Trusts and Estate Planning

If there has been any light at all at the end of the pandemic’s tunnel of despair, it’s perhaps been in sharpest focus when reminding us that we should work just as hard at planning to distribute our assets after we’ve gone, as we do to acquire them while we’re here.

The best investment we can make today is in the future security and prosperity of the people we love, and yet the perils of intestacy are often ignored. As a result, it is the living that suffer its wretched and uncompromising consequences.

So, what should our hand-down handbook look like and how can we be sure that our assets and wealth don’t fall into the hands of anyone too young or too reckless to manage unfettered access to a sudden windfall?

One answer is to include a family Trust rather than a Will within your Estate Plan and in doing so to effectively appoint it rather than someone, to be the beneficiary of a particular asset or collection of assets.

Whereas a Will is a relatively simple high level legal document that spells out how you want your affairs handled and your assets distributed after you die, it’s not a particularly tax-efficient way of leaving your wealth to your heirs. Wills can too easily be contested and over-ruled by Probate; the frequently lengthy process that seeks to make sure property and possessions are given to the correct people and that any taxes or debts owed are paid in full.

A family Trust on the other hand, actually holds and controls the contents of your estate on behalf of your designated beneficiary or beneficiaries, and is a legal entity governed by the documents drawn up to create it. In the eyes of the law, your Trust dictates how and when anyone receives whatever you wish them to inherit. While this means that any assets you use to fund a Trust no longer belong to you, one potential upside is that when you pass it’s your Trust rather than your heirs that own your assets and so their value normally won’t be counted when your Inheritance Tax obligations are calculated. Another Trust benefit is that while strictly speaking, Probate can rarely be bypassed entirely, if there is a Trust the process of distributing your estate is a lot easier and faster.

While some assets cannot generally be used to fund your Trust for a variety of reasons and so may still need to go through the Probate process, your most important assets could be exempt. Assets best-suited and most commonly used to fund a Trust include mortgage-free property, financial instruments such as bond and stock certificates and annuities, life insurance policies, and high value collectables such as fine art, vehicles and jewellery. Less suitable or not allowable funding sources for Trusts include active bank accounts, everyday vehicles and retirement plans such as pensions.

The role of Trusts in Estate Planning can be complex and the first consideration should focus on the two main Trust types.

The most common Revocable Trust (also known as a Living Trust as it can own your assets while you’re still alive as well as dictating what happens to them when you’re not), is an extremely popular estate planning tool and a great fit for high net wealth individuals who want maximum flexibility. Life is long, adventurous and unpredictable and if you’re proactive and wise, you’ll set up your Trust early and be ready to change it as life deals you your cards. Any part of a Revocable Trust can be changed as often as you like.

An Irrevocable Trust on the other hand, typically cannot be changed after the documents have been signed. At first glance, it may seem that Irrevocable Trusts are never a good idea, but in certain instances, they can actually be quite beneficial. Most people who set up Irrevocable Trusts do so for tax considerations. Additionally, as they can protect from lawsuits and creditors, Irrevocable Trusts can be wise for high net wealth individuals who have built their asset base from within a particularly litigious profession - such as doctors or lawyers.

Photo by Kelly Sikkema on Unsplash

Of the three main characters involved in all Trust arrangements, the principal one is the owner of your assets (you), and is known as the Grantor (or the Trustor in some jurisdictions). It’s up to the Grantor to decide how the Trust will operate - including which property and other assets should be included in it, who the beneficiaries will be and how the beneficiaries will receive their inheritance.

The second character is the Trustee, who acts as a custodian for the assets that are held within the Trust and is responsible for managing and administering its finances in accordance with the Grantor’s instructions. As the Trustee regulates and controls how the Trust operates, considers the wishes of the beneficiaries and most importantly seeks to protect your legacy, it’s always worth considering carefully who should - and should not, be considered for the role. 

Technically,  anyone over 18 can be appointed Trustee but it’s wise to appoint someone close who understands your family’s dynamics. Also bear in mind that he or she will need to be able to understand the complexities of the Trust and its intentions, have at least a basic grasp of how to invest any assets in the event that the duties include investment strategies, be able to communicate clearly and decisively with the Beneficiaries and generally be an organised record-keeper. This administrative element is particularly important as a Trustee can be held personally liable for misrepresentation or miscommunication of instructions.

For their service, Trustees claim reasonable compensation directly from the Trust. Sometimes but not always, the remuneration model is stipulated when the Trust is created. Where the term reasonable compensation applies, the idea is that a typical fee for the size and complexity of the Trust must prevail. So for instance, if the average fee tends to be 3% of the estate value each year, it would not be reasonable for a Trustee to expect 10%. Fees are often in the region of 1%-3%.

If there’s no glaringly obvious candidate who seems keen to become a Trustee, a law or estate planning firm can be counted on to be implacable in the face of family pressure and influence. Using a specialist firm with experience of handling the affairs of high net worth, ultra-high net worth and high-profile clients will also sidestep the need for you to go through the search process a second time in order to find a Successor Trustee in the event that the Trustee dies or becomes incapacitated.

The third character is the Beneficiary - typically the person (or persons or organisations) who gives purpose to your Trust and who will benefit from your life’s endeavour. When choosing a beneficiary, you need to think about the people who depend on you financially. If you’re married, you’ll likely choose your spouse as the primary beneficiary, and your spouse would choose you. Together, you would name a secondary beneficiary (also known as a contingent beneficiary) in case something happens to both of you. Since you can specifiy more than one beneficiary, keep in mind anyone outside your immediate family who may also depend on you. If you’ve made commitments to ongoing medical support or education for instance, you can specify what (and how much) each beneficiary will receive when you die.

Aside from the two main Revocable and Irrevocable Trust formats, other options are commonly-considered as a means of protecting significant personal wealth.  

These include Joint Trusts which are sometimes chosen by high net wealth married couples who both want the ability to retain control over the assets while they’re both alive. As their name suggests, Charitable Trusts are often set up to benefit a charitable organisation and can offer some tax benefits while still generating income. Asset Protection Trusts might be a particularly robust option if you’re concerned about judgements or any other threat against your estate. Blind Trust beneficiaries have no knowledge of the scope and scale of the assets and could be a good choice if you anticipate any conflicts of interest among your beneficiaries. Insurance Trusts are established with a life insurance policy as the sole asset and are often used to avoid estate tax on any money that comes out of a policy upon your passing. Credit Shelter Trusts can greatly reduce estate taxes and are often the Trust-of-choice when educational or medical expenses may need to be covered by not only the income, but also the principle of the Trust. These are all highly personal and customisable vehicles, and a local tax and legal specialist should always be consulted before any substantive decisions are made.

While you’re alive, your acumen, good fortune and ambition drive how you build your asset base. But after you die, it’s your family Trust that takes over to make sure it’s all been worthwhile and that your legacy succeeds you. So talk to a Continental Group advisor to really understand the benefits of living trusts and what they can do to enhance what you have. Get in touch with our team below to discuss how we can support your private wealth plans.