The importance of trusts in financial planning

Trusts are a vital part of good financial planning, and their importance has significantly increased as we enter a new era of restrictive Inheritance Tax (IHT) legislation.

What is a trust?

A trust is a legal arrangement where assets are held and managed by trustees for the benefit of beneficiaries, who are often children, family members, or other individuals. It is a mechanism that controls how and when wealth is passed on, protects assets for vulnerable or young beneficiaries, and can potentially reduce Inheritance Tax on your estate.

Many assets can be ‘wrapped’ in a trust, including property, shares and land, helping ensure they can be passed to the intended beneficiaries in the most efficient way possible. Most commonly, financial planners will see life insurance and investment bonds wrapped in trusts.

However, my interactions with clients demonstrate that, to many, trusts are perceived to be “complex, scary, expensive and restrictive”. This raises the obvious question: why do people feel this way about trusts?

Complex reality of trusts

Recent client experiences have highlighted why trusts can feel so intimidating and frustrating, albeit beneficial.

I am currently working with two separate families - adult children in their 60s who have dealt with their parents' deaths and estates in the last two years. While initial death certificates and probate were handled relatively swiftly, in each case, the trusts their parents had established revealed several challenges.

The parents had been advised to set up three and four trusts, respectively, throughout their lifetime, and in each case, the trusts have worked in the sense that they have protected assets from IHT. However, there are a significant number of learnings to be taken, matters that we are still battling with, much to their frustration:

• The trusts have been set up across different tax regimes: UK, Ireland and the Isle of Man.
• Each trust has been invested in an ‘Investment Bond’, but in several cases, the lives assured are deceased.
• Each trust has appointed ‘lay trustees’ where some of the trustees are deceased and others are retired professionals who no longer wish to be involved.

Why might you consider a trust?

It is my firm belief that the use of trusts will rise significantly in the face of the impending legislation changes. Trusts are a very important tool not only to protect assets from Inheritance Tax, but also to protect assets from divorce, bankruptcy, or even to look after assets for those who lack the capacity or support to do so themselves.

However, it is important to ensure that those setting up trusts now, and their families, do not suffer the same frustrations I am seeing today.

Key considerations when setting up a trust

• Seek professional advice: It is prudent to take time to seek financial, tax and legal advice when setting up a trust.
• Choose the right trust: There are many types of trust. Take the time to listen to advice and ensure you select a trust that meets your needs. Often we encounter clients with discounted gift trusts who have no need for the income, and there are alternatives that would be better-suited.
• Keep it simple. If you are investing assets in a trust, why does it need to be offshore? Are there really tax savings, or are they deferred? Setting up an offshore trust involves registering the trust both in the UK (on the trust registration service) and on a second register, such as Ireland, both of which incur a cost.
• Plan for longevity: If you are investing in an investment bond, add lives assured of the next generation to keep options open for longer.
• Professional trustees: Appoint a professional trustee company. This is not expensive, and ensures you have a professional trustee who is always willing and able to act - however far in the future that might be.
• Registration: Ensure your trust is registered on the HMRC’s Trust Registration Service.
• Regular reviews: Undertake an annual review of the trust (not just the investment performance).

Don’t overlook trusts

As financial planners, we listen to our clients and then formulate a plan to help you meet your objectives and provide peace of mind. There are many varied ways of doing this, and a trust is just one of the tools in the toolbox.

It is vitally important that we don’t allow trusts to be overlooked as being “complex, scary, expensive and restrictive”. It is within our gift of advice not to overcomplicate and to have a responsibility to today’s clients and the long-term beneficiaries of the trust.

Don’t be put off by any perceived complexity; instead, seek support and find out if a trust could be part of your financial plan.