View more on these topics

Child&#39s play

Last week I made the (fairly obvious) point that the vast majority of investment strategies for the benefit of children are funded by adults, often parents, so the legal niceties of contracting with children are rarely relevant.

Almost every financial product available could be used to provide for the financial future of children. In most cases, the easiest and most flexible way to do this is for the “provider” (for example, the parent or grandparent) to effect the plan or plans and to use the proceeds (or part of the proceeds) for the intended purpose when the time comes.

In these circumstances, there will be no complexity. That the investment proceeds are to be used to provide for children is merely a “potential” purpose.

There will be no compulsion on the investment owner to use the funds in a particular way and so the legal and tax implications during the lifetime of the investor will be no different from those applying to any investment made by any individual.

When considering the legal and tax implications of investments for children, it is most important to first ascertain precisely who owns the money that is to be invested. In most cases, as stated above, the funds will belong (and continue to belong) to the “funding” individual.

Sometimes, though, cash or investments may be gifted to a child or left to a child under a will. It may well be the case that in such circumstances the cash is not legally owned by the child but is owned by trustees who hold it for the absolute benefit of the child.

Such a trust could be expressly declared on the face of the document evidencing the gift or may be implied by law where there is no separate trust document evidencing the gift, for example, by “designating” that the investment (for example, a unit trust or Oeic) is for the child.

Although the latter route is often chosen because of the absence of formalities, in the absence of specific powers given to the trustees restrictive provisions of general trust law would apply with regard to dealing with trust income and capital, for example, in deciding how much capital can be advanced to the child beneficiary.

In practice, therefore, if an individual is contemplating a gift to a child (and does not want to merely hold an investment for the possible future benefit of a child), it should normally be recommended that an express trust document is executed.

If the cash is owned by the trustees, then the investment house or the life office in question will be contracting with the trustees and not the child. Some building societies, Nat-ional Savings and unit trust groups offer special trustee accounts for this purpose.

Where funds are to be held for the child&#39s benefit in a deposit account, it will be important to fully understand the rules operated by the dep-osit-taker for the running of the account. Particularly in recent years, banks and building societies have been competing with each other for children&#39s savings, offering a variety of incentives for children (or “providers” for children) to open savings accounts with them.

Although the attitude of the different institutions differs, most societies and banks will readily permit a child to open an account and operate it personally from age seven. Before that age, parents and guardians will normally need to be signatories. Many banks allow children from age 11 to have cash cards.

For younger children, generally speaking, the accounts would be opened either as designated accounts or trus-tee accounts. Designated acc-ounts will also be the most common way of holding inv-estments such as unit trusts or Oeics for children. Here, the unit/share certificate will be issued in the name of the adult nominee followed (usually) by the child&#39s name or initials to indicate the beneficial ownership.

The nominee will have power to sell units/shares and to reinvest any dividends alth-ough the position as far as any further reinvestment is concerned is not entirely clear as the nominee has no specific powers of investment.

The disadvantage of a designated account is that the money will often be “locked in” to the original investment until the child is old enough to deal with it although, again, practice will vary. At 18, the ownership of the investment can be transferred to the beneficiary.

I will continue with this topic next week.

Recommended

Pru bids to undercut rivals in loan protection sector before rebrand

Prudential is cutting premiums on its Scottish Amicable mortgage protection products in a bid to improve its market share before its rebrand next year. It only entered the market 20 months ago, selling through IFAs and mortgage brokers. Market share in this sector is traditionally driven by price. The Scottish Amicable name is set to […]

Skipton launches two-year fix rate mortgage

Skipton Building Society has launched a new two-year fixed rate mortgage with a rate of 3.99 per cent until November 30 2004. It offers 0.30 per cent discount off the variable rate, currently 5.70 per cent, in years three and four, and 0.50 per cent off the variable rate from year five onwards. It is […]

Alexander Forbes expands Irish operation

Alexander Forbes is expanding its Irish operations with the acquisition of the insurance broking business of K&H Insurance Management Services.The two principals of the Dublin-based broker, Martin Kavanagh and Philip Herron, will join Alexander Forbes as consultants.  Alexander Forbes Dublin managing director Declan Healy says: “We are delighted to have secured an acquisition of this […]

Big rise in single people buying homes

A dramatic increase in the number of single people buying houses is leading to a fundamental shift in UK housing demand, according to res-earch from Halifax. The UK&#39s biggest lender says in 2001, single buyers accounted for more than four in 10 buyers compared with only a quarter in 1983. In the medium to short […]

Guide

Guide: 10 required letters — what to send, to whom and when?

This guide from Johnson Fleming will take you through the required communication and also give ideas for additional actions that will ensure your auto-enrolment project is a success. The topics in this guide include: the letters you need to send out; what to send and when; the importance of employee engagement; and what to consider as additional communication.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment