What Happens When Children are Beneficiaries and left Money, Wealth and Assets in a Will?

Parents and grandparents, as you would expect, often leave money to children and grandchildren in their Wills.  Indeed, other relatives and close friends may also do the same. 

Children Lack Capacity

Under UK law, a child does not have any legal capacity to contract.  They are ‘minors’.

On reaching age 18, the age of majority, the child becomes an adult with:

• Capacity to enter into contracts and agreements.
• Responsible and accountable for their own actions.
• Can manage their own affairs.

Types of Trust

Discretionary Trust

• Trustees hold assets and have full discretion to decide how income or capital is distributed among a group of beneficiaries.  Beneficiaries have no automatic right to funds, making it a flexible tool for providing for vulnerable beneficiaries, protecting assets, or future-proofing inheritance for families.

Absolute/Bare Trust

• An absolute (or bare) trust is a simple legal arrangement where trustees hold assets (cash, property, shares) on behalf of a beneficiary who has an immediate, fixed, and unchangeable right to both the capital and income.  The beneficiary can demand the assets at age 18 (16 in Scotland).

What Happens with Legacies in a Will to Children on Death?

• Most Will trusts are discretionary trusts as a child cannot have control until they are adults.

• As a ‘minor’ child has no capacity, a child ‘discretionary’ trust is automatically created by the Will.
• The executors are usually also the trustees, and they manage the wealth in the best interests of the child until they reach 18 years when the child takes control (sometimes the Will may not allow access until later e.g.  age 25).
• If the discretionary’ trust age is set beyond 18, e.g.  18-25, then when the child reaches 18 or if the ‘adult’ child is already 18, the trust will continue until the age specified.
• There can be taxation problems for discretionary trusts for ‘adults’.

Bereaved Child Trusts Taxation v Adult Trust Taxation

Typical Trusts in a Will

• Accumulation and Maintenance (A&M) Trust (pre 2006)
• Child/Vulnerable Persons Trust (post 2006)
• 18–25 Trust
• Discretionary Trust
• Interest in Possession (IIP)

On 21st March 2006 (Budget Day), Gordon Brown changed the face of the taxation of trusts forever with reduced income and capital gains tax allowances and trust income taxed at 45% for most trusts … but child trusts (vulnerable persons) and 18-25 trusts are still effective and have favourable treament.

Pre March 2006 Discretionary Trusts

IHT Treatment Before Finance Act 2006

• Discretionary trusts were subject to a special IHT charging regime.
• Rarely used with life policies (except pension trusts, which were exempt).
• Commonly used in estate planning to utilise the nil‑rate band (less relevant after transferable NRB introduced).

Why They Were Used

• Useful where frequent changes of beneficiaries were expected.
• Avoided PETs that arise when changing beneficiaries in interest in possession (IIP) trusts.

Post March 2006 Discretionary Trusts

Impact of the 2006 Finance Act

• The discretionary trust IHT regime remained largely unchanged.
• BUT the regime was extended to almost all lifetime trusts created on or after 22 March 2006.
• Meaning new Accumulation and Maintenance (A&M) Trusts disappeared overnight (although old ones continued).
• Exceptions:
• Bare trusts
• Trusts for disabled  and vulnerable (children) beneficiaries

High‑Level Comparison Table

Tax Comparison Table

*Property Interest: The life tenant has a "present right to present enjoyment," meaning they are entitled to income from the trust (e.g., rent or interest) or the right to occupy a property.

Structural / Legal Features Comparison

*A&M Trusts:  The Accumulation Problem (Pre 2010)

Historic English trust law had rules against accumulations:

• Income could not be accumulated for more than 21 years
• But A&M trusts required accumulation until beneficiaries reached up to age 25

This created problems where:

• A child was under age 4 when the trust was created, or
• Beneficiaries were unborn at the trust’s creation

Practical Effect

• When the statutory accumulation period ended, trustees had to distribute income annually, but:
• This did not give beneficiaries a vested right
• Trustees simply had to choose who received income each year

This changed in 2010 and new 18-25 Trust rules 'came of age'

Reduced exit charges on 18-25 trusts

When capital is distributed to beneficiaries between ages 18 and 25, with rates capped at a maximum of 4.2%, lower than the standard 6% discretionary rate.  The charge is based on the number of quarters since the beneficiary turned 18, often resulting in minor charges. 

Key Aspects of Reduced Exit Charges (18-25 Trusts):

• Maximum Charge: The maximum Inheritance Tax (IHT) exit charge is 4.2%.
• Graduated Rates: Charges are generally a fraction of 6%, starting lower and increasing as the beneficiary approaches 25 (e.g., 1.8% at age 21, 4.2% at age 25).
• Trigger: Charges apply when capital is distributed from the trust to the beneficiary.
• No 10-Year Charge: These trusts generally do not incur 10-year anniversary charges unless terms are modified to extend beyond 25.
• Eligibility: These trusts must be established for bereaved young people (usually by a parent) where they gain full access by age 25.
• Exemptions: No exit charge applies if assets are distributed within 3 months of the trust starting or 3 months after a 10-year charge date. 

Planning Use‑Case Comparison

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