Bank of Mum and Dad shuts door over trust issues

Lack of trust in potential in-laws is leading parents to review the use of cash payments to children for house purchases with alternatives such as will trusts and ringfencing deposits under consideration 

While the Bank of Mum and Dad effectively continues to act as one of the nation’s biggest mortgage lenders to help children get a foot on the housing ladder, research from financial advice firm, NFU Mutual, reveals around half (48%) of all parents with grown up children say a lack of trust in their son-in-law or daughter-in-law would affect when or how they would give money to their children – including any help to buy their first home.

One in five do not trust their child’s partner, describing them as money-grabbing, secretive and lacking intelligence, while one in four parents said they would like their son-in-law or daughter-in-law to be excluded from benefiting from any gifts or inheritance altogether.

Sean McCann, chartered financial planner at NFU Mutual, said: ‘Like most lenders, the Bank of Mum and Dad is risk-averse. But just because parents don’t trust their child’s choice of partner, it shouldn’t stop them giving money to help their son or daughter get on in life.

“There are plenty of ways to ring-fence a gift, such as for a mortgage deposit, in case a relationship breaks down. However, it’s much easier to do this before sending a bank transfer than afterward.’

There are a number of options to protect the money when it is going to be used for property purchase, including declarations of trust covering the deposit, a straight loan for the property or setting up a trust in a Will.

If a loan is made rather than gifting money to a child and their spouse, it is important to set out the circumstances the loan would be repaid and to make sure that this is formally documented.

Another option is to structure a will with an embedded trust, known as a will trust. There are a number of options for this but one of the most common is to give the child a ‘life interest’ in property or investments. This gives them the right to live in the property or enjoy the income from the investments for their life, but not ownership of the asset.

If your Will creates a trust then, giving trusteeship to the child, they will go on to manage the trust property.

McCann said: ‘The fear of family money ending up in the hands of someone else – be it the taxman or a child’s untrustworthy partner – is very powerful but quite often some simple financial planning can ensure a gift of money will stay in the family. Whether it’s in your lifetime or afterwards, there are many ways you can make sure gifts will only go to the people you care about.’

HMRC research into the use of trusts showed that one of the main reasons settlors took advantage of trusts was as a protective measure to protect assets from other people, including beneficiaries and other relatives. Flexibility was also seen as a benefit as trusts allow a settlor to respond to changing circumstances and needs within their family.

The government is currently reviewing the use of trusts following a consultation which closed for comment in February 2019. There is no response to the consultation as yet about possible reforms.

There are also significant changes to ownership transparency due to come into force next year.

The introduction of blanket disclosure means all UK trusts will have to register details of their ownership on the UK Trust Register from March 2020 resulting in millions of additional registrations.

Sara White

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