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  1. Wealth
  2. Tax
November 26, 2014updated 01 Feb 2016 10:18am

Should you tell a child they're worth a lot of money?

By Spear's

The answer depends, says Jeremy Passmore of Thomson Snell & Passmore, on the way their wealth is structured

An interesting recent case in the High Court has had to address an issue which confronts all wealthy families, namely the extent to which children should be aware of the extent of the wealth of their parents and the amount of their own entitlements and expectations.

In the case, which concerned the variation of certain family trusts, the judge imposed reporting restrictions to protect the identity of five children all aged under ten, who were beneficiaries. The family was very wealthy and the rationale for the ruling was that if children became aware of their wealth it would:

’ adversely affect their wellbeing;
’ create a sense of entitlement; and
’ hinder them enjoying as normal a lifestyle as possible.

The decision seems admirable in its recognition of the dangers that knowledge of existing and future wealth can bring. However it only related to these court proceedings, and of course those children will have many other ways of discovering their financial position in the years ahead.

That raises the question of whether – and the extent to which – trust beneficiaries can, for their own benefit, be kept in ignorance of the assets and their value being held for them.

While the children are under the age of eighteen, there is no need for them to be given any information as to what they are entitled to either then or in the future.

Once they reach adulthood, the matter will turn entirely on the type of trust involved.

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1. Bare trust. This is a simple structure where the trustee is only holding the assets on behalf of the beneficiary, who is legally entitled to them. It would be wrong for the beneficiary not to know what they own beneficially, although parents and trustees may in practice just say ‘there is something here for you, and it is not really for you to use just yet’ and be vague about the detail.

Any income will no doubt have to be shown on the beneficiary’s personal tax return, so that information at least will be obvious to the beneficiary. The same situation would apply where the assets were in the person’s own name, but somehow being looked after in some way for them.

2. Life interest trust. This is where a beneficiary is entitled for the time being, and sometimes for life, to the income from all or part of the trust capital. The amount of that income must be paid over and would thus become clear to the beneficiary.

It is the case that trustees may sometimes retain income on the beneficiary’s behalf, but that is not really correct practice. The beneficiary would be entitled to information about the trust so trustees would not be able to keep matters secret, certainly in the face of a determined beneficiary.

3. Discretionary. Here the individual beneficiary has no entitlement as such to any fixed part of the trust; he or she gets what the trustees decide, and when. It is usually said that the only right such a beneficiary has is a right to be considered as a potential recipient of funds, and no more.

Clearly therefore a discretionary trust offers the greatest protection in this context. There are limits to what can be put into such a trust by a lifetime gift but, as in the court case in question, where business (or agricultural) assets are involved there is relief from inheritance tax and that means that there is virtually no such limit on what can be transferred to trust.

4. Lifetime Trusts. Virtually all forms of lifetime trusts are treated in the same way for inheritance tax, so a fully discretionary arrangement would often be chosen precisely for the element of confidentiality, along with its other main attribute, namely that all aspects of the distribution of the assets are entirely in the control of the trustees.

5. Trusts in Wills. When deciding on the appropriate trust structure to contain in a will passing on assets, the right approach may be less obvious. This is because the inheritance tax treatment of interest in possession trusts and discretionary trusts is different when they are established by a will, the former essentially not being subject to tax until the interest ends or the beneficiary dies, whereas a discretionary arrangement would be subject to a tax charge every ten years.

These are quite significant differences and are likely to take priority in the decision-making process. In any event, the issue of the amount of information to be given to younger children may be less of an issue, granted that the will is likely in most cases to be implemented at a time when the children are older, perhaps fully adult.

A final thought. While many parents attempt to minimise the information children are given, another approach is actually to involve them in family financial matters, to increase their awareness of the issues and to develop their financial maturity and knowledge.

After all, they will have to be involved fully with their wealth at some stage of their lives. There is a lot to be said for such an approach, but it clearly it would not be suitable for the five children under the age of ten whose welfare was being considered by the court in the case that prompted these observations.

Jeremy Passmore is a partner at Thomson Snell & Passmore

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