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August 17th 2021

Passing assets to minors on death: a case study

In most cases, where an individual dies leaving a spouse and minor children, they will leave their assets with their widow or widower until their children reach adulthood.

There are, however, circumstances where an individual will want their estate to pass sooner to their minor children, for example where:

  • the surviving spouse is unlikely to survive until the children are over the age of 25 (seven years after they turn 18);
  • they are separated from their spouse; or
  • the surviving spouse is not the children’s parent.

One method of achieving this is by creating an immediate post-death interest with the surviving spouse as beneficiary; and a bereaved minor’s trust for the children.

Immediate Post-Death Interest

Where an individual is beneficially entitled to income from or to enjoy an asset within a trust, that individual has an “interest in possession”.

Where an interest in possession is created immediately on death, either by will or intestacy, it will be called an “Immediate Post-Death Interest” (IPDI) and will form part of the estate of the beneficiary for IHT purposes.

The spouse exemption is available on the creation of the IPDI and this provides potential for tax planning.

Bereaved Minors’ Trust

This is a type of trust that is created for minor children (under the age of 18) on the death of a parent, under a will where the children are absolutely entitled to the trust assets by the age of 18.

The assets passing from the deceased parent will be a chargeable transfer, which means that the value exceeding his or her nil rate band (up to £325,000) will form part of their estate and liable to IHT.

There will be no entry, lifetime or exit charges for IHT purposes on the assets being passed to or from the trust. The trust is effectively exempt from IHT.

Planning opportunity

Where an IPDI ends during a beneficiary’s lifetime and property passes to a bereaved minor’s trust under the terms of the settlor’s will, this will be a potentially exempt transfer (PET). A PET simply means that the value of the assets transferred will be removed from the transferor’s estate if the transferor survives seven years from making the gift.

This provides the opportunity to pass assets tax-free to minor children. Please see example below:

Example

John wants to leave his entire estate to his son Adam who is four years old. If John left his entire estate directly to Adam or a trust for Adam’s benefit, the IHT would be significant. Instead, John creates a will which leaves £325,000 (equaling his nil rate band) in a bereaved minor’s trust for Adam and the remainder of his estate to an immediate post-death interest trust (IPDI) with his estranged wife, Vicky.

John’s estate initially passes into Vicky’s IPDI tax-free under the spouse exemption and three years later passes into Adam’s bereaved minor’s trust as a potentially exempt transfer (PET).

If Vicky outlives John by 10 years (three years from the creation of the IPDI trust and seven years from passing assets to the bereaved minor’s trust), his entire estate can potentially pass to Adam tax-free.

Please note that for the above planning to work the following conditions had to be satisfied:

  1. The period of Vicky’s interest in the IPDI trust should not be less than two years, otherwise HMRC can challenge the arrangement, which could result in John’s entire estate being subject to IHT.
  2. There would have to be clause in the will terminating Vicky’s interest for example when Adam reaches a certain age (before he turns 18) or if she re-marries.
  3. As the transfer from the IPDI to the bereaved minor’s trust is a PET, holdover relief is not available for Capital Gains Tax (CGT) purposes. CGT would arise on the increase in value of non-cash assets in the trust since John’s death. A cash settlement into the IPDI trust would avoid any potential CGT charges.

Inheritance tax and estate planning is a complex area of tax law and the above article is for illustrative purposes only and is not intended to be advice. Readers who require assistance are advised to contact a suitably qualified tax professional. Contact us to discuss your requirements in detail.

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