While the benefits of using a trust are well documented, says Rachael Holland, many clients may be unaware of the benefits of appointing a professional trustee
Trusts can be a useful technique to move assets out of an estate - perhaps to reduce investors' potential liability to certain taxes. They can also help avoid the often lengthy delays associated with administering estates so that, in the event of the death of the investor, the people named to benefit from the estate are able to do so as quickly as possible.
A trust is a legal agreement, which in its basic form has three parties: a settlor who generally provides the asset to put into the trust, the trustees who are the legal owners of the trust, and the beneficiaries who are the people who are entitled to benefit from the trust.
Clients may feel a trust sounds complicated and expensive, and the appointing of a trustee can be a key concern. It is not uncommon for clients to nominate friends or family as trustees and, while this arrangement can be satisfactory, there are instances when this understanding may not be in the client's best interest.
Anybody creating a trust is working on the core principle that the trustees will ensure the trust assets are paid to the right people at the right time. Appointing a trustee is a simple process; however, once named, a trustee will generally have equal say with other trustees as to how the trust is invested and distributed. Removing a trustee can be complicated when the trustee does not want to be removed, making it paramount that the trustee is selected after careful consideration.
Advisers can provide essential advice when it comes to making trust arrangements and to selecting trustees. Advisers should ensure that the client understands the role of a trustee, who is eligible to become a trustee and the options that lie outside of nominating friends and family.
What is required?
Appointed trustees are required to fulfil a number of responsibilities to ensure that the trust conditions are adhered to and that the wishes of the settlor are met.
Trustees must comply with specific conditions set out in the individual trust deed - unique to each trust - and also comply with statutory obligations set out (for trusts adhering to English law) in the Trustee Act 2000 (section 1). The Trustee Act 2000 introduced a 'duty of care' for trustees to follow when carrying out their trustee responsibilities.
The Act allows trustees to make investment decisions as if the trustee is the absolute owner of the trust. The Act also grants trustees the power to invest in anything! This means that if there are a number of trustees, each individual has a say on how the trust is invested. It is essential that trustees are selected to ensure that the best and original interests of the trust are upheld.
Trustees are also required to follow standard investment criteria that require trustees to consider the suitability of the trust to the investment and the need for diversification within the investments. One of the key responsibilities of the trustees is to seek proper and appropriate financial advice before they make a proposed investment and ensure that they continue to review the suitability of any particular investment on a periodic basis.
Who can be a trustee?
There are no legal restrictions on who can be a trustee, providing that the person is aged 18 or over and is mentally capable. However, trustees should have the necessary judgment, skills, perspective and time to perform their duties adequately. If they are related to the beneficiary they should be able to remain objective and act impartially in the face of family conflict.
Potential trustees must also understand their responsibilities before agreeing to help administer a trust. The demands on trustees are substantial, with the need for self-assessment of tax and to maintain clear records of both the amount and nature of income received. While a simple life policy is unlikely to need too much work prior to a claim, balancing a series of investments could involve a huge amount of effort.
Appointed trustees face long-term legal responsibilities, which can include understanding and complying with the terms of the trust, meeting regularly to review the trust and its assets and documenting all decisions made and actions taken. Responsibilities also extend to keeping up to date with any changes in trust law and, if applicable, filing the appropriate tax returns.
Seeking professional help
For the more sophisticated arrangement a line needs to be drawn on how much service and specialist advice can be provided by the adviser and how much guidance can be provided by the nominated trustee. Defining these parameters is the first step to arranging a successful trust.
Further value can be added by using the services of a professional trustee, who can help reduce both risks and the adviser's burden of managing two or three enthusiastic but unqualified trustees.
A professional trustee service can help both the client and adviser to manage the investment and the trust. Using a professional trustee can avoid any problems in selecting personal trustees, while trust paperwork is professionally dealt with, respecting the client's wishes. In addition, the level of professionalism also gives the client confidence that the trust provisions and trust laws are not being breached.
A professional trustee removes the moral and personal burdens of providing objective trustee decisions, which might weigh heavily on a friend or family member. Without the possibility of personal complications a client can be confident that his stated wishes will be fully taken into account - imagine some of the difficulties a family member may face attempting to cater impartially for children from previous marriages, or ensure fair distribution of funds for a widow or widower.
For investors looking to hold their assets in trust, finding the appropriate trustees can be difficult. Appointing a professional trustee service gives investors peace of mind that not only will their assets be dealt with in a professional and unbiased manner, but that they will be handled in line with their wishes too.
It's natural that requirements around the use of a trust will vary widely from client to client as the personal circumstances of the client create a sensitive situation. Here the impartial nature of a professional trustee service can be advantageous. For example, catering for children from previous marriages as well as ensuring sufficient funds for any widow or widower is just one area where appointing family members or friends as trustees can be very emotive.
Introducing a professional trustee service to the advice process should enable the adviser to focus on the client with the confidence that the day-to-day requirements of the trust are being well managed. These services, when incorporated within the overall advice strategy, simply enhance the value of advice.
- Rachael Holland is head of product law and financial planning at Skandia International.
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