View the article online at http://citywire.co.uk/money/article/a619412
How to leave property to your grandchildren
Leaving property to your grandchildren could give them an invaluable helping hand, but you need to be aware of the complications, Lorna Bourke says.
An increasing number of grandparents are helping out with their grandchildren's school fees, higher education costs and the deposit on a first home.
Given that most 40-something adult children have already made that all-important step onto the property ladder, many grandparents may well be considering skipping a generation and leaving the family home to a grandchild or grandchildren, rather than their children.
But how do you leave assets to a grandchild – in particular property? Children under the age of 18 cannot own property. With mothers increasingly leaving childbearing until their 30s and even 40s, many grandparents now coming up to 70 have infant grandchildren.
The answer, according to experts, is to leave assets in trust for minor children. ‘A key point is that the trust should be written into the will, and age of access is crucial too,’ explains Julie Hutchison, a trust expert and head of technical insight at Standard Life. ‘If you don’t use a trust to control when the grandchild will inherit, he or she will be entitled to the asset left outright in a will at age 18.’ This is far too young an age to expect a person to behave responsibly.
‘You can leave everything in a discretionary trust where it is up to the trustees to decide who gets what and when,’ Hutchison says. But this may not suit everyone. Even if your offspring are the trustees and the grandchildren the beneficiaries, many elderly people worry that the son or daughter will succumb to pressure from an unscrupulous partner, anxious to get their hands on the cash in the trust under the guise of benefiting the grandchildren.
Parents who are trustees can access money provided the purpose is to benefit the child. But who is to check on how the money is spent?
Grandparents wanting to leave their family home to grandchildren – sometimes their only asset, and generally the main one – also have to consider inheritance tax (IHT). If the family home is worth more than £325,000 (or up to £650,000 if the owner is a surviving spouse who is entitled to use their deceased spouse’s unused nil rate IHT allowance) then there will need to be other assets to pay the IHT bill, otherwise the property will have to be sold to meet the tax charge.
You must also take into account that property or any assets left in a discretionary trust, or in a trust until a specified age, may incur a potential IHT charge every 10 years on a sliding scale of up to 6% of the value of the trust in excess of whatever the starting point for IHT is at that time. If money is not set aside to meet this charge, the trustees may be forced to sell the house to pay the tax bill.
You can leave assets to minors without realising you are setting up a trust. ‘A trust is automatically formed if assets are left to minor children at a certain age whereby the executors become trustees,’ says Emma Myers, TEP head of Wills and Probate at Cogent Law and legal adviser to Saga, the over-50s organisation.
She suggests an ‘age contingent’ fixed trust, which would ensure that the grandchild or grandchildren would be entitled to the assets at a predetermined age – say 25 or 30 when they are less likely to blow the lot on a fast car or designer clothes.
But what would happen if most assets were left to the grandchildren, with the adult offspring receiving relatively small amounts? Wouldn’t the adults be tempted to apply for a deed of variation, reallocating the assets so that they inherited more? ‘That would be very difficult, as all beneficiaries must sign a deed of variation and minors under the age of 18 are unable to do so,’ Myers says.
Income for parents, capital for grandchildren
If the main asset is a property, what some grandparents might want to do is leave the assets in trust, with the adult children enjoying the income from the trust until they die and the grandchildren inheriting the capital or the property.
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