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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Introduction

Term assurance is the most basic form of life assurance. As the name suggests, the policy runs for a fixed term.

There is no investment element to a term assurance policy – it is pure insurance – unless you make a death claim then the policy ends at the end of the term and you get nothing back.

Types of Term Assurance

Essentially there are three types of term assurance.

Term only – this provides cover for a fixed term, and if no claim is made, cover ends at the end of the term.

Convertible Term – this is a term assurance policy with a fixed term, but also included is the option to convert to “whole of life” assurance at any time during the plan. The conversion normally occurs without any further medical underwriting; assuming the same level of cover is applied for.

Renewable Term – again a fixed term contract, but with the option to renew a for a further identical term at maturity

How can they be set up?

It is possible to have single life and joint lives assured. So, for example, a husband and wife could take out two single life plans or a joint life, first death plan. With a joint life plan, on first death the proceeds from the policy are normally paid to the surviving life assured.

It is possible to take out two single life term plans, and write them under a suitable trust, for the benefit of spouse and/or children. The benefit writing a single life plan in Trust is that the proceeds from the policy do not enter your estate, where they could be delayed in being paid out, for example to redeem a loan or to provide for your children, due to the need to obtain probate which can take up to and sometimes in excess of 6 months.

We will cover more on Trusts and their uses in a later article.

When do they pay out?

As well as paying out on death of the life assured, modern plans may include “terminal illness” benefits – what this means is if you are diagnosed with an illness which, in the opinion of medical professionals, reduces your life expectancy below 12 months then the plan will pay out the sum assured ahead of your death.

The benefit of this is that you then have time to ensure the proceeds from the policy are used for the purpose which you intended and allow you to get your affairs in order ahead of your passing.

Cover Types

It is possible to set up plans in a number of ways: –

Level cover – the sum assured (amount of cover) remains constant throughout the term of the plan
Indexed cover – the level of cover increased each year, in line with a fixed percentage, to maintain the real purchasing power of the sum assured
Decreasing cover – often taken out at the same time as a repayment mortgage – the level of life cover decreases over time in line with the mortgage profile.

In the next part of this article we will consider the various options which can be included within a term assurance policy as well as the different uses and some special types of term assurance which are useful financial planning tools.