Education trusts will replace accumulation and maintenance trusts. As A and M trusts are no longer available what IHT-efficient arrangements are available to those who want to make provision for grandchildren now?
A controlled access trust is designed as an alternative to the old A&M trust and can form part of an estate planning solution. Some may not be familiar with how this type of trust works.
Like an A&M trust, grandparents may decide, as part of an estate planning and school fees exercise, to gift money for the benefit of a grandchild. However, not only are they seeking IHT-efficiency, but they also want to make sure that there is a control over how and when the grandchild can benefit.
At outset, the grandparents will create a bare trust and gift a lump sum to the trustees for them to invest. This is a potentially exempt transfer for IHT purposes and therefore any chargeable gains within the trust are chargeable on the beneficiaries.
The trust is structured so it has two beneficiaries; the named grandchild, who must be under the age of 18, will be entitled to 99% of the benefits and an adult beneficiary (perhaps the 99% beneficiary’s parent) will be entitled to the remaining 1%. Under the rules of the trust, the trustees cannot change the beneficiaries or the split of benefits each beneficiary will receive.
The trustees then invest the lump sum across a series of policies with defined maturity dates and no surrender option. These policies can be structured in such a way as to provide the trustees with periodic lump sums which can be used for expenditure, such as school fees.
As the initial gift is made into a bare trust, there is no IHT payable on entry, whatever the size of the investment, and no 10-year anniversary periodic charges. It is treated as a potentially exempt transfer and is therefore outside of the donor’s estate after seven years. If the original gift is in excess of the nil rate band and death occurs within seven years then taper relief may apply to reduce any IHT payable.
Unlike other bare trust arrangements, the controlled access trust allows the benefits to be held back until after the grandchild’s 18th birthday.
Experienced advice is essential