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Trusts – their use in Personal Financial Planning

Author: Anthony McManus

Published: 23 Jan 2024

An explanation of the role of trusts in personal financial planning.

Before setting up a trust, you need to think about you or your clients’ goals, the need to consult with experts, and to choose the right time to set the trust up. Trusts are different from accounting for companies as they focus more on managing assets than saving taxes. Nevertheless, they are still a great way to support clients during their lifetime. To plan trusts and estates effectively, you should work with a team of professionals including FCA regulated financial advisors and legal experts in this specialism.

You can read a refresher to understand the structure of a trust and how they work, including the roles and responsibilities of all parties involved.

The three reasons generally considered for creating trusts are for a) legal and administrative reasons, b) protection and finally for c) tax planning purposes.

There are various types of trust available, and the settlor needs to decide which type is best suited for the circumstances. A quick summary of the principal types of trust is as follows:

  • Bare/Absolute Trusts – Where the settlor transfers the legal ownership of assets to the trustee for the benefit of the beneficiary absolutely.
  • Discretionary Trusts – The beneficiary has no entitlement to income or capital from the assets held under trust. All distributions are entirely at the trustees’ absolute discretion.
  • Interest in Possession Trusts – The beneficiary holds a right to the income of the trust fund or the right to use trust assets.
  • Flexible Trusts – The beneficial interests of these trusts can be altered.

Note that these are a few examples but there are many other types of trust which can be used under different circumstances.

It’ll be of no surprise that one of the main reasons for using trusts is for tax planning and mitigation. As an example, when an individual dies, their estate (i.e., net assets) is subject to inheritance tax (IHT), meaning the beneficiaries may lose up to 40% of their net inheritance. If assets are put into trust during a settlor’s lifetime and they survive seven years, they are not part of the estate on death and may escape IHT at that time.

Trusts are used in certain IHT planning arrangements for the benefit of the settlor, i.e. gift and loan plans, discounted gift trusts and flexible reversionary trusts.

Trusts are frequently created in wills, particularly where the beneficiaries are minor children who need someone to look after them financially. Any asset left to a minor under a will is effectively held in trust for the minor by the executors until majority is attained unless the will allows payment to be made to a parent. Trusts can be explicitly created in wills to ensure that a beneficiary does not benefit until some other age is attained or a condition if fulfilled.

There are many other reasons for setting up trusts, noticeable example being to provide a pension, provide for families, assist a charity, give property to those who legally cannot hold it and to also gain protection from creditors and business protection.

Trusts offer control, protection and flexibility over the property involved which acts in the interests of the individual who settled the property and the beneficiaries who will benefit from it.

Naturally, this article only scratches the surface of what trusts can offer and how they’re used, but hopefully gives you a better foundation to understand their structure and how they work in tandem with financial planning.

Should you wish to learn more about trusts we advise you speak with a Financial Advisor. Access to greater expertise on Personal Financial Planning and more information on trusts can be found by joining the Personal Financial Planning Community at ICAEW.

Anthony McManus
Personal Financial Planning Manager, ICAEW