Trusts – Protecting Wealth and Financial Planning

Trusts – An Introduction

This article is an introduction to Trusts and how they can be used in financial planning to achieve your money and wealth goals not only as a tax planning tool but also to protect your existing wealth.

What is a Trust?

A Trust is any arrangement whereby one person(s) manages and looks after assets for the benefit of another person or people. It is a legally binding agreement and is covered by various Trust and Taxation laws as well as judicial precedent.

Who is involved?

There are three classes of person involved in the setting up of a Trust – a Settlor is the person who sets up the trust, normally to receive their own assets - the trust assets are looked after by the Trustees for the ultimate benefit of the Beneficiaries.

During the term of the Trust, the Trustees are the legal owners of the Trust assets but the Beneficiaries are the beneficial owners. It is the Trustees legal responsibility to ensure that all decisions made in respect of Trust assets are made in the best interests of the Trust’s Beneficiaries.

It is normally good practice to have more than one Trustee and in the majority of cases the Settlor will also be Trustee. In line with this, it is also possible to name direct individuals to be Beneficiaries under a Trust or this could be written into the Trust to cover a group of people – for example, “all my children who survive me by 28 days”.

How is a Trust set up?

A Trust is generally set up by completion of a Trust deed. This deed sets out the nature of the Trust, the Beneficiaries of the Trust and the powers and obligations of the Trustees.

In respect of life insurance policies generic Trust wording can usually be supplied by the life office to help the Settlors’ legal representative ensure that a correctly worded Trust is put in place.

Are there many Different types of Trust?

Yes – there are a number of different types of trust and they all have different purposes – further information on the different types is available from your Solicitor – the purpose of this article is to introduce you to the topic of Trusts and how they can be used in relation to your own personal financial planning. In future articles we will deal with some of the more common Trust arrangements in more detail

How are they used in financial planning?

Two of the most common uses for Trusts in financial planning are to protect assets from taxation or creditors or to ensure that assets pass to the correct beneficiary in the event of the death of the Settlor.

The majority of people reading this article may come into contact with a Trust arrangement through taking out a life assurance policy.

The Settlor, who is also usually the life assured, sets up the Trust using a standard wording provided by the life office (which it is advisable to get checked by a suitable qualified Solicitor) to leave the benefits from the policy (the sum assured) for the benefit of specific individuals.

A normal course of action would be for a parent to effect a life policy and place it in Trust for their children. There are several benefits to this course of action:

1. The sum assured on death is outside of the deceased’s estate and is therefore not normally subject to Inheritance tax.
2. The proceeds from the plan can normally be paid out quicker as there is no need to wait for probate to be obtained to allow release of funds. Usually provision of the death certificate and a copy of the Trust is all that is required.
3. It stops third parties accessing the funds which may not be what the life assured intended – it’s amazing who can “come out of the woodwork” when someone dies and there is money to be shared out!
4. It stops the sum assured being used to repay debts of the life assured in the event of the life assured dying whilst being insolvent or having large debts.
5. If the Beneficiaries are young children then the money can be held within the Trust and the Trustees would usually have the ability to make advances of the funds for the welfare and benefit of the children, whilst retaining the monies until the children are older and better able to manage their own affairs.
6. Grandparents could utilise a Trust to allow their assets to effectively “skip a generation” and be passed to grandchildren which is a particularly popular arrangement where their children are already wealthy in their own right.

What about Tax Planning?

Yes, Trusts can also be used for tax planning and in later articles we will discuss the various Trust planning tools available in the UK today. Gifts can be made into specific Trusts which provide an immediate saving against Inheritance tax; other Trusts exist to remove growth of investments outside of an Estate whilst still allowing the Settlor access to their capital.

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