I’m not suggesting for a moment that you have wayward children, but let’s imagine for a moment you know someone that does. Everyone that has some degree of wealth and challenging children would do something about it, if they could, wouldn’t you agree?
Well let me tell you a story that may help alleviate at least part of the problem and concerns.
Imagine a family, has two teenage children: a boy and a girl! The prefect family.
Child number one is superb, the model child. They are doing brilliantly at school hope to go to university to study medicine. So far so good. Mum is so proud and tells everyone how good things are going.
Child number two is a different child altogether and is struggling with behavioural issues, in and out of school and is unsure what to do when GCSEs are finished. A worry for every parent of teenagers. Mum tries to avoid discussing child number two with everyone. So even A levels may be questionable and university just doesn’t look like it will happen.
What a dilemma!
So, let’s assume for the moment the total net worth is around £2 million, including the family home which is debt free and you have good pensions that will pay you a strong income in retirement and you have a personal investment portfolio and/or savings of say £300,000.
If it was me, not knuckling down and building the bedrock of a good career, I know what my parents would have said. “You’re getting nothing!” But reality is not quite that simple, unless you intend to blow the lot.
For most of us, we would prefer that our children only receive money once they leave school and go into work or university. You may also be thinking, “how do I protect the value of my life’s work from being taxed on my death at 40%”. It’s what I call the Inheritance Tax conundrum.
So, what could be done to help the situation
(This is not advice. Always seek advice from an Independent Financial adviser before proceeding)
The basis of this story is purely fictional and any resemblance to anyone you may know is purely coincidental.
The first thing you could do is invest some of your investments/savings in an offshore bond.
And most importantly you put the policy in a discretionary trust, with legal ownership passed to a trustee. That could be you.
A letter of wishes instructs the trustees to divide the capital between her children according to their personal circumstances and personal milestones.
When child number one starts university, they will be given £10,000 each in September of every year in which they are still studying. This will help them cover living costs while they are there. They will only receive the funds for as long as they remain in higher education.
I see this a powerful incentive to work.
Additionally, at the discretion of the trustees, the children will be given £10,000 when they begin their first full-time employment, £10,000 and further funds could be distributed as and when they reach additional milestones.
For example, if child number two does get their act together and they start a full-time apprenticeship, the trust could help them out. Apprenticeship salaries are usually quite low, so the added money could provide a real incentive to persevere.
The trustees could assign segments of the offshore bond, equivalent to the values specified above, to the individual beneficiaries. This means when the segments are encashed they would be taxable at the individual beneficiary’s tax rate, meaning more of the money is available for the children’s expenses.
While they are studying, or are in the early stages of their career, the additional capital would allow them to make use of their tax-free personal allowance.
You can also give the trustees guidance that, should any of her children face serious financial hardship, they should be awarded funds from the trust even if they are not working or studying. Not only that, you could instruct the trustees to use their discretion to distribute up to £50,000 each to the beneficiaries as a lump sum to use on any future mortgage deposits.
What I like about this strategy as much as anything else, is how it can potentially help with Inheritance Tax. If you make a gift into a Trust up to the current nil rate band and survive seven years, the residual value of the Trust will be entirely outside of your estate for Inheritance Tax purposes. What I really like about it though, is that the distribution of the Trust fund to your children is within your control.
Can you image what might happen if you gifted the money to them outright? I know that I was gifted say £50,000 at age 18, the chances are there would be nothing left by the time I was 20!
So, as you can see from my simple example, a simple investment combined with a Trust can be very effective.
Furthermore, as I said in my headline, this strategy could be put to great use with older offspring that are perhaps not meeting expectations.
And for grandparents with similarly errant grandchildren, this can work very effectively in exactly the same way, as well as helping with Inheritance Tax.
And I’ll leave with one final comment from my late father and it goes something like this.
“Your children will never spend your money as you would see fit, so be careful how you give it to them
To make sure you don’t make a mistake, it is advisable to take advice from a professional financial adviser.
Contact Martin Dodd on 01902 742221 or email him at firstname.lastname@example.org if you would like to talk about money issues.
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The contents of this article should not be regarded as specific advice. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.