Do you TRUST your Grandchildren?
Many grandparents are worried about the financial challenges that face their grandchildren. From paying for university to funding a deposit to buy a property, today’s grandchildren face financial challenges that previous generations did not.
What are the Options?
A simple option that many grandparents consider is to contribute to a Junior Individual Savings Account, which replaced Child Trust Funds in November 2011. However, there are some limitations of JISAs. Contributions are capped at £4,080 for the 2015/16 tax year, only a parent of the grandchild can open an account, the grandchild must live in the UK, and most importantly, the account will belong to the grandchild at age 18.
Assuming that annual JISA contributions are capped at £4,080, it is possible for a grandchild born today to have a pot worth at least £73,440 by the time they are 18. This is a considerable amount of money for a young person to control.
Are there any alternatives?
An alternative to a JISA is to set up a discretionary trust. The grandparent would choose one or more trustees to manage the trust fund. The grandparents could be the initial trustees. The class of beneficiaries could be all current and future grandchildren, and money can be added to the trust as and when the grandparent can afford to do so. There is no cap on how much money can be contributed to the trust fund, but there could be Inheritance Tax considerations if more than £325,000 is contributed over a seven year period.
What are the benefits?
A key benefit of a discretionary trust is control – it is the trustees who decide who will benefit from the trust and at what age. Many grandparents don’t know how their grandchildren will turn out when they get older. Some 18 year olds will be very sensible with money, whereas others may still be irresponsible at age 25 or older. The trustees can decide at what age their grandchildren can inherit money and for what purpose.
Another benefit of a discretionary trust over a JISA is what would happen if the grandchild’s parents got divorced. Normally one of the parents would be named as a “registered contact” for a JISA. However, if this is your former son or daughter-in-law, they would control the account, which could prove difficult if you lose touch with them.
What do I do now?
For further information, please contact the Head of Trusts, Philip Evans, at Graham & Rosen’s Hull or Cottingham offices.