There will be many reading this against the backdrop of advising on a potential trustee investment case. If so, regardless of type of trust, the trustees will almost certainly have wide investment powers either through the specific wording in the trust deed, statutory powers or a combination of both.
Where a bereaved minor is benefitting under intestacy laws in England & Wales, or there is a will where the child’s entitlement is delayed to a specific age (18 for example) then the Income Tax & CGT rules of discretionary trusts apply (before the child becomes entitled) unless a Vulnerable Person’s Election is made where the trustees are only paying tax in line with what the liability would have been had the income & gains arisen directly to that person. In saying that, a Vulnerable Person’s Election is not always necessary. If for example the trustees purchased a non-income producing Offshore Insurance Bond, then until the beneficiary becomes absolutely entitled, the trustees would be liable, but only if a chargeable event gain occurred. If therefore the trustees could confine withdrawals to within 5% limits then no trustee tax would arise and when the child reached the appropriate age, he/she would inherit the withdrawal history of the bond and become taxable on future gains. There are no doubt many case where a child is benefitting after someone’s death and those funds remain intact until the child becomes entitled.
Where you have a bare trust for a minor – either arising under the terms of the will or it’s a statutory trust on intestacy in Scotland or Northern Ireland, then the child is simply taxed and not the trustees. From a tax perspective, that’s welcome as children have the same allowances, reliefs and exemptions as adults. Offshore Bonds and OEICs spring to mind as investments that can mop up the Personal Allowance, the 0% Starting Rate for Savings, the Personal Savings’ Allowance’, the Dividend ‘Allowance’ and the annual CGT exemption
Where you encounter a Personal Injury Trust, it’s likely to be a bare trust so that the ‘injured’ beneficiary is taxed and not the trustees. Again, from a tax perspective, this may be an exercise in Blending OEICs and Bonds.
And finally, where you have a qualifying trust for a disabled person then remember that the income tax & CGT rules of discretionary trusts apply unless a Vulnerable Person’s Election is made whereby the trustees are only paying tax in line with what the liability would have been had the income & gains arisen directly to that person.
There are undoubtedly complexities with trusts for care and compensation but understanding those complexities can reap rewards.