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Fanfare for the common trust plan

Over the last few weeks, I have been discussing various fundamental

aspects of trusts with particular regard to their use in core financial

planning recommendations.

My main aim at the start of this series was to stress the importance,

first of all, of using trusts in a greater proportion of recommendations

than is commonly the case with most financial advisers.

I also wanted to highlight the crucial decisions which must be taken by

the adviser and his client in relation to the selection of trustees as well

as the initial and potential beneficiaries.

Equally crucial to this process is the proper selection of the most

appropriate type of trust according to circumstances and requirements. But

while I will touch on this aspect a little later in this concluding

article, I noted at the start of this series that I am leaving such

considerations to more specialist and knowledgeable Money Marketing

commentators, primarily Tony Wickenden of Technical Connection.

In this article, I want to pull together the main aspects of the last few

weeks and examine the range of circumstances in which the use of trusts in

a financial planning recommendation is either crucial, highly advantageous

or simply helpful and good style.

Along the way, my small contribution to the political debate (in the

financial services sense, that is) on polarisation and distribution

channels is to highlight the fact that off-the-page and technology-based

marketing cannot in my view ever hope to claim the ability to advise in

respect of the proper selection and completion of trusts.

Indeed, the vast majority do not even pay lip service to this issue. This

being the case, if financial advisers generally, and IFAs in particular,

ensure their proper development of education in this field of financial

planning, then the proof of added-value service to an otherwise

straightforward product sale could in itself justify a certain level of

fees or commission.

First of all, what are the pointers to situations where trusts simply must

be used in financial planning recommendations? The list is endless but an

easy starting point is term and whole-of-life policies established for

family protection purposes, primarily to provide a substantial fund for

dependants in the event of the death of an income earner.

It never ceases to amaze me how, where the sums assured, added to the life

assured&#39s other assets, exceed the inheritance tax exemption limit, the

majority of policies are nonetheless established on an own-life,

own-benefit basis without so much as a whiff of a mention of trusts. Quite

apart from the advantages of speed of payment to the selected

beneficiaries, ensuring the policy is effected or transferred into a trust

can offer simple and clear IHT savings by keeping the death benefit out of

the life assured&#39s estate in the event of his death.

How can any distribution channel justify wholesale disregard for this

feature of trusts? Part of my induction training for a major financial

services player some years ago included a direction for us categorically

not to get involved in the possible use of trusts in these or, indeed, any

other circumstances. Trusts, we were advised, “are simply too dangerous to

dabble with and so, if the client wants some advice in this respect, point

him or her to a local solicitor”. Quite amazing.

Every experienced adviser will know that the vast majority of clients

would not even think about the use of trusts with family protection

policies if we did not mention it. Even those who do pose such questions

cannot generally be relied upon to take the proper steps to obtain legal

advice.

Advisers who do not mention it are guilty of negligence as there is every

chance of an IHT liability materialising on the payment of the death

benefit where it can so easily be avoided.

The use of trusts should be perfectly clear in portfolio planning where

the client&#39s total assets exceed, or are likely to exceed in the

foreseeable future, the level of the IHT exemption. This must particularly

be the case where the client&#39s portfolio appears certain to provide greater

benefits than he will retain for himself, thereby generating a tax

liability either immediately or in the future for his nominated

beneficiaries.

More detailed discussion really is beyond the scope of this series of

articles (back to you, Tony) but I would like to close by at least

outlining my favourite use of trusts in this respect – extremely simple but

exceptionally effective.

The following strategy can (and, arguably, often should) be appropriate

where it is required to leave capital (either accumulated investments or

death benefit under a policy) for the benefit or use of one person but with

any residual benefit or capital to then pass to another person.

Primarily, this strategy is used where the initial beneficiary is a spouse

or partner but the ultimate benefit is to pass to the couple&#39s child or

children. The appropriately selected trust typically names the spouse as

trustee, with power to select the beneficiary for payment under the trust,

and also a potential beneficiary. The remaining beneficiaries include the

couple&#39s children. The spouse can pass any or all of the benefits to

himself or herself as and when required and so retains the possible use of

the whole of the trust&#39s assets if required. Any part of those assets not

passed to that spouse during his or her lifetime then remains in the trust

on death and becomes available to the children.

What has this achieved? Even if the asset in question had not been placed

in trust, there would have been no IHT liability on the settlor&#39s death if

the first nominee was the spouse, so there is no saving in this respect.

However, on that spouse&#39s death, any part of the capital not used by the

spouse would ordinarily be subject to IHT but not, of course, if that

residual value is held within an appropriate trust.

To put the finishing touches to this strategy, if the would-be settlor

wishes to retain control of the asset during his or her lifetime, the trust

could be incorporated within his will, ensuring that it does not come into

force until he dies, before which time he retains access and ownership.

Well, that last little idea should hopefully whet the appetite of relative

beginners to this exciting aspect of trusts but that appetite will now have

to be satisfied elsewhere (the Sofa CPD days are excellent).

Next week, I return to pensions, looking at current issues in retirement

income planning.

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