When your child inherits or wins a lump sum, the initial excitement is often followed by a practical concern: how to make sure the funds are managed responsibly until the child is old enough to handle them independently. Many parents turn to trusts as a way to safeguard the funds. The two most commonly used structures are bare trusts and discretionary trusts, each offering different levels of simplicity, control and flexibility.
A bare trust can be easy to set up and straightforward to run. Under a bare trust, the child is the ultimate owner of the money, but trustees – who can also be the parents – look after it until the child reaches 18. The trustees can use the funds for the child’s benefit, typically for education, welfare or general expenses, but once the child reaches adulthood the money becomes theirs outright.
Bare trusts are generally most suitable when the sums involved are modest, or where parents feel confident that their child will be ready to manage the funds responsibly at 18. However, once the child reaches adulthood, parents and trustees have no further control. If a child chooses to spend the entire lump sum immediately, there is little anyone can do to stop them.
On the other hand, a discretionary trust offers a more flexible and protective structure. Instead of giving the child a fixed right to the funds, the trustees have discretion over when to make payments, how much to release, and for what purpose.
This allows the trustees to take the child’s personal and financial circumstances into account at the time before making a distribution. For example, the trust could cover education and living costs, with any surplus income over and above what the trustees consider to be ‘normal’ spending reinvested for distribution when the child is older. The child may also prefer the funds to remain in the trust. Equally, trustees may consider it appropriate to retain the assets if the child appears to be in an unhappy or unstable marriage, is going through a divorce or bankruptcy, or is under the influence of drugs or alcohol.
The trade‑off is that discretionary trusts involve more administration and can have less favourable tax treatment, particularly where income is retained in the trust. But for significant sums, many families find the protection and control more than worth it.
While trusts can be very useful for wealth protection, they should be considered as part of a wider financial and estate planning exercise. Legal structures are only part of the picture. Parents should take financial and investment advice to ensure that the funds grow in line with their wider investment objectives and are held in the right vehicles. This may include using Junior ISAs (tax‑free investment accounts for children), Junior SIPPs (long‑term pension savings with generous tax treatment), or general investment accounts. Each of these offer different advantages in terms of tax efficiency, access and long‑term growth potential.
A suitable trust structure, combined with a sound investment strategy, can make a significant difference to a child’s financial future.