There’s a common misconception that parental trusts for children are a separate type of trust in their own right.
This is not the case, though there are some notable differences between standard examples of the following trusts and those that are set up by parents for their own children under eighteen who have never been married or in a civil partnership.
Parental Trust Income Deemed as Settlor Income
For each of the below trusts, if all assets in a child’s trust equate to less than £100 per parent then the child’s trust income doesn’t count as the settlor’s income for income tax purposes.
For trusts that produce over this amount the entirety of the child’s income from the trust is deemed to be the settlor (parent’s) income for income tax purposes. In most cases the trustees pay the income tax on income from the trust by filling out a Trust and Estate Tax Return, then they give the settlor a statement containing all the income paid and the rates of tax charged on it (for a detailed definition of trustees and their responsibilities, see our recent article on the topic). The settlor is then required to account for the amount of tax the trustees have paid on their behalf through their Self Assessment tax return.
Types of Parental Trusts for Children
Parental trusts for children under eighteen who have never been married or in a civil partnership will be either a:
Bare Trust
Though not their primary function, as with all the trusts here, bare trusts are commonly used to pass money and assets down to children under eighteen. While the assets within a bare trust are held in the name of a trustee, the beneficiary (the child) has the right to access all capital and income from the trust once they turn eighteen.
Interest in Possession Trust
Different from bare trusts, except for the standard prerequisite that no child under eighteen can receive any income or assets from the trust until they reach the age of eighteen, an interest in possession trust differs in that once the child reaches this age the trustee must pass on all income from the trust to the beneficiary (child) as it accumulates.
Accumulation Trust
Accumulation trusts allow the trustee to accumulate income inside the trust and add this amount to the trust’s overall capital. It’s also possible, in most cases, for the trustee to pay income out of an accumulation trust in a similar fashion to discretionary trusts…
Discretionary Trust
Discretionary trusts for children allow the trustees to make decisions surrounding how the trust income (and occasionally the trust capital) is used. The trustees can decide on a number of things for the beneficiary (child), including what gets paid out, how often these payments are made, and which beneficiary to pay when, if there is more than one beneficiary.
Experienced Trust Accountants
To speak with a professional accountant to discuss which parental trust is right for you and your child, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.