Over the last few weeks, I have been discussing various fundamental
aspects of trusts with particular regard to their use in core financial
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's 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's 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
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's 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's 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
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
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's 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's 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's 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's death if
the first nominee was the spouse, so there is no saving in this respect.
However, on that spouse's 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