When drafting a will, the testator will often want to provide for younger beneficiaries, such as children or grandchildren. However, directly gifting assets to someone under the age of 18 presents challenges as a minor cannot hold assets in their own name. This requires some form of trust to hold the beneficiary’s inheritance. This article explores various structures used in wills to provide trusts for minors and young persons.
Bare Trusts
A Bare Trust is the simplest form of trust. Bare Trusts are a common form of trusts for minors, one is created by will is where a will makes a gift to a minor with no age condition attached. As the minor cannot receive the inheritance in their own name, the trustees would hold on a Bare Trust.
Under a Bare Trust, the beneficiary has an absolute entitlement to both the capital and income of the trust assets from the outset. The trustees simply hold the assets on behalf of the beneficiary until the beneficiary reaches the age of 18. At this point, the beneficiary gains full legal control over the assets and can demand their transfer.
For Inheritance Tax (IHT) purposes, the assets are considered part of the beneficiary’s estate from the moment the trust is established. There are no anniversary or exit charges.
The main disadvantage of a bare trust is the lack of control if the beneficiary survives the testator, but dies before reaching 18. In that circumstance, as they are entitled, the trust capital will pass according to the beneficiary’s intestacy and will be taxed for IHT as part of the beneficiary’s estate.
Bereaved Minors Trusts (BMTs)
A Bereaved Minors Trust (BMT) is a specific type of trust for minors that arises when a parent dies and leaves assets to their child who is under 18. To qualify as a BMT under Inheritance Tax Act 1984 (IHTA 1984) s.71A, the trust must meet certain conditions:
- It must be created by the will of a deceased parent (which includes a step-parent or person who had parental responsibility for the child immediately before their death).
- The beneficiary must be a minor at the time the trust is created.
- The beneficiary must become absolutely entitled to the trust property on or before their 18th birthday.
- During the period the beneficiary is under 18, any income or capital applied must be for their benefit.
If the will stated “I give my Residuary Estate to my son John subject to him attaining the age of 18” this should create a bereaved minor’s trust.
An inheritance left to a BMT will be held by the trustees to hold until the beneficiary reaches the age of 18. At that point, the beneficiary will become entitled and the trustees can transfer the assets to them. If the beneficiary dies before reaching 18, as they have no entitlement the inheritance will pass according to the terms of the testator’s will.
BMTs benefit from highly favourable tax treatment. For IHT purposes, there are no periodic charges (ten-year anniversary charges) or exit charges when capital is distributed or when the beneficiary becomes absolutely entitled at 18 or if the beneficiary dies before reaching 18.
Bereaved Young Persons Trusts (BYPTs)
A Bereaved Young Persons Trust (BYPT) is an extension of the BMT concept, designed to benefit a beneficiary at an age between 18 and 25 years old. Introduced by IHTA 1984 s.71D, a BYPT must satisfy similar conditions to a BMT:
- It must be created by the will of a deceased parent (same definition as BMTs applies).
- The beneficiary must be under 25 at the time the trust is created.
- The beneficiary must become absolutely entitled to the trust property on or before their 25th birthday.
- During the period the beneficiary is under 25, any income or capital applied must be for their benefit.
If the will stated “I give my Residuary Estate to my son John subject to him attaining the age of 25” this should create a BYPT.
An inheritance left to a BYPT will be held by the trustees to hold until the beneficiary reaches the age stated in the will. At that point, the beneficiary will become entitled and the trustees will transfer the assets to them.
If the beneficiary dies before reaching the age stated, as they have no entitlement the inheritance will revert according to the terms of the testator’s will.
BYPTs also enjoy favourable IHT treatment. There is no tax charge if:
- the beneficiary becomes entitled to capital at or under 18;
- the beneficiary dies under 18;
- the trust becomes a BMT while the beneficiary is under 18;
- the trustees make an advance of assets for the benefit of the beneficiary at or under 18; or
- 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 BYPT in all other cases. The exit charge that applies when a beneficiary is between 18 and 25 is calculated similarly to an exit charge from a relevant property trust. The charge is determined by the number of full quarters that have passed since the beneficiary attained 18 years or the trust’s creation, if later. The maximum rate of charge is 4.2% for assets over the nil-rate band, in contrast to the 6% rate for a relevant property trust. There are no anniversary charges.
Other Age Conditions
There will be other trusts for minors and young persons created by will that will not be BMTs or BYPTs. These will include age conditions higher than 25 for children and stepchildren and any age conditions for all other beneficiaries. In most cases, these trusts will be considered relevant property trusts. In some cases, the trust may be considered an Immediate Post Death Interest Trust (IPDI) if it gives the beneficiary an entitlement to income.
How Trustees Can Benefit the Beneficiary
Regardless of the specific trust type, trustees play a crucial role in managing the assets for the beneficiary’s welfare. Trustees have broad powers on how they can benefit the beneficiary.
Unless excluded by the will, the trustees will have the power under S31 Trustee Act 1925 to apply income for the beneficiary’s maintenance, education, or benefit.
Trustees will also have the power under S32 Trustee Act 1925 (unless excluded) to advance capital to a beneficiary, even if they are not yet entitled to the trust fund. This power allows trustees to release a portion of the capital before the beneficiary reaches the age of absolute entitlement (e.g., 18 or 25).
These powers are also often expanded on by administrative provisions in the will. For example, the STEP Provisions Third Edition includes provisions that will allow the trustees to transfer trust income or capital to a minor beneficiary’s parent/guardian on behalf of the minor, which will allow the parent/guardian to use it for the minor’s benefit.
All of these will allow the trustees to use an inheritance for a minor or young person’s benefit. This could include:
- Essential living expenses, such as food, clothing and accommodation costs
- School fees, university fees, vocational training, books, educational trips, and equipment for studies
- Anything else that would benefit the beneficiary
Conclusion
This overview highlights the importance of understanding the nuances between different planning for trusts for minors and young beneficiaries. Testators should take the time to consider the most appropriate trust structure for their circumstances.
If you have subscribed to our Quiz Membership 2025, please find this article’s quiz here. You must be signed into the partner area of our website to access this.
