Investing children's inheritance in our family home.

[Youknownorhing]

My Mother left her house split four ways. Myself. 2 siblings and my two children. So 25% for each child and 25% slit equally between GC in trust. They can have when they are 27.

I am a single parent in a house worth £400k. Ex left me with the mortgage and skipped off abroad with OW. He is in Dubai where CM is unenforceable.

My mortgage went from £500 to £1400 in January. I had already put my inheritance into the house to reduce mortgage to £150,000.

The children's share is £167k.
It seems ridiculous that I pay this money for a loan when there is money in a discretionary trust of which I and my best friend are trustees. The money makes bugger all in interest. The sea single thing to do in my eyes is to pay off my mortgage with the children's money . (I would do it via a lawyer so that their percentage of ownership is clearly recognised and recorded at the land registry )

Kids are 11 & 13.

I currently struggle to pay for day to day life for us all now the mortgage has increased . Doing this would free up my salary and allow us to have a few treats and perhaps even a holiday this year - something not on the cards at the moment .

Other trustee is more than happy . Can anyone see any problems doing this ?

Obviously I will have to sell in 15 years or so. But until then it seems a much better way to invest their money which will benefit us all.

@Luckydip1 yes there will be fees, but it will be far less damaging than here proposal here.

Even if the lender would give up first charge over some or all of the property, which there would be absolutely no obligation for them to do, if OP defaulted, she, and the other trustee be legally obliged to pursue herself, and potentially engage a debt collection agency to repossess her own house, TV, car and so on. Can you see them acting with any vigor to recoup trust assets?

Its is a massive conflict of interest and a terrible high risk low yield illiquid investment for the trust.

@Everanewbie I think you would have to look at the loan to value of the property. There could be a clause that the OP is not allowed to borrow any more money against the house. Say, the loan was for 50% of the value of the house, property values haven't fallen by 50% in the last 100 years.

Even then, which is big leap, can you see the OP and her relative, as trustees, seriously pursue repossession proceedings against the home if repayments we defaulted? Can you really not see how the OP would be failing her duties under Trustee Act 2000 here?

@Everanewbie there will be no need for repossession procedures, the OP will want to sell the house due to the punitive interest after the cut off date. You keep referring to the earlier Act, but what I am suggesting is quite common because it is deemed low risk and is in the interest of the trustees. Don't forget all those diversified low risk portfolios in bonds by financial planners which have a lost a fortune over the past two years, does that make the trustees negligent?

Depends on the trust. You need solicitors advice.

The investment is completely the opposite of low risk. It is dependent on the credit worthiness of a single mother whose objective default risk is objectively high. Furthermore the asset itself is incredibly illiquid in that the entire property must be sold, you can't sell a bathroom to buy a car, or a bedroom to pay for a wedding. It also lacks diversification in that if house prices fall, the investment falls equally, there is no other assets that could grow to mitigate losses, and no opportunity to take advantage of other markets that could be performing better.

Yes, a managed portfolio of assets advised by an IFA may fall in value. This can happen. However downside risk can be appropriately managed with reference to the investment term and capacity for loss. A range of assets can be held, from low, mid and high cap shares, corporate bonds, gilts, property funds (not individual residential homes) and cash, with the balance depending on term and risk profile. Taxation will also be managed and assignments to beneficiaries taking place at times and in a manner that minimises tax.

This stands a much greater chance of a successful outcome than going all in on a single leveraged asset. Its not entirely without risk, but those risks are managed an appropriate for the trust, not a short term debt alleviation strategy for one of the trustees.

@Everanewbie I think you are getting confused, I'm talking about a loan to the house not an investment. Again, all the advisers charge huge fees, they have tended to manage risk by investing in low risk and look what a disaster that was for all the beneficiaries. The advisers don't care because they are not family and still pick up there annual 2%.

Oh come on, do you really not see the risk of the trust investing in a loan to a private individual? And that private individual has a poor credit rating and struggles to pay her mortgage.

An adviser would likely charge something like 1% on a trust of c. £350,000 for initial advice and ongoing of 0.5%, depending on the adviser. Wrapper charges and investment costs of c. 1.5%, so likely >2% p.a. This will provide ongoing advice and a full review and reassessment at least annually. For the services and expertise this brings I do not believe this is huge.

Any advice that they prove is subject to a complaints process and the Financial Ombudsman Service. In this case, the fact that an adviser is not part of the family is a huge benefit as they will objectively assess the trust objectives, the term, the trustees appetite for risk, and how losses may affect the beneficiary. They are not soothsayers and cannot predict which shares will do well, they'd all be billionaires themselves, but they will have expert researchers behind the scenes who will do due diligence on the advisers and by extension, trustees behalf.

Things may go wrong, investments don't always perform, as they say, investments can go down as well as up. But as a trustee she'd be absolutely doing her utmost.

This is night and day from loans to a single borderline insolvent single mother.

The internet. You’re wrong!!!!

OP. No I’m not.

@Everanewbie but it's not a personal loan it's a charge on a house with a low LTV, that allows the beneficiaries to continue living in their family home. There is no downside. As for all these professionals, they rarely even beat index funds, so their fees are such a waste of money.

What a bizarre thread. Such a lot of frothing about a subject which happens quite frequently in the real world.

Provided the trust lends the money and gets a first charge over the house, the money is as safe as it can be. Interest can be charged on the loan and either paid monthly back to the trust or rolled up and paid when the loan is repaid.

Good luck @Youknownorhing . You are doing the right thing obtaining legal and financial advice and I hope you find a satisfactory outcome.

@FunnysInLaJardin at last someone who gets it...

@Luckydip1 I must admit to be rather taken aback by all the accusations of fraud, mismanagement, breach of fiduciary duty etc against the OP.

It really is nothing of the sort. It is a sensible way to invest the money which is beneficial for the children. You could easily agree a 5% return which is what you would get in a diversified investment portfolio or even a fixed term savings account with a bank.

As for using the trust money for treats etc, that is one of the silliest ideas I have heard. The trustees should be safeguarding the capital for the DC future, not dipping into it.

and as for those saying the current lender wouldn't allow the charge, that is nonsense as the charge will be repaid by the new loan.

Will the trustees enforce the charge? Honestly. OP will go to herself, and demand that she sell her home and repay outstanding balance and interest to the trust if she defaults? And go to court to get a order for court appointed sheriffs remove her from her property so that she can take possession of her home and sell it to repay the trust?

Interestingly, I often debate the merits of actively managed funds v passive. I reached the conclusion that unless there is a specific requirement of active management, for example cherished existing holdings or targeting a certain income yield, i prefer to recommend a solution that minimises cost. Some beat their benchmark indices, others don't. Alpha is a good measure of fund manager skill, and that is something an IFA's background research team will look at when devising a portfolio.

But that is an investment preference, its not where an adviser really brings their expertise to the table. They look at circumstances, objectives, taxation, ethical preferences, need for income (school fees/other ongoing expenses) assess risk profile and review this each year.

With no regard to diversification, risk and liquidity?

Complete no from me. Because the children will not want to make you sell up and move in the next decade, so it will make them feel obliged to let you keep it and I’m sure you know this.

Of course the OP knows this, even subconsciously.

@Everanewbie I know you are determined to be right, and I don't particularly want to get into an argument with you but what you seem to be overlooking is that this is not some huge investment structure with faceless beneficiaries.

This is a mother trying to do the best for her children by giving them a comfortable life now, while safeguarding their inheritance.

Of course you wouldn't recommend that the trust invest the money in a strangers home on the same basis, but we are not talking about that.

There are always risks with any investment and tbh, this is a low risk investment

It is a difficult situation, and it must be frustrating for OP. I do appreciate that, and concede this point. But she must separate her role as mother and head of the home to her role as trustee. They are entirely different roles with different responsibilities. If she can't separate those roles she should appoint someone else to manage the trust.

I do not concede that this is a low risk investment. By almost every definition of investment risk it is extremely high. No diversification, a single asset, debt instrument where the borrower has a poor credit rating. Illiquid. Not tradeable on any secondary market platform.

In investment terms, sorry for the insulting word, but this kind of risk for a debt would be known as 'Junk' and would carry a huge coupon (effectively, the interest rate).

@Everanewbie the loan is protected with a first charge on the beneficiaries home. The beneficiaries are benefitting from being able to stay in their home rather than move to somewhere smaller and possibly away from their friends. It provides stability for the children. This has to be the best option for them. Being a loan the trust is highly unlikely to lose money and will receive a modest level of interest.

Its a convenient fudge. First charge or no first charge, please answer this; if OP defaults, will OP order bailiffs on herself?

The OP hasn't specified, but she will be advised to grant the trust a first charge in order to comply with her fiduciary duties.

I'm not sure @Everanewbie why you insist on using such strong language. It is clear the OP is just trying to do her best and not trying to obfuscate or hide her intentions in any way

I use strong language to try to put it in as blunt a terms as possible that what the op proposes is against the interest of the trust and is leaving herself open to legal action from her own children. I hope professionals she engages highlight this, but my fear is that her mind is made up and she is looking for someone to facilitate this somehow.