Using Trusts and busting myths in Estate Planning

 

Sometimes in Financial Planning it is good to go back to basics. Nowhere is this more important than in estate planning. Having a core understanding and knowledge of Trusts is a vital part of an Adviser’s toolkit in this area. With an increasing number of alternate schemes being advertised as estate planning solutions, it’s also good to be aware of some common myths.

Remember that a Trust is set up so that assets can be managed by one person or persons on behalf of another, which means there are three parties involved:

  1. The Settlor – the person who gives assets to the Trust
  2. The Beneficiary (or Beneficiaries) of the Trust
  3. The Trustees – who are the legal owners of the Trust assets and responsible for managing the Trust on behalf of the Beneficiaries.

 

Let’s now recap on some of the principles of Trusts, and consider some common misconceptions:

 

Trusts are about much more than simply mitigating inheritance tax

Preserving the family’s wealth should be the prime purpose in estate planning. Using Trusts to protect that wealth can ensure that any of life’s events, for example, divorce and bankruptcy, do not diminish what has been accumulated. Trusts have a potential lifespan of 125 years (the perpetuity period), so are ideal for the intergenerational transfer of wealth.

 

Trusts can be managed in accordance with the Settlor’s wishes

The Settlor can set out how they would like the Trustees to manage the Trust’s assets in a ‘Letter of Wishes’, which can be updated at any time. The Letter of Wishes can include such things as how the Settlor would like the trustees to invest the Trust money, such as only investing in investments that meet Environmental, Sustainable & Governance (ESG) certification requirements. The Letter can also give guidance to the Trustees as to who the Settlor would like to benefit from the trust, how and when.

 

Setting up a Trust does not have to mean losing access to assets

With WAY’s Flexible Inheritor Plan, reversionary payments can be made to the Settlor in future years if needed or deferred and kept invested if not. This can be a good way to help plan for future uncertainty – such as unknown care costs.

 

Trusts can provide a timely way to manage an IHT liability

At WAY we have long since lost count of the number of times we have been told that Business Property Relief (BPR) investments are “outside of the estate after two years”, when the reality is markedly different. Remember, that these schemes only potentially qualify for the exemption after they have been held for two years and need to remain qualifying until death (when their qualification for the exemption is tested by HMRC) and are subject to probate. The Beneficiaries of a 60-year-old female investing in such assets might actually have to wait until her demise in 25+ years* to determine whether or not the investments have actually qualified for IHT exemption. In contrast, a Trust is established in law with assets fully outside the estate after seven years. It is not subject to probate so its assets can be distributed immediately – which could be crucial for the financial well-being of the Beneficiaries, including a surviving spouse or civil partner. In addition, gifts into Trust from surplus taxable income, under the normal expenditure from income rules, are outside the estate immediately (providing they do not affect the Settlor’s standard of living and were intended to be made regularly).

Critically BPR investments are, by definition, also higher risk, and may not be suitable for the risk profile of many clients.

 

The purpose of a Trust is to ensure that the assets are protected and distributed to the right people, at the right time, in the most efficient manner.

Mark Wintle, WAY’s Regional Manager for the South of England and South Wales, recently wrote in FTAdviser magazine a more detailed article about the benefits of using Trusts within estate planning. The CPD-qualifying article is available online.

* Source: O.N.S. Average Life Expectancy data December 2019.