Definition
An 18-25 trust is a specialized form of trust created for the benefit of a young person who becomes absolutely entitled to the trust property by their 25th birthday. This type of trust can now be established solely through the will of a young person’s parent or step-parent. Before April 2008, it could also be created by converting an existing accumulation and maintenance trust.
Key Points:
- Beneficiary Age Requirement: The beneficiary must receive the trust property by their 25th birthday.
- Creation: Can be established only through the will of a parent or step-parent post-April 2008.
- Tax Implications: Subject to inheritance tax upon settlement, distribution to the beneficiary over 18, and absolute entitlement of the beneficiary over 18.
Examples
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Scenario One: Parent’s Will
- A parent includes a clause in their will specifying that their child will receive a certain sum held in trust until they reach 25. Upon turning 25, the child receives the entire trust property absolutely.
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Scenario Two: Distribution Upon Age 21
- A step-parent creates a trust for a step-child that releases funds gradually starting at age 21. The beneficiary receives distributions annually until age 25, when the remaining funds are disbursed and the trust terminates.
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Scenario Three: Inheritance Tax Event
- If a beneficiary over 18 receives a distribution, inheritance tax liabilities are triggered, and the trust must account for these taxes during such distributions or when the beneficiary gains full entitlement at 25.
Frequently Asked Questions (FAQs)
What is the primary purpose of an 18-25 trust?
The primary goal is to manage and protect assets for a young beneficiary until they reach a mature age, often 25, ensuring responsible use and protection from premature spending.
Why was the 18-25 trust restricted to will creation post-April 2008?
This restriction aims to simplify tax regulations and limit the scope of trusts that defer immediate access, aligning with broader tax policies toward trusts.
Are there alternative trusts for young beneficiaries?
Yes, options include bare trusts, discretionary trusts, and accumulation and maintenance trusts, though these have differing terms and tax treatments.
How does the inheritance tax apply to an 18-25 trust?
Inheritance tax is charged during three key events: the initial settlement of the trust, any distribution to a beneficiary over 18, and when the beneficiary becomes absolutely entitled at or before reaching 25.
Can an 18-25 trust be altered once established?
Typically, the terms set forth in the creating will are binding. Any significant changes would require legal counsel and possibly judicial intervention.
Related Terms
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Discretionary Trust: A trust where the trustee has the power to decide how the trust income or principal is distributed among the beneficiaries.
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Inheritance Tax: A tax on the estate of a deceased person before distribution to the heirs, based on the value of the estate.
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Accumulation and Maintenance Trust: A trust that previously allowed for income to be accumulated until the beneficiary reached a certain age, before transferring to 18-25 trusts.
Online References
Suggested Books for Further Studies
- “The Complete Book of Trusts” by Martin M. Shenkman
- “Understanding Trusts and Estates” by Roger W. Andersen
- “The Law of Trusts” by Hon. Gerald M. Dworkin and Tony Browne
Accounting Basics: “18-25 Trust” Fundamentals Quiz
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