Financial planning through use of trusts - part 2 - Veterinary Practice
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Financial planning through use of trusts – part 2

Dylan Jenkins concludes his review of using trusts within financial planning by focusing on the key considerations you will need to make before setting up a trust- based arrangement.

IT is important to consider a number of key points regarding successful trust planning and areas of good practice.

1. Think very carefully about your decision should you be asked to be a trustee

This might sound obvious, given the duties we talked about in last month’s article, but let me put it more definitively for you.

I don’t know why anyone would volunteer to be a trustee unless they had a particular love for the person or body asking them to be one. It is an incredibly onerous responsibility.

If things go wrong, and you get sued by the beneficiaries for some reason, you are personally liable. The chances are it’s not your money, unless you’re also the settlor, so why would you take on the risk of looking after it?

In reality, most trustees know the person who is the settlor and have some kind of vested interest, even if it is only their children and not themselves who will benefit from the trust. This is what drives them to accept the job of being a trustee.

It is highly probable that the vast majority of people who take on a trusteeship have no idea of the duties, powers and responsibilities they are taking on, let alone the extent of their liability.

Therefore, becoming a trustee is not an undertaking that should be taken lightly and careful consideration must always be made to the responsibilities you will be taking on.

2. It is often a good idea to write life assurance policies within a trust

Life insurance is too rarely written in trust. Again, this is because many advisers are unaware of the benefits of trusts or the pitfalls of not writing life insurance in trust. Life assurance generally pays out a lump sum on death, though it can sometimes pay out smaller lump sums over time (via a family income benefit policy).

Take a moment to imagine the impact on your family if that payout were just dumped on them. You might think it would be wonderful, and for your particular circumstances it might be the right thing, but you should definitely take advice before making the decision to use a trust or not.

In addition to this, one of the biggest reasons for writing a life policy in trust is to avoid the amount of the policy being part of one’s estate, which could then attract inheritance tax, and also for speed of payout as monies paid to a trust don’t need to go through probate. This is due to the fact that a life policy owned by a trust has nothing to do with the estate of the person whose life the policy is on.

All life insurance companies will provide trust wording which you can use, but you shouldn’t always rely on this. A prudent course of action would be to get it checked out by your solicitor first. One should also be careful if the life insurance policy includes other benefits, like critical illness cover. Some policies pay out once on diagnosis of a serious illness, then again on death. If you’re alive and poorly, you probably want to have the money yourself, but if you’re dead, the money may be better off in a trust. There are special trusts called split trusts which allow for policies with different kinds of benefits.

3. Be aware of the taxation of investments, particularly within a trust

Trusts are just boxes, remember, and in those boxes can be put all kinds of investments and tax wrappers. Each of these different kinds of investment has different rules that apply for income generation, taxation, surrender. Often these have subtly different effects inside a trust than they do for an individual. Or maybe, the rules of the trust might preclude certain investments from being held at all.

For instance, you may have a trust which is supposed to pay an income to a beneficiary and where the trust money is held within an investment bond. The problem here is that investment bonds don’t produce an income per se, but instead they throw off capital withdrawals. Therefore, the trustees were in breach of trust by investing in the wrong thing. A lay trustee can’t be expected to know about that subtle little wrinkle in the law, but they are still liable under law for that mistake.

4. Use a solicitor and seek specialist financial advice

Hopefully, from reading the above, you will have got the message that successful trust planning is fairly complex and takes a fair amount of skill and prudence. As a result, you should not enter into a trust of any kind without seeking advice from a solicitor, or at the very least from a financial adviser who has a good deal of experience in trust planning and knows exactly what he or she is doing.

Mistakes made in setting up a trust can cost you financially and emotionally. A tax cock-up might not come to light for years after the trust is set up, and maybe years after you can do anything about it.

My advice would be that you should never try to cut costs with the writing of the trust, only to pay for it more dearly later. It might cost you £500-£1,500 or more for a decent lawyer to write a comprehensive trust but, in my opinion, it is often money well spent.

It’s worth mentioning that everything I say here applies to trust law within England and Wales. If you’re in Scotland, there are subtle differences that you should be aware of. Should you require more in-depth knowledge of trust law in Scotland then I would recommend you consult your solicitor.

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