Info on Trusts
Latest research shows that overseas financial advisers are hesitating to recommend trusts to clients. In fact, of more than 250 financial advisers surveyed globally only 5% agreed that they use trusts for the majority of their clients, with three quarters of financial advisers confirming that they use trusts for just 10% of their clients.
Trusts are viewed by many to be complicated, which perhaps is why so few financial advisers are using them. However, trusts need not be complicated and are relevant to the majority of clients that seek financial planning.
why use trusts?
There are many different types of trust but the most common are absolute and discretionary trusts, with the main difference being the flexibility regarding who is able to benefit. There are many advantages to their use the survey results cited inheritance tax planning as the top reason, with asset protection from creditors coming a close second. In light of these survey findings it is worth summarising the key planning benefits:
Tax planning
Trusts can be crucial in helping your clients reduce their inheritance tax (IHT) liability. Take, for example, Peter, who is resident and works in Hong Kong. He is a UK domicile and has an offshore bond which was recommended by his financial adviser. If Peter dies, the value of the offshore bond over the nil-rate band (on the assumption he remains a UK domicile) will currently be subject to 40% UK inheritance tax on his death. By writing the offshore bond into trust it may be possible to significantly reduce Peter’s IHT liability.
Succession planning
A trust can be used for succession planning purposes. For example, the settlor can specify who can benefit after their death by stating either individuals or a class of individuals. If the settlor wishes to restrict who can benefit they can do so when the trust is created.
Probate avoidance
Probate is a means of identifying the legal owners of the deceased’s estate. In the case of Peter, if at his death he is the sole policyholder his executors will need both Hong Kong and (say) Isle of Man probate in order to receive payment of the proceeds. If the offshore bond were held under trust the legal owners of the bond would be the trustees. Provided at least one trustee were alive, they would be able to request the proceeds of the offshore bond to be paid to the trustees without the need of Hong Kong or Isle of Man probate.
Protection of assets
With the legal ownership of an asset transferred to the trustees, the assets should no longer be included in situations where a settlor has to detail their own assets.
By not writing assets into trust, clients are potentially putting themselves at risk of having to pay higher tax charges. Nearly everyone is able to use a trust for some form of protection and financial advisers have a crucial role to play to ensure that they are adding real value to a client’s financial plans by maximising the opportunities within various tax regimes.
