There is often a popular misconception that financial advisers only sell products and little mention is made of the financial planning aspects of their services.
Of the large number of advice-based solutions in the toolbox of the financial adviser, there is one that is often underutilised and it is the trust.
Protecting, and increasing, wealth is one of the cornerstones of financial planning. The correct use of trusts plays a big part in this.
10 uses of trusts in everyday financial planning
1. Nil rate band trust
2. Probate Delays
Avoiding probate can mean substantial savings in time, legal fees and paperwork. A trust allows your descendants to bypass this process and gain access to the assets and property more quickly. This is particularly important if funds are needed to pay the first installment of Inheritance Tax, legal fees, and other day-to-day things that the family will need if the breadwinner were to die.
A further benefit of using a trust is increased privacy. A will is a public document (i.e., anyone can go down to the probate court and review the contents of a will). However, a trust remains private. There is a register but that is not available to the public.
3. Protection against creditors
A protective trust can protect both business and personal assets from most creditors’ claims. A trust works because it splits ownership of trust assets; the trustee has equity ownership and the beneficiaries have beneficial ownership.
4. Gifting to minors
A trust is an ideal way to protect gifts to minors and for the trustees to look after the capital until the children are at an age to look after their own financial affairs.
5. Provide for those who cannot make their own decisions
It is not only minors who do not have the capacity to make financial decisions and such a trust could well ensure the financial wellbeing of those who are incapacitated, particularly should they outlive their other family members.
6. Inheritance Tax (IHT) planning
For UK domiciled clients, there are a wealth of financial planning opportunities available to offset the affects of IHT. Key to a lot of this planning is the use of trusts.
7. Life assurance in trust
Writing a policy into trust, not only provides funds without probate delays, these funds will be outside of the deceased’s estate for IHT and available for immediate disposal if required.
8. Contesting your wishes
A trust gives greater protection than a will against legal action from anyone who is unhappy with the distribution of assets and decides to challenge it. Whilst not ‘fireproof”, as there will be times when trusts are open to challenge, it is more difficult to do than to challenge a will.
9. Flexibility
Trusts can give power to the trustees to exercise discretion, over a long period of time, as to how capital and income is to be distributed. This power can continue long after the donors have died.
10. Charity
Trusts are an ideal way to provide funds to charity or suitable good causes. Again, these trusts can continue well beyond the life of the charitable donor.
Private pensions
In addition, how many people have pension benefits in UK private or company schemes? Even though the benefits may be deferred, there is going to be an element of death benefit should the pension member die before taking benefits.
Thought should be given to contacting the scheme trustees and completing an “Expression of Wish” form. This will assist the trustees in considering how pension members would wish to have such benefits to be paid on death, possibly into another trust!
Trusts in other jurisdictions
The impact of monies in a trust need to be considered in the light of the rules of different countries. A recent example is the change to how the French authorities want to deal with trusts that will affect expats who are French residents and are settlors or beneficiaries of a trust.
The FACTA rules will affect US individuals, citizens and tax residents. Trust firms that operate as trustees in which at least one settlor or beneificiary is a US individual will need to understand the reporting obligations related to these trusts.
Summary
Trusts are a great tool to enable the financial adviser to link up with legal and tax specialists to help provide their clients with a truly holistic financial planning solution. The two examples, above, demonstrate why this could be important. They also allow the adviser to demonstrate to the other legal and tax specialists, just how trusts can benefit their own clients.
Financial advice is not about selling a product, it is about providing solutions and trusts provide many of these solutions.
Image by Drazen Zigic on Freepik
