Investing a Bequest for a Minor

[pds2008]

I am an Executor for my late father's estate. Part of his estate is to be shared by two grandchildren under the age of 18 and myself and my sister will act as trustees for this until they reach the age of 18. Their parents have asked for advice on investing the money for the respective periods of 7 and 10 years. They do not just want to stick it in a Cash ISA, nor do they want to want to invest in a Stocks and Shares ISA.

It is important that they make the decision but I was wondering if a long term bond would provide securoty together with decent growth over these timeframes. I do not know where to start. Could anyone pont me in the right direction, or suggest an alternative.

Thanks - yell

[YeeWo]

If the Children don't have a pension that would be an interesting option, Government immediately adds 20% Tax Relief to amounts invested. Also the money can't be touched until the Children are 55 years old, a great for your Father's legacy to be remembered later in life!
A degree of measured risk is necessary to do something useful with money over time. Perhaps a mix of cash, bonds and equities would be something you're comfortable with? Some more detail may assist people here to help........

[Muddywaters]

Just to clarify, did the will make you and your sister trustees?

[Muddywaters]

If the Children don't have a pension that would be an interesting option, Government immediately adds 20% Tax Relief to amounts invested. Also the money can't be touched until the Children are 55 years old, a great for your Father's legacy to be remembered later in life!
A degree of measured risk is necessary to do something useful with money over time. Perhaps a mix of cash, bonds and equities would be something you're comfortable with? Some more detail may assist people here to help........

The children are due the money at 18 under the terms of the will by the sounds of it, pensions is not an option unless you want a potential court case when they reach 18

[Dod101]

As trustees you and your sister should be asking the parents for advice if you think you need that. As Trustees you two are responsible legally for how the assets are invested not the parents. The parents have no legal say in the matter. The trustees are there to hold the assets and carry out the wishes of the settlor (your late father). If I were you, over the periods involved I would be inclined to buy a boring generalist Investment Trust such as F & C or Alliance if the Will has no guidance in it as to the investment.

I would not personally go down the pensions route if that means tying up the money until 55. Most grandparents (I am one) in leaving money for grandchildren would probably want it tied up in a trust until say 18 or 21 to help with further education or maybe house purchase.

Dod

[LooseCannon101]

I agree with Dod101 - a generalist investment trust like Foreign and Colonial (FRCL) should deliver decent returns over a 10 year period, more than doubling in value - especially if dividends are re-invested.

Buying and holding such a trust is boring but what's wrong with that?

[Parky]

FRCL and other Investment Trusts provide facilities for setting up such Trusts. Just download the appropriate forms from their web-site, fill them in , and send them off with the cash. Easy - I did the same for my grandchildren.

[pds2008]

Thanks for the responses to date. To calrify a few points:

Muddywaters - My sister and I are named as Trustees and the grandchildren shall benefit at age 18
Dod01 - My father would have wanted their parents to make the decision on investing the money - regardless of principles
the law of Trust. I had the discussion with him when he and I were executors to my late mother's estate.

I would go down the IT route but I am not sure of their attitude to risk

Yell

[tjh290633]

Thanks for the responses to date. To calrify a few points:

Muddywaters - My sister and I are named as Trustees and the grandchildren shall benefit at age 18
Dod01 - My father would have wanted their parents to make the decision on investing the money - regardless of principles
the law of Trust. I had the discussion with him when he and I were executors to my late mother's estate.

I would go down the IT route but I am not sure of their attitude to risk

Yell

I support the IT route, and use FRCL, WTAN, ATST and FIC for my own grandchildren. You have to watch the charges.

Not sure what you are getting at about risk. Look at the annual reports and read what they say.

Alliance Trust Savings have some strange ways with a multitude of accounts for what is one with the others. I would avoid them, if I were you.

TJH

[hiriskpaul]

I assume here that the legacy is relatively modest as you have mentioned ISAs. If £1m+ my advice would be quite different!

Returns on regular cash ISAs are not generous, but Junior ISA returns are good and higher than the returns you might expect from investment grade bonds:

https://savingschampion.co.uk/best-buys ... unior-isa/

It is possible to get higher returns from bonds, for example Co-op Group 11% 2025 matures in a 7.5 years and has a yield to maturity of about 5.6%, but this is subordinated debt, absolutely not investment grade, with a non-negligible chance of default. Given the capital preservation remit, in the first instance I would ignore bonds and get as much as I possible could into Junior cash ISAs, adding more each year if cash was available. Keep the rest on deposit with the best rate you can find, then load up the Junior cash ISA at the start of each new tax year. You will need to watch the rates on offer and will likely have to play the switching game a number of times to make sure you are getting the best rates, which is a chore, but unfortunately necessary.

If the Junior ISAs are already being used each year, then I would suggest you either hunt out the best term deposit rates you can find, or pick a low cost currency hedged global bond fund, such as Vanguard's Global Bond Index Fund, or iShares Global Aggregate Bond ETF (AGBP). These bond funds are however the next step up in risk compared with FSCS protected deposits and there is no guarantee they will perform as well.

You could choose to invest some money in equities and I think it more likely than not that you would make more than 3.5% per year over the next 7-10 years if you did that, but there is certainly a good chance you would do worse than the returns from Junior ISAs. If I was doing the investing I would put around 20% in a World tracker, or collection of regional trackers if the size of the investment justified the additional trading costs, then either reinvest dividends or redirect into a Junior Cash ISA.

Assuming you will be using a bare trust (probably the best option), unsheltered income and capital gains will be taxable and the parents may need to complete self-assessment forms for the children each year. The children will of course get their own personal allowances and so hopefully should not need to pay any tax.

[PinkDalek]

Are not the funds held in trust for the minors? If so, I'm not convinced the trustees can invest in Junior ISAs etc.

[OLTB]

Just to re-iterate that the funds will need to be invested in some form, rather than held in cash (which I know you said that the parents didn't want to do anyway).

Lewin on Trusts states in Chapter 35 "Trustees are under a duty to make the trust fund productive for their beneficiaries by investing it" - and "investment" was defined in Re Wragg (1919) 2 Ch 58, p65 as being the application of money "in the purchase of some property from which interest or profit is expected and which is purchased for the sake of the income it will yield".

The court in Re Power (1974) Ch 572 held that current accounts and property which is purchased for occupation by a beneficiary should be excluded from the requirement to invest. However, where material amounts of cash are held, trustees should normally consider investing this unless it is required for use by a beneficiary in the very near future.

In Midland Bank Trustees (Jersey) Limited v Federated Pensions Services Ltd (1996) Pensions Law Reports 179 it was held that trustees who kept trust monies on deposit for three months were in breach of trust because they had failed to take advantage of a rising market. This reflected the view of the court in Nestle v NatWest, in which it was held that, in view of the lengthy investment period involved, at least half of a trust fund held for persons in succession, with vested interests, should have been invested directly or indirectly in equities.

Cheers, OLTB.

[Muddywaters]

Are not the funds held in trust for the minors? If so, I'm not convinced the trustees can invest in Junior ISAs etc.

Correct, isa’s aren’t an option for trust monies

[Dod101]

OLTB may well be correct but it will not matter in this case since the trustees are not going to be exercising their responsibilities anyway since they are asking the parents how they would like the funds invested despite the fact that they are the ones with the legal responsibility for doing so.

The law is only relevant I suppose if the beneficiaries at some later date challenge the trustees but I assume the trustees think that unlikely.

Dod

[bobsmydog]

If it were me, I agree - a boring growth trust or ETF like vanguard all world, something with little or no dividends/interest as income is taxed on trust income.

[PinkDalek]

... something with little or no dividends/interest as income is taxed on trust income.

One wonders if this is a Discretionary Trust, the Income Tax rate for which is presently 38.1% on dividends and 20% on interest, within the standard rate band of £1,000, and 45% on interest above that band.

However, if sums are spent on the beneficiaries' education etc, the Tax Pool created by such income above will, effectively, result in an Income Tax repayment to them on someone submitting a Tax Return on their behalf, making use of their personal allowance.

Broad brush above - the Taxes board is available for further discussion.

[OLTB]

... something with little or no dividends/interest as income is taxed on trust income.

One wonders if this is a Discretionary Trust, the Income Tax rate for which is presently 38.1% on dividends and 20% on interest, within the standard rate band of £1,000, and 45% on interest above that band.

However, if sums are spent on the beneficiaries' education etc, the Tax Pool created by such income above will, effectively, result in an Income Tax repayment to them on someone submitting a Tax Return on their behalf, making use of their personal allowance.

Broad brush above - the Taxes board is available for further discussion.

You could always invest within an Investment Bond wrapper for the trust as you can still choose the underlying investment(s) (assuming the bond provider has a wide fund range), and, being within an Investment Bond wrapper, will generate no income therefore no income tax/capital gains tax issues and can be assigned to the beneficiaries at age 18 with no tax complications.

Cheers, OLTB.