The government should create trust funds for young people in care to give them a better chance of a fair deal in obtaining a mortgage and getting a place in higher education, says the Local Government Association.

Social services departments should be allowed to administer the funds, which would match child benefit allowances, the LGA suggests, with children in residential and foster care receiving a lump sum when they reach adulthood.

And the call has gone out to health minister John Hutton and the Treasury to investigate the proposals, which the association believes could help prevent homelessness among young people.

Child benefit is only payable in respect of children who live with their families. The trust fund could be used to pay for further education, employment training or a mortgage for care leavers when they reach 18, says Lane, who approached Hutton at the local education authorities conference on education and lifelong learning at the University of Warwick last week.

In a letter to chancellor Gordon Brown, the association explained that unpaid child benefit is being returned to the Treasury when it could be placed in a trust fund.

"There are practical issues to be resolved but it is a proposal which, if implemented, would give significant educational opportunities to many of these young people who often miss out," the letter says.

"By opening trust funds, looked-after children would get the chance to invest in their future education and employment."

The NSPCC has backed the proposal, arguing that it would put an end to the inequity in the child benefit system between children in conventional families and young people in care.

And the National Foster Care Association has welcomed the idea, but warned that it should not be an alternative to a leaving care service.

A Treasury spokesman confirmed that the letter had been received and said that the suggestions would be considered.