AGED 18 - 25 TRUST

14/03/2009

The Finance Act 2006 made many changes to the inheritance tax treatment of trusts. In particular it abolished accumulation and maintenance trusts which had been popular for gifts to children and grandchildren. Accumulation and maintenance trusts were popular because they enabled the settlor to provide funds for young people at a later age than 18 but yet benefited from no inheritance tax charge at the time the nest egg passed to those young people.

The Aged 18-25 trust is a less beneficial and flexible replacement.

Definition

The Age 18-25 trust – or s.71D trust is a trust where property is held for the benefit of a person:

Who has not yet attained 25
Where at least one parent, step-parent or person with parental responsibility has died
And the trust arose under the Will of the deceased parent (or under Criminal Injuries Compensation scheme)
Who gets the capital [and income] by 25 absolutely even if already entitled to the income at 18

For example, a gift

In trust for such of my children as attain the age of twenty-five years and if more than one in equal shares absolutely

provides for capital at 25, a specified age greater than 18, so it will not be a bereaved minor trust but an Aged 18-25 trust (71D trust).

Usually the focus will be on protecting potentially minor children until they are old enough to manage money in a sensible way and to protect them from predators.

Given the likely view will be that hopefully all the children will be 25 or over by the time of the testator’s death he may be happy to live with the prospect of differences in tax treatment for the children if he dies young. For those who wish to know more about the differences a more detailed explanation of the IHT effect would then be needed.

Inheritance Tax treatment

s.71D IHTA 1984 will apply if the children are under 18 at the date of the testator’s death or will not get to the age of 18 within two years of the testator’s death.

There will be no charge to IHT while the child is under 18 but on the child attaining 18 the fund becomes subject to the relevant property regime so that whilst there will be no periodic charge (as there is less than 10 years between 18 and 25) there will be an exit charge on the beneficiary becoming absolutely entitled to the capital at 25 or under which will be at the rate of no more than 4.2%.

If any child is over 18 at the date of the testator’s death or becomes 18 within two years of the testator’s death and s.31 Trustee Act 1925 is not excluded or amended then such a child’s share will be subject to the immediate post death interest regime instead with no IHT being due on the share vesting at the age of 25.

It is worth noting that it is possible to still comply with the conditions for s. 71 A and s.71D if the trusts contain powers of advancement in accordance with s.32 Trustee Act 1925 or to like effect (even if the power is in relation to the whole fund and not just half). Whilst the existence of such a power does not change the nature of the trusts obviously if the power is exercised then the conditions for them will probably be broken. Nevertheless, this act will not give rise to an exit charge if it is exercised under s.71A trust – s.71B(2)(c) IHTA 1984. It will give rise to an exit charge in relation to a s.71D trust if the vesting is postponed beyond the age of 25 – s.71F IHTA 1984 and the subsequent trust will be in the relevant property regime.

However, if a gift to a child is subject to an overriding power of appointment which can be exercised by the trustees at any time then this prevents the conditions for s.71D applying from the outset since the wording does not ‘secure’ that a beneficiary will become entitled to the capital at age 25. This would therefore be a relevant property trust unless the trustees were able to release this power of appointment and did so within two years of the deceased’s death under s.144 IHTA 1984 – in which case the change would be read back to the deceased’s Will and the conditions for s.71D would apply.

Gifts in substitution

If one of the children of the testator predeceases him, and a gift in substitution applies to give the deceased child’s own children their parent’s share at a lower age of 18, but nevertheless at a specified age and not absolutely then that share of the estate provided for them under the grandparent’s Will cannot be within either s.71A or s.71D.

Instead, because the substitution is on a specified contingent age of 18 that share will be a relevant property settlement and not a bare trust. The related settlement rules will apply in working out any periodic and exit charges in relation to any grandchild’s share.

Practice points:

Aged 18-25 trusts arise only in Wills on the death of a parent, step-parent or person with parental responsibility – grandparents and others cannot therefore make them; if similar conditions are imposed in a grandparent’s gift it will be a relevant property regime settlement.
Watch out for the mixed class of ages where not all would enjoy the s.71D IHTA 1984 treatment if any were 16 or over on the death of their parent etc., and s.31 Trustee Act 1925 applied unamended.
Can be made flexible by the inclusion of a wide power of advancement but cannot be compliant with s.71D IHTA 1984 if there are powers of appointment.