Quick summary: Setting up an educational trust for your grandchildren is a thoughtful way to support their future, and it doesn’t have to be complicated or reserved for the wealthy.

By understanding the basics, choosing the right type of trust, and following practical steps, you can make a real difference—without adding to your life admin stress. If you’re ready to take the next step, start by talking with your family about your wishes, choosing trustees you trust, and drafting a clear trust deed. With a bit of planning, you can help your grandchildren thrive, whatever path they choose.

What is an Educational Trust for Grandchildren?

An educational trust is a legal arrangement where you set aside money or assets for your grandchild’s education. Instead of handing over cash or opening a savings account, you create a trust deed that names trustees (often yourself and another trusted adult) to manage the money until your grandchild needs it for school, college, or university.Unlike a simple gift, a trust gives you control over how and when the money is used. You can set conditions—such as only releasing funds for tuition, books, or living costs—and you can decide at what age your grandchild can access the money. This can be reassuring if you’re worried about the money being spent unwisely or if you want to make sure it’s used for its intended purpose.

Why Set Up a Trust Instead of Just Giving Money?

Many grandparents wonder why they shouldn’t just give money directly. The answer is that trusts offer several benefits:

Protection: If your grandchild is still young, a trust ensures the money is managed responsibly until they’re old enough to make decisions.

Flexibility: You can set rules about how the money is used, and trustees can adapt to changing circumstances.

Tax Planning: Trusts can help manage tax liabilities, especially if you’re concerned about inheritance tax or want to avoid complications for your children.For example, imagine you want to help your granddaughter, Sophie, with university fees. If you give her £20,000 outright, she might spend it on something else, or it could affect her eligibility for student loans. With a trust, you can specify that the money is only for education, and trustees can release it as needed.

Types of Trusts: Bare vs DiscretionaryThis is where things can get confusing, but it’s worth understanding the basics.

A bare trust is the simplest type. The grandchild is the absolute beneficiary, meaning the money is theirs, but the trustees manage it until they turn 18. Once they reach adulthood, they can demand the money. This is straightforward and often used for education.

A discretionary trust gives trustees more control. You can name several potential beneficiaries (perhaps all your grandchildren), and trustees decide who gets what, when, and how much. This is useful if you want flexibility or if family circumstances might change. For most educational purposes, bare trusts are common because they’re simple and direct. But if you have several grandchildren and want to keep options open, a discretionary trust might suit you better.

How Does an Educational Trust Work in Practice?

Let’s say you set up a bare trust for your grandson, Oliver. You put £15,000 into the trust, and you and your daughter are trustees. The trust deed says the money is for Oliver’s university fees and living costs. When Oliver turns 18, the trustees can release the money for tuition, rent, or other approved expenses.If Oliver decides not to go to university, you can include a clause in the trust that allows the money to be used for other forms of education or training, or even held until he’s older. This flexibility is one of the main advantages of a trust.Trustees have a duty to act in the best interests of the beneficiary. They manage the money, keep records, and make decisions about when and how to release funds. If you’re worried about the responsibility, you can appoint a professional trustee or ask a trusted family member to help.

Practical Steps to Setting Up a Trust

Setting up a trust doesn’t have to be daunting. Here’s how you can do it:

Decide the Amount and Assets:
Think about how much you want to set aside and whether you’ll use cash, investments, or property. For most families, cash or investment bonds are common.

Choose Trustees:
Trustees should be people you trust to manage the money responsibly. You can be a trustee yourself, but it’s wise to have at least one other person involved.

Draft the Trust Deed:
This is the legal document that sets out the terms of the trust. You’ll need to specify the beneficiary (your grandchild), the purpose (education), and any conditions or rules. You can find templates online, but it’s important to make sure the deed is clear and covers all scenarios.

Register the Trust (if required):
Some trusts need to be registered with HMRC, especially if they generate income or gains. This is usually straightforward and can be done online.

Manage the Trust:
Trustees need to keep records, manage investments, and make decisions about releasing funds. Regular reviews help ensure the trust is working as intended.

Tax Implications and Common Pitfalls

Tax is often the biggest worry for grandparents. Here’s what you need to know:

Who Pays Tax?
If you set up a trust with your own money, and you’re the grandparent, the tax rules are generally more favourable than if a parent sets up the trust. For example, gains from investment bonds held in trust are usually taxed on the beneficiary, not the parent, unless the parent is the settlor and the beneficiary is a minor.

Parental Settlor Rules:
If a parent sets up a trust for their own child, and the income exceeds £100 a year, the parent may be liable for tax on the income. This rule doesn’t apply to grandparents, so you can set up a trust for your grandchild without worrying about this complication.

Exit Charges and Assignments:
If trustees assign segments of an investment bond to a beneficiary, there may be an exit charge depending on the value. It’s important to check the terms of the investment and the trust deed.

Common Mistakes:
One common mistake is not making the trust irrevocable. If you want the gift to be outright, you can’t change your mind later. Another is failing to pass on chargeable event certificates to the beneficiary or their legal guardian, which can cause tax headaches.

Solutions and Workarounds

If you’re unsure about the tax position, keep good records and ask trustees to pass on any relevant documents to the beneficiary or their parent. If you want flexibility, consider a discretionary trust, but be clear about who can benefit and under what circumstances.If you’re worried about the trust being too restrictive, include clauses that allow trustees to adapt to changing circumstances—such as using funds for vocational training or other educational needs.

Frequently Asked QuestionsCan I change my mind after setting up the trust?
If the trust is irrevocable, you can’t take the money back. If you want flexibility, discuss options with your trustees before finalising the deed.

What if my grandchild doesn’t go to university?
You can include provisions for other types of education or allow trustees to hold the money until your grandchild is older.

Can I set conditions?
Yes, you can specify how and when the money is used, but be realistic and allow for life’s unpredictability.