Trusts are a time-honoured means of protecting assets and beneficiaries from a range of threats, yet they are also one of the trickier areas of wealth management due to the complexities of the law. Read on to get a foothold on this important topic area.
Wealth management is certainly about which assets one owns, but as clients become more aware of their options, they quickly come to the realisation that how assets are owned can be just as important. The right ownership structures, like trusts, can make all the difference to tax exposures. They can also protect wealth on an intergenerational basis, such as by stopping the young from having too much too soon or by shielding assets from the potential ravages of divorce.
What is a trust?
In essence, trusts separate the legal ownership of assets from their beneficial ownership; the legal owner holds the title and is empowered to deal with and administer trust assets while the beneficial owner is the one who – as the name suggests – gets the benefit from them, whether that be in terms of use, being paid out any income from those assets or the proceeds of a sale.
Trusts separate the legal ownership of assets from their beneficial ownership; the legal owner holds the title and is empowered to deal with and administer trust assets while the beneficial owner is the one who – as the name suggests – gets the benefit from them
A person known as the ‘settlor’ places assets into trust, which may be money but also property or other types of assets like life insurance policies, investment portfolios and so on. This may be done during their lifetime (a lifetime trust) or the placement of assets into trust may be triggered by death and via the operation of a valid will (a will trust).
By placing the assets into this structure, the original owner may relinquish some of their rights and delegate responsibility to a trustee during their lifetime, but they can gain a lot more control in other ways. Likewise, a settlor can project their wishes years into the future. Provided a trust is set up correctly, you can determine who gets what and when with a good deal of precision.
Provided a trust is set up correctly, you can determine who gets what and when with a good deal of precision
Who are trustees?
Trustees can be professionals (who work for a trust company) or any other person you believe is competent and who is prepared to take on these responsibilities. Trustees can have very wide-ranging powers and tasks, which include settling tax bills and hiring investment management and legal professionals. They might also have to make certain decisions about how to use the trust income and/or capital if the trust is ‘discretionary’, meaning they have discretion as to the distribution of assets.
For these reasons, many will prefer to have their trust administered by professionals, paying them annual fees out of the trust’s assets. However, others looking to structure family wealth may appoint a mixture of professional and family friend trustees to create a nice balance of objectivity and personal knowledge of the beneficiaries’ situations and needs.
Common trust scenarios
Trusts are extremely versatile, and while they are certainly deployed in very complex ways by the super-wealthy they can also be relatively simple.
One of the most common scenarios for using a trust is to protect the interests of those who are too young to inherit a significant amount of wealth, but trusts are widely used to distribute family wealth even when minors (or other vulnerable members) are not the main concern.
You might have ambitions of preserving family wealth so that current members can benefit from the income from a communal ‘nest egg’, but with capital also being preserved for future generations. A trust could be set up very robustly to further this plan.
Equally, trusts can be very valuable when it comes to treating both first and second families fairly
Equally, trusts can be very valuable when it comes to treating both first and second families fairly. You could, for instance, leave a residence to a second partner on a ‘life interest’ basis so that they can live there for the rest of their lives but with the property to ultimately go to children from a first marriage upon their death.
In fact, it is worth noting that trust structures can depersonalise wealth to a large degree, making it easier for individuals and families to manage and share assets strategically in general, without emotions becoming quite as involved as they might do otherwise.
There are several types of trust structure, and your eventual choice will be dictated by the situation at hand and what you are trying to achieve by establishing it.
Top Tip
Trusts seem to be something that most people are aware of as a powerful tax mitigation tool, but many seem to think they are the preserve of only the super-wealthy. Now, it is true that trusts are only worthwhile for assets over a certain level due to the set up and running costs involved, however that threshold might be far lower than you might think.
Cost control is always a consideration for a good wealth manager and we can help you have conversations solely geared towards sensible, sustainable options in no time at all. Simply take our short wealth manager matching questionnaire to start the process of meeting your best-matched wealth managers.
Lee Goggin
Co-Founder
Tax benefits from trusts
Inheritance Tax is naturally a huge concern for our users, particularly given that the IHT allowance has been frozen at £325,000 since 2009; fiscal drag and rising house prices mean that more and more families are being dragged into the net.
Trusts are a key way of tackling IHT concerns, since seven years after the assets are placed into trust they fall outside the settlor’s estate for death duty purposes
Trusts are a key way of tackling IHT concerns, since seven years after the assets are placed into trust they fall outside the settlor’s estate for death duty purposes. There is however a once-a-decade IHT charge of up to 6% of the trust’s assets over the £325,000 nil-rate band and a ‘lifetime tax charge’ of 20% if assets more than the nil-rate band are put into trust in one go.
That said, on the first point it should be noted that IHT may be an eyewatering 40% without the use of a trust; on the second, as with the nil-rate band generally, married couples or civil partners can double up on their allowance to £650,000.
Another easy way to benefit from trusts is to write life insurance or assurance policies into trust, so that a named beneficiary can receive their payout simply upon proof of death. IHT is technically a tax on the reduction of an estate’s value and this way the monies never form part of the estate, and so remain untouched by IHT. This is something that all families should consider if they still face hefty bills even after all mitigation measures have been deployed. HMRC must get paid out before the estate is distributed and without such lump sums passing to beneficiaries it is increasingly the case that families are forced to sell homes or other treasured assets before they can wrap up the deceased’s affairs. In fact, some assets being held in trust is an incredibly useful way to reduce the stress of obtaining probate generally. Liquidity can be sorely needed in such times. You will appreciate by now why the appeal of trusts is so durable.
Not only do trusts offer very attractive tax benefits, they also offer control. They are not an option to take lightly though.
Points to consider
As previously discussed, the travails of the role and the serious legal nature of a trustee’s fiduciary duties mean that many people prefer to appoint professionals to manage their trusts and look after the beneficiaries’ interests. This kind of expertise, and insurance, does cost however, meaning that a trust might not make sense at asset levels lower than several hundred thousand pounds or more. Assets of any significance will also need professional management – and that in turn must be of a quality to deliver returns sufficient to justify those management fees.
Although trusts might be a fairly simple concept they are far from easy once you get into the legal technicalities of implementation
Meanwhile, although trusts do still represent very compelling tax mitigation opportunities, their benefits have been somewhat eroded over the years. One must therefore consider the possibility of future changes to the tax regime for trusts and remain flexible.
Most of all, it is important to remember that although trusts might be a fairly simple concept they are far from easy once you get into the legal technicalities of implementation. They should not be attempted without professional advice as there may be serious consequences to a trust failing and assets potentially reverting back to an estate.
Interested in trusts?
Trusts are an area where having a professional adviser on your side really adds value. Your wealth manager will be able to explain all the trust options available to you and help ensure you choose the optimum strategy for both your own and your beneficiaries’ profiles and needs.
The best institutions are also likely to have an excellent professional network which will make it easy to source the legal expertise you need to establish your trust and have it managed by a professional trust company if that is your wish. Some wealth managers even have a trust arm, since these legal structures are such a useful tool for High Net Worth individuals and their families.
If you would like to explore your options around trusts or any other wealth management strategy, simply use our smart matching tool to start your adviser search.
Important information
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.
