or both parents can take on a child, especially since some might try to use this situation to their advantage.

It's important to point out that these trusts are only used for the testator's biological or stepchildren. Grandparents, for example, can’t include this trust in their wills for their grandkids. So, any inheritance set aside for grandchildren or nieces, for example, will create either a bare trust or a relevant property trust.

For a trust to qualify as a Bereaved Young Person’s Trust, it must meet the following conditions:

• One of the minor's parents must have passed away.

• The trust must have been established through the parent's will, intestacy, or under the Criminal Injuries Compensation Scheme.

• The trust must adhere to the stipulations outlined in section 71D of the Inheritance Tax Act 1984, encompassing conditions such as the beneficiary attaining absolute entitlement to the trust property by their 25th birthday.

When the parent passes away, the trust is created, holding the assets under its management. The trustees can choose to either save the funds or use them for the beneficiary's living expenses, education, or other needs. If the beneficiary is under 18, the trustees can use the income and capital for their benefit or give capital to the surviving parent or guardian. Upon reaching the stipulated age (no later than 25), the beneficiary gains unmitigated entitlement to inherit the assets held within the trust.

Tax Implications for Bereaved Young Person’s Trusts

Bereaved Young Person’s Trusts are exempt from the Inheritance Tax (IHT) charges applicable to relevant property trusts and qualifying interest in possession trusts.

There is no IHT charge in the following scenarios:

• When someone who benefits gets the right to capital at or before they turn 18.

• If a beneficiary under 18 passes away.

• So, when a trust changes into a Bereaved Minor Trust because a beneficiary is still under 18, that's what happens.

• Trustees are providing an asset advance for the benefit of the beneficiary who is 18 or younger.

So, Bereaved Minor Trusts don’t have exit charges, but that’s not the case for 18-25 trusts in other situations. If a beneficiary is between 18 and 25, there's an exit charge that works similarly to a relevant property trust. The maximum charge rate is 4.2% for assets that go over the nil rate band. Hey, just so you know, there are no ten-year anniversary charges that build up while the trust is active.

If you’re looking to write your will or lasting power of attorney, book an appointment with Joshua Young. I am A Will writer covering Farnborough, Basingstoke, Camberley, Aldershot, and the surrounding areas.