In last week’s article we covered what a Bereaved Minor’s Trust is and its requirements. This week we will cover a similar trust, a Bereaved Young Person’s Trust also known as an 18-25 trust. This is another commonly used trust in wills that would arise if a gift is made to the testator’s own children with an age condition that is above 18 but no higher than 25. It is very similar to a Bereaved Minor’s Trust but there are key differences, particularly in its taxation.
Bereaved Young Person’s Trust Conditions
There are a number of conditions that must be satisfied in order for the trust to be treated as a Bereaved Young Person’s Trust.
- At least one of the minor’s parents must have died.
- The trust was created by the parent’s will, on intestacy, or under the Criminal Injuries Compensation Scheme.
- The trust must meet the conditions set out in section 71D Inheritance Tax Act 1984:
- The beneficiary becomes absolutely entitled to the trust property no later than their 25th birthday;
- Whilst the minor is under 25, if any capital is applied, it is applied for the benefit of the bereaved young person; and
- While the beneficiary is under 25, they are entitled to all the income generated by the trust, or if any income is applied for the benefit of the bereaved young person.
How does a Bereaved Young Person’s Trust work?
On the parent’s death the trust is set up and the assets held by the trustees. The trustees can either accumulate the income generated by the trust or apply the income and capital of the trust for the beneficiary’s education, maintenance or other benefit as they see fit.
Whilst the beneficiary is under 18, the trustees can apply income and capital either by using it directly for the beneficiary’s benefit themselves, or by paying it to the beneficiary’s surviving parent or guardian. When the beneficiary has reached 18, they can either apply the income and capital directly for the beneficiary’s benefit or apply it to the beneficiary outright.
This means that even while the beneficiary is under 25, they can still benefit from the trust and will be provided for.
When the beneficiary reaches their attainment age, which can be no later than 25, they will become absolutely entitled to the trust fund and will inherit it absolutely.
The trustees may exercise their powers to either end the trust early or extend the trust. By distributing all the trust assets to the beneficiary outright, they could end the trust below the attainment age if they see fit. They could also make a ‘settled advance’ of the trust fund by advancing it to different trust for the beneficiary’s benefit and defer the minor’s entitlement to a later date. Either of these may have a tax consequence if completed after the beneficiary has turned 18.
Any trust assets will initially be taxed as part of the testator’s estate for inheritance tax (IHT). For Residence Nil Rate Band (RNRB) purposes, if a qualifying residential interest is left on a Bereaved Young Person’s Trust then the RNRB will be available.
Bereaved Young Person’s Trusts have their own IHT rules and are neither relevant property trusts or interest in possession trusts.
There is will be no IHT charge if:
- the beneficiary becomes entitled to capital at or under 18;
- the beneficiary dies under 18;
- the trust becomes a trust for bereaved minors while the beneficiary is under 18; or
- the trustees make an advance of assets for the benefit of the beneficiary at or under 18
- the trustees make an advance of assets within the first quarter following the beneficiary reaching 18 or the trust beginning.
There is an exit charge when assets leave a Bereaved Young Persons Trust in all other cases. The exit charge that applies when a beneficiary is between 18 and 25 is calculated in a similar way to an exit charge from a relevant property trust and a charge is calculated depending on how many full quarters have elapsed since the beneficiary reached 18 or when the trust was set up if later. The maximum rate of charge is 4.2% for assets above the NRB, compared to the rate for a relevant property trust which is 6%.
These rates of tax are very low and are balanced against the advantage of being able to control the inheritance age of children more.
There are no anniversary charges for a Bereaved Young Persons Trust.