What are educational trust funds?
An educational trust fund can be set up by parents to fund current or future school and university tuition fees. An education trust fund is available to the parents of any child, or children, up to the age of 25 who are, or will be, in full-time education. This type of fund differs from others as the beneficiaries are not in control of how the money is spent. Quite simply, you place a sum of money intended to fund your children’s education up until the end of university into trust now rather than paying on an ongoing basis. One trust can be set up per child, siblings would need to have a trust set up for each of them.
Normally, any payments you make towards your children’s education are not considered gifts; they are payments on behalf of a financial dependent and as such they are exempt from IHT. This rule still applies, whether you pay school or university fees as they arise or, instead, place a lump sum calculated to pay for your children’s entire education into a trust in one go. As the payment is not considered a gift for IHT purposes, there will be an immediate reduction in your estate for inheritance tax purposes and you don’t need to worry about waiting 7 years before such a gift is outside of your estate.
The limit on the amount that can be given is what is reasonable for your children’s education. For example, if you calculate that you would need £200,000 to complete your children’s school and university education and then put that into an education trust, there will be an immediate reduction in your IHT liability of £80,000. To the extent that the funds are not used, they revert to you or to your estate after a set period (usually at the end of your children’s education).
Advantages
- Educational trust funds are shielded from issues such as divorce, bankruptcy, or insolvency, as they sit outside of your estate.
- Educational trust funds are removed from your estate. Therefore, the value of the trust fund will not be subject to inheritance tax.
- Parents can ensure they remain trustees, which enables them to have control over how and when the funds are distributed. For example, any income which the trust accrues from investments/interest is treated as belonging to the parent and is taxed accordingly to their current income tax rate. The trustees of the trust, who may be the parents, would be liable for Capital Gains Tax (currently at 28%), but this would come out of the trust’s funds.
- Unlike other gifts, educational trust funds do not require a 7 year wait period before the gift drops out of the estate.
- Provides peace of mind knowing that education and maintenance for children and grandchildren are provided for.
Disadvantages
- Potential Tax implications related to trust income, distributions and transfers.
- Funds are specifically for educational purposes and cannot be used for other purposes.
- If the trust covers only a proportion of a beneficiary’s educational expenses, it could affect their eligibility for financial aid.
For further information on this topic or on any other legal area, please contact John Szepietowski or Kay Stewart at Audley Chaucer Solicitors on 01372 303444 or email admin@audleychaucer.com or visit our Linkedin page.
Annabelle Hubbard
This information was correct as of June 2024
