Financial Planner Alex Smith introduces the topic of Trust Planning.
The challenges that the pandemic brings to society are vast. They have rocked our economy to the core and challenged us to find new ways of working, ways of living and for many, simply ways of just existing. It might seem a little detached to be reading an article about ‘Trust Planning’ (what on Earth is Trust Planning anyway? – we’ll get to that shortly...) in these times, but an obvious consequence of the pandemic is the fact that it is causing many of us to consider what would happen in the event that we, or those close to us, pass away.
So how could a Trust help? Well, a Trust is simply a legal arrangement that allows an asset to be held and managed on behalf of others (beneficiaries - more on this later). They are usually set up in one of two ways, either:
- - During an individual’s lifetime (on behalf of that person); or
- - On death, either via a Will or the rules of intestacy (which means dying without a valid
Trust Planning is usually concerned with the distribution of your assets to your beneficiaries - it allows you to control the ‘who, when and how’ of passing your wealth on. Pandemic aside, we are at a significant transition point in society whereby a large amount of property and other assets are going to pass to Generations ‘X and Y’ from their parents/grandparents over the next 25 – 30 years*. Given that many could be relying on inheritance to maintain their own financial futures, it makes sense to understand how best to plan so that assets are received by the right people in the right way.
Consider some scenarios where Trust Planning could play an important role:
- 1. You might wish to provide certainty in the future as to who can/cannot benefit from
- your assets. You might think that a basic Will achieves this, but that’s not
- necessarily the case.
- 2. You might wish to mitigate Inheritance Tax liabilities that exist on your own or
- parents' estates.
- 3. You could have disabled or vulnerable children and worry about who will look after
- them when you are gone.
- 4. You might be divorced with children, and would like the security of entering a new
- relationship knowing that your children’s inheritance is secure.
- 5. You might be worried about the implications of bankruptcy within the family and
- potential loss of inheritance. Bankruptcy, sadly, could be an unfortunate
- consequence of the current pandemic for some people.
Trust Planning can help to provide peace of mind and security. The three core components to any Trust are:
- - The ‘Settlor’ (the person who sets up the Trust)
- - The ‘Trustees’ (the people who are responsible for managing the Trust); and
- - The ‘Beneficiaries’ (those who are/may be entitled to the proceeds
Beyond these basic elements, different Trusts work in very different ways, and there are numerous types, designed for various scenarios and with differing purposes. For a Trust to be effective, it must be the right one for your circumstances. For example, the type of Trust required to provide an income to children would be very different to that used to safeguard a property for future generations. Setting out your objectives and timeframes is, therefore, incredibly important.
Let’s now have a brief look at some common types of Trusts and example scenarios in which they might help:
1. The Bare (or Absolute) Trust
This is probably the simplest form of Trust. An asset is placed into Trust for an ‘absolute’ (specific) beneficiary. The Trustee’s role is to manage the asset and transfer it to the beneficiary at the appropriate time, e.g. capital for university fees. There is no doubt as to who the beneficiary is, or their entitlement.
2. The Discretionary Trust
With the more common and flexible Discretionary Trust, assets are held for the beneficiaries (e.g. children/grandchildren) and the eventual distribution and allocation is controlled by the Trustees. We may wish to use this type of trust if there are multiple potential beneficiaries (spouse, children, grandchildren etc.) and so ‘discretion’ is required.
3. The Interest in Possession Trust
This type of Trust allows a division of income and ownership. Often used within a Will where there is a more complex family structure, e.g. second marriages. It can allow the children ultimately to inherit the asset but assures that the surviving spouse will retain interest during their lifetime.
Clearly, Trust Planning is a broad and often complex area. Nevertheless, we find that the vast majority of people can benefit from this type of financial and legal planning - certainly not only the wealthy. We strongly recommend seeking professional advice if considering this avenue, so as to learn how these tools can best work for you.
Alex Smith BA(Hons) DipPFS
Read more of our articles about trusts here
Information is based on our current understanding of taxation, legislation, and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
The value of investments and income from them may go down. You may not get back the original amount invested.
The scenario included is for information purposes / general guidance only and should not be interpreted as advised recommendations.