precatory trust

Wasting an inheritance

 

I hear many cases of young adults wasting an inheritance, received from one of their parents, a grandparent or close relative.

It can be very tempting for someone in their teens, twenties or even thirties, particularly if they’ve suffered financial hardship, to blow the lot very quickly.

Rather than thinking about key investments which will need to be made in their future such as buying a car, a home, saving for a wedding, family or even for retirement, it’s all too easy to “buy a little happy” and opt for the short-term feel good factor, instead.

Let’s face it, very few individuals in their twenties want to consider investment or savings options. Unfortunately, once they’ve received their windfall, there’s absolutely nothing that can be done to stipulate how they should spend it.

The best way to ensure that a young beneficiary doesn’t waste your hard earned money is to place it into a trust whilst you’re still alive, with the explicit instructions that they are not to receive it until they reach a certain age. Most people prefer to use the ages of 18 or 21. However, if your child or grandchild is likely to fritter it away, this age can be increased. Alternatively, within a precatory trust, you can also state that the money is to be used for a specific purpose.

What is a Precatory Trust?

Put simply, a Precatory Trust is a way in which you can leave a sum of money to an individual (usually your child or grandchild), but specify exactly how you want that money to be spent.
 
This is a great way of leaving money to someone so that it has a valuable purpose, whether that purpose is to fund the deposit on a house or to pay university fees.
 
A Precatory Trust doesn’t just apply to money, however. You can also use it to dictate who should receive what particular items, using a letter of wishes to say what you’re leaving to whom and why. This can be changed regularly, without actually changing the content of your Will.
 
Often, a Precatory Trust will offer benefits in relation to Inheritance Tax liability and Gift Aid tax.
 
Care must be taken when preparing a letter of wishes, so that the wording is in no way ambiguous and your express wishes are clear. You should indicate that you definitely want to create a trust, name the asset you want to distribute and state who to and why.

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