My firm advises recipients of NS&I £1m Jackpot prizes and occasionally the winner is a child.
Where the child is under 16 years of age, the prize is paid out to the ‘responsible person.’ If the child is 16 years of age or over, the £1m prize is paid directly to the child’s cash account under their control.
Where a child’s prize is paid to the ‘responsible person,’ I have always held the view that an implied trust exists, which is a bare trust with the child winner as the sole beneficiary and the ‘responsible person’ as the trustee. Consequently, I have so far believed that the right course of action is for a declaration of trust to be established to ‘formalise’ the implied trust. However, it has recently been suggested by a solicitor that another solution is for an application to be made to the Court of Protection for a deputy to be appointed to look after the child’s affairs until they reach the age of legal capacity.
Bearing in mind that I am a financial planner and not a lawyer, I am interested to receive any insightful comments from specialist lawyers on this forum.
I agree with your recent advice, namely that there is more than one solution. Personally, I would advise a declaration of trust is prepared to formalise the bare trust, but if there is any concern over the ‘trustee’, then a Deputyship application should be made.
Although not necessarily of direct concern to you, an interesting issue arises, namely whether the child could claim against NS&I if the trustee spent their money. On what authority is the ‘responsible person’ paid. Presumably that will be covered within the terms of business. However to protect the child, a Deputyship could be the best option.
That is helpful and confirms my view. An interesting point on whether NS&I could be held responsible if the responsible person does not deal with the child’s prize appropriately to the child’s detriment. I would be interested to hear comments on that to explore the technicalities.
I’m slightly uneasy with this type of arrangement.
It is the child’s money. He/she won the jackpot.
Has the child the capacity to create a trust?
If a trustee (presumably parent) spends some of the prize money and that expenditure does not benefit the child then I would have thought the trustee is obliged to make good the ‘loss’ to the child either directly or by reimbursing the trust fund. I can’t see how NS&I can be liable for the trustee’s inappropriate expenditure.
I would have thought that an organisation of the size of NS&I would have taken Counsel’s Opinion on the options.
That’s helpful. Yes, you would like to think that NS&I has taken advice, I do know that they have access to the Treasury Solicitor.
On the point of whether a child has capacity to create a trust, I’m not sure that applies here because, am I not right in thinking that an implied trust already exists and the declaration of trust merely confirms the terms of the implied trust - i.e. it formalises the arrangement? It seems to have the three certainties of intention, subject matter and object. So, isn’t the declaration simply confirming what’s implied?
Drafting trust deeds is outside my scope of practice, so I would be interested to hear insight from a solicitor who deals with this type of situation.
Also, I’m interested to know more about the suggestion of a deputyship order and the interaction with the implied trust.
I agree that a declaration of trust should be executed to formalise the position. It would be similar in form to declarations dealing with awards of damages to children.
The Court of Protection would not have jurisdiction in the ordinary case of an under-16 winner, because its jurisdiction is limited to dealing with adults who lack mental capacity. The Children Act jurisdiction would be the appropriate one for a child.
What action can be taken on behalf of a child beneficiary where the trustee (their parent) is in breach of trust?
Can an advocate be appointed or do they need to wait until they are adults to then sue the trustee? If an advocate can be appointed, who would be appointed? It is a bit of a bizarre situation that seems unique to Premium Bonds child winners!
The child may not (usually doesn’t) know that they have received a £1m prize.
Following on from Josh’s comment, which is of course correct, it is the case that the CoP only has power in respect of a person under 16 years of age if the CoP considers that it is likely that the child (P) will still lack capacity to make decisions in respect of the relevant matter when s/he reaches 18. Children do not possess the capacity necessary to manage their property and financial affairs, but you would have to show, for example, that the child suffers an impairment (possibly through injury) that will endure into adulthood to engage the CoP’s jurisdiction. Medical evidence will be paramount. Whilst this might be a circumstances you face once in a while, it does not seem to be the typical issue you are facing and the solicitor in question appears to have misled you as to the alternative Deputyship option.
Section 3(3) of the Children Act 1989 gives parents and guardians the right to receive or recover in their own name, for the benefit of a minor, property which the minor is entitled to receive or recover. The parents/guardians can therefore give good receipt to NS&I for the child’s award. I agree with you that in taking custody of the funds there is an implied bare trust. I further agree with you and others that it would be a good idea to enshrine the terms of the bare trust expressly in a written deed. As the beneficiary of the bare trust is a minor, the trustees do have active powers and duties (for example, to invest the trust assets and to consider whether and how to use trust capital and income to benefit the beneficiary). Contrast that with a bare trust for an adult where the trustees have no active duties except the duty to hold the legal title to the trust assets.
If a trustee commits an actionable breach of trust, technically an action can be brought by the child through a litigation friend or the child waits until they are 18. A litigation friend can be a friend, someone related to or connected with them (an older sibling, grandparent etc.). However, as you note, the child might not even be aware that they are a beneficiary of a bare trust and any breach of trust may be well concealed from them and the other adults around them. The breach of trust may not come to light for many years (if ever). It would be useful for NS&I to insist on making contact with the child once they had attained 18 to check they have now taken custody (if that is what they want) of their winnings as it would be perfectly possible that it could be kept hidden from them indefinitely.
Is it relevant that NS&I insist that bonds purchased for a child under 16 are registered in the name of a parent/guardian, whoever pays for them, and carries out usual money laundering checks against all persons named on the application [ie child, parent/guardian and donor, if any].
The NS&I application for a child (under 16) has to be made by only one person - the ‘responsible person.’ I presume they undertake money laundering checks for the ‘responsible person’ and the child, not where the money comes from necessarily
s.3 Children Act 1989 gives any person with PR the right to “receive or recover in his own name, for the benefit of the child, property of whatever description and wherever situated which the child is entitled to receive or recover.”
In the face of that, I would expect that the simplest solution would be to transfer funds to a person with PR and use a declaration of trust for the record. Provided NS&I take appropriate steps to confirm that the recipient does have PR for the child (e.g. sight of birth certificate) then it is difficult to see how they could be liable given the statutory position.
A child may beneficially own property which is legally vested in a parent and held or dealt with by that parent. If the precise terms on which that occurs are not explicit (e.g. from the nature of the property or the terms and conditions applicable to it) the parent is a trustee. The trust may be described as “bare” and it is not express. It seems to be properly described as constructive. A constructive trust is imposed by operation of law in many private property, and increasingly in commercial, contexts. I seriously question the latitude which a constructive trustee has to declare express fancy trusts delineating, restricting or expanding his legal obligations as opposed to recording them evidentially for clarity and posterity.
As someone who holds Premium Bonds for my children, this is an interesting thread. I have always taken it that the Bonds are already in a trust for my children, which I created when I first deposited the money in their names. Therefore, any interest that accrues (i.e., winnings) is within the same trust and there is nothing newly created when they win any amount. We’ve had several £25 wins in the years I’ve held them, and these get paid to my bank account (as the ‘responsible person’) and I move them to the children’s own building society deposit accounts (also in trust).
If one of my two children were lucky enough to win the £1m jackpot, the bigger issue I would face would be dealing with that from the position of how to create equity between them. I think it would be very challenging to have one daughter a child millionaire and the other not. I would therefore ‘encourage’ my lucky daughter to make a formal declaration of a gift of 50% of the winnings to her sibling, so as to create equity between them on their own terms and avoid the chance of me being held to account at a later stage!
Of course, although slightly away from the main topic, this isn’t the only issue. I have provided the initial funds that created the jackpot. If these tax-free winnings are reinvested in assets that produce an income, they technically fall within the parental settlement rules and income will be taxed as if it were mine. As you’re investing the proceeds, this is possibly of equal importance to your investment advice.
I agree with your analysis; the issue that often crops up where there is more than one child is exactly as you describe. The winning child though cannot settle a trust until they have capacity to do so. The problem that can occur is the parent deciding to share the child’s winnings, which I think could amount to breach of trust. The obvious solution seems to be for a declaration of trust to be established at outset and then, when the winning child is 18, to suggest they share it with siblings at that stage - I’m not a lawyer but it would seem to make sense for the child (at 18) to have independent legal advice so they are making an informed decision and there is no undue influence or coercion.
In my experience, though, none of that happens and the funds are probably shared. We refuse to engage if that is what they intend to do because of the conflict of interest it would create.
The other consideration that comes to mind is regarding any obligations for an implied trust to be registered under the new regulations.
My research suggests that a written document is not in fact necessary as is confirmed in the HMRC’s Manual ([TRSM21030] which provides that, whilst an express trust is usually created by a declaration of trust which is made by the legal owner, the declaration can be written or oral, except in the case of land.
So, if it is acknowledged that an implied trust is established at outset when the investment is made and then held by a ‘responsible adult’ for the benefit of the child, does it follow that the ‘implied trust’ should also be registered?
Also, if that is the case, then does it apply to all of the bank accounts that parents and grandparents open for children and what about appointments of capital from a discretionary trust to a minor beneficiary where the funds are to be paid to a parent as a trustee of a bare trust that is also implied by virtue of the appointment?
An implied trust is not registrable. A document recording and acknowledging that it exists does not create a trust so is also not registrable.
An appointment to a minor beneficiary of a DT is not an appointment to a parent though the trustees may for their protection avail themselves of a clause permitting them to accept a receipt from a parent to avoid breach of trust. This undoubtedly makes the parent a constructive trustee, not an express trust so not registrable. If the trustees exercise a power lawfully that enables them to appoint to the minor upon trust that would be express and registrable.
A parent who is a constructive trustee cannot declare any further trusts over the trust property but may deal with it for the infant’s benefit within what the law allows. This does not permit equalisation of a premium bond jackpot among siblings. Purchase of an asset in the name of another and a gift by a parent to a child raises a presumption of advancement but the intention to make a gift in buying bonds for a child may not be challenged in any event by the parent or a third party. The equalisation issue can be overcome by a contemporary declaration of trust making all siblings eligible beneficiaries but being express would be registrable, not to mention entail different tax consequences. Contemporary does not mean several months later having read contributions here.
The great British public, fictional passengers on the Clapham omnibus, blissfully ignore all this kind of caper. Generally with some justification. No one complains—until they do. In these days of Trigger Warnings and Helplines for the Affected I am surprised that NS&I do not invite the purchasing Unwashed to contact an adviser concerning the possible employment of a nasty trust thing at the shocking expense of a family outing to Nandos. Perhaps someone will eventually assert that they had a duty of care to do so and instruct Sue Grabbit and Run to demand Compo. It is almost impossible to totally insulate the untutored from true wisdom which " cries out in the streets and no man regards it" per The Bard and Prince Hal.
The problem here is that any express trust must be in place when the parent/grandparent or other donor buys the bond for the child. Once the bond is purchased the constructive trust offers limited flexibility. The receipt of one, even several, small prizes can doubtless be dealt with by a parent for the child’s benefit within the bounds of what the law permits. Prizes are not liable to income tax or CGT and these taxes will only be in point if the prize funds are invested to produce income or gains. Even then they and IHT will be somewhat theoretical if amounts remain small. The receipt of a £1m jackpot into a bare constructive trust, though perhaps rare, is in a different order of magnitude.
For income tax s31 TA 1925 will apply which will mean that a parent settlor will only be taxed on any income from investments which is “distributed” (see TSEM4300, accumulation and discretionary trusts) during the minority. This provided the parent does not “retain an interest” and potential entitlement on the minor’s death intestate does not count. For CGT the gains during minority are taxed as the minor’s as the trust is not settled property, the minor being absolutely entitled but for being a minor. For IHT the trust will be a relevant property trust with anniversary and exit charges until majority which constitutes a final exit chargeable event; one or two hits at just under 6% effective may be tolerable.
The practical issues of a minor not be able to make a will and becoming absolutely entitled to the entire trust fund on majority are self-evident. There is also a doubt whether a trustee, bare or otherwise, can invest into premium bonds, originally or additionally, probably largely and routinely ignored by all parties. The concept of a “person responsible” i.e. a bare trustee is either NS&I not understanding what is going on legally or holding the telescope to the wrong eye. £1m may concentrate the minds wonderfully.
Life assurance companies have long provided trust policy wordings, free but built into their charges. The drawbacks of these are well known but do not undermine their utility. It may be too much to expect NS&I to do this especially as the probability of the most undesirable outcome is statistically low. I do believe that it is reasonable for them to draw attention to the issue so that a person buying a bond for another is at least alerted. A standard form discretionary trust with basic admin provisions needs minimal initial advice unless and until the jackpot is won. I suspect that the general prohibition on trustees investing in bonds is a genuine potential obstacle and it may be too much too expect NS&I to co-operate with a rule change or clarificatory blind eye. Government and Government Agencies do not see it as their role to be helpful until a major scandal precipitates acute official hand-wringing and rigorous denial of foreseeability and culpability.