Article published 2nd June 2008
Very few savings products or accounts can be held in Flora or Rufus's own name - in fact, only children's bank accounts, friendly society savings plans and NS&I Children's Bonus Bonds are eligible.
Who looks after what?
Control of friendly society plans and bonus bonds remains with the parent. Other savings plans - including unit and investment trusts - must be held in the name of the adult who set it up. If you want to indicate formally that an account is set up on behalf of Flora, however, you can 'designate' it by adding her initials after your name, though this carries no legal weight and you still retain full control over the money.
What if you want more certainty that the money will be used as intended?
You can set up a trust, which is basically a means of giving your assets away for another person's use, but laying out rules about how and when they are used.
Three groups are involved:
- the settlor gives away the assets and decides how they are to be used (there may be more than one).
- the beneficiary benefits from the money in the trust (again, there may be more than one).
- the trustees (one of whom is usually also the settlor where children's trusts are concerned) - who administer the trust and look after the assets in it.
There are several types of trust, but the cheapest option and the one most commonly used for school fees is called a Bare Trust. It can be set up by anyone for a specific child or children; the trustees withdraw money as necessary to pay for school fees, and on their eighteenth birthday, the children receive control of any money remaining in the trust. As the chances are most of it will have been used up on fees by then, however, this is not usually an issue.
In addition, after seven years any money put into the trust by the settlor ceases to be liable for inheritance tax. However, once you've set up a bare trust, you cannot change your mind about who gets the money or how it's spent! Nor, incidentally, is it possible to hold investment or unit trusts within a bare trust, as they already have a trust structure. More complex trust alternatives would have to be used instead, but for most people it's probably easier simply to designate the account in the child's name.
Accumulation and maintenance (A&M) trust
If you want a more flexible trust arrangement that can continue beyond Flora and Rufus's eighteenth birthdays and could therefore incorporate university fee savings plans, you could use an accumulation and maintenance (A&M) trust.
These are more complicated and expensive to arrange and administer, and (unlike a bare trust) require professional help. But they have certain advantages, not least the fact that they can be set up for children who are as yet only a twinkle in their dad's eye. A grandparent, for example, could set up an A&M trust to benefit all his/her grandchildren, both existing and down the line.