Introduction
The birth of a new baby usually associates delighted parents, grandparents or close relatives giving sums of money. If not following the birth, subsequent birthdays and Christmas are traditional times for monetary gifts to be awarded.
The following questions then arise:
What should parents do with the money?
Can it be invested in the child’s name?
Can they spend it freely for the benefit of the child?
Are there any formal restrictions as to what parents can do; perhaps more importantly, what cannot be undertaken.
Monies that are deposited in a bank or building society account
A minor can open a bank or building society account. The Building Societies Act 1986 provides that a minor may be admitted as a member.
However, if the child is not old enough to operate the account, parents may decide to invest the money in their own names. If this is the case, what rights and obligations do the parents then have?
Has a trust been created?
It may well be the case that where say relatives hand over monies to the children’s parents “to hold for the children” that the parents are acting in the fiduciary duty as trustees.
A first consideration is that of “children” – are there step children and children of both parents in the family? A gift for the benefit of “the children” is ambiguous and needs to be clearly defined to avoid future problems arising when “the children” reach their majority.
Are any formalities needed to create a trust?
Section 53 (1) of The Law of Property Act provides that a declaration of trust in respect of any land, be actioned and proved in writing and signed by a person who is able to declare such a trust or by his/her will.
It is clear however that if the declaration of trust is over property other than land (or an interest in land) an oral declaration is sufficient.
Thus a donor who provides money, or other assets to parents, can create a trust in favour of the children without any written document.
Are parents subject to any duties as trustees?
If it is assumed a trust is created –parents (or grandparents) will then be subject to all the formal duties and obligations imposed on trustees. A prime duty here is that in relation to investment.
Generally a will (or any other document creating a trust instrument) will give trustees absolute discretion as to how trust funds should be invested.
Where a gift by a third party is given to the parents to hold on trust “for the children”, it is unlikely that the donor will have given an express power. However, it will be implied if the donor states “use it as you may think fit for the children”. In the absence of any express or implied power, then investments must be made in accordance with the Trustee Act 2000.
Parents may be very surprised to learn that they may be subject to these (onerous) duties with regard to investment of money given to them for the benefit of their children assuming a valid trust is created.
Fortunately, if comparatively small sums are involved –parents will probably discharge their duties by investing monies in National Savings Certificates. However, to avoid any possible hint of criticism in the future –parents would be well advised to take independent financial advice.
Can parents spend the money for the benefit of the children?
The answer here depends on the manner and any powers given to the parents by the donor.
In its simplest form “here is £25.00 spend it on the children for me”. This is an express authority for parents to apply the money for the benefit of the children.
In the absence of such directions – the donor must look to Sections 31 & 32 of the Trustee Act 1925.
In brief terms trustees may, at their sole discretion, pay to a parent or guardian or apply towards the infants, maintenance education or benefit, the income arising “as may in all the circumstances be reasonable”.
In so far as income is not so applied, it has to be accumulated until the infant either attains 18 years or marries under that age.
It is clear that parents have power to apply the whole of the income for the benefit of their children.
A power to advance capital is incorporated within Section 32 of the Trustee Act 1925. This enables Trustees to advance up to one half of the capital to which a beneficiary is, or might be, entitled. Trustees have an absolute discretion as to how such power should be exercised and, in appropriate circumstances, it is possible to widen the discretion to the extent of the whole presumptive capital.
A typical situation could be for Trustees to exercise their discretion, where the minor beneficiary requires special equipment to assist with an educational requirement or need, particularly if an element of disability was involved.
Taxation
Minors are subject to income tax, capital gains tax and inheritance tax in the same manner as adults. The corollary of this is that minors are also entitled to the various tax allowances and reliefs as adults: for example the income tax personal allowance and capital gains tax annual allowance.
There are anti-avoidance provisions in place where it is deemed that income arising belongs to the parent rather than the child (subject to a general exemption of £100.00 gross income per income tax year).
The anti-avoidance provisions referred to above are excluded where grandparents make provision for minor children rather than immediate parents.
Trusts for Bereaved Minors
A donor may wish to make ‘settled property’ or money for the benefit of children; a Will trust could make similar provision. The concept of “Bereaved Minors” trusts was introduced within the Finance Act 2006 – (provided certain qualifying criteria are met); such trustscanhavesignificant IHT advantages.
Summary
A minor can hold a bank or building society account but it must not become overdrawn
Gifts of money for the benefit of children by parents, grandparents, other relatives or friends may create a trust in their favour
Parents and grandparents are subject to the same duties as other trusteesand have the same powers and obligations.
Andrew Murdoch
Associate – 27 March 2007
