Bank of Mum and Dad – Advantages of setting up a Gift Trust

Everyone wants to give their children a head start in life but they also want to protect the assets they have worked so hard for.

If your children are looking to accumulate a deposit for a house you may want to help them out if you can afford to do so but it needs to be done with care.

As an example, you may wish to give your daughter £50,000 as a gift.  Whilst none of us like to think of the worst in this scenario it is worth thinking a little longer term.  Your daughter has a lovely husband and they have been together for many years.  They are looking to buy a place of their own as they have been renting up until now and you feel this is ‘ dead’ money. Furthermore, your daughter is expecting their first child and as such they need more space.  You are even more keen to help knowing the reasons behind it – you can help them build a home for your first grandchild.  They use the £50,000 deposit to buy a £250,000 property in rural Lincolnshire.

10 years later and sadly the marriage does not work out.  They put the house on the market as part of the divorce.  The unfortunate reality is that the value of the house is split 50:50 and your now ex son in law has pocketed £25,000 of that deposit.

With a bit of careful planning you can protect your assets and your daughter’s financial future.

Instead of giving her £50,000, you create a Trust and make a gift of £50,000 into that Trust.  You and your wife are the Trustees, retaining full control over the monies.  The Trust then loans your daughter £50,000 with the condition that it is used to purchase a property and is repayable in the event that the property is subsequently sold.  Of course if your daughter is taking out a mortgage then she would need to declare this as a loan to the mortgage provider

10 years down the line when the property is sold in the divorce the loan must be repaid, ensuring your now ex son in law does not benefit from that loan.  The Trust then can re-loan the money back to your daughter to purchase a new property given her new circumstances. This guarantees the funds are protected and means the full amount of the gift to your daughter is used for its intended purpose….the security of a home for your daughter and grand children.

Trusts can be complicated and there are tax implications to consider so legal advice should be sought and guidance from an independent mortgage adviser.  We work with all these professionals to make certain that all factors have been considered before making any decisions.

If you are considering making a substantial financial gift to your child feel free to contact Claire at clm@fhmanning.co.uk to discuss the best way forward.

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