The steps a client should take to ensure trust wishes are kept

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Scottish Widows
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Supported by
Scottish Widows
The steps a client should take to ensure trust wishes are kept
(RODNAE/Pexels)(RODNAE/Pexels)

So what steps should a client take to ensure their wishes are kept?

Trusts can be an excellent tool for financial planning, but just like a will they need to be monitored to ensure they remain fit for purpose. 

Trusts separate legal and beneficial interests in property.

The legal ownership rests with the trustees who are legally obliged to act solely in the best interest of the beneficiaries. A trust therefore provides a framework for ensuring that the best interests of the children prevail. 

They can be particularly useful for ‘complex families’, ensuring one parent’s wealth is used in the specific way they want if they were to pass away.

Shaun Moore, tax and financial planning expert at Quilter, cites an example where if a married woman has an inheritance, which she then specifically earmarks for her children’s education, she should consider putting the money in trust. 

Doing so shields it from potential misuse because, if she died without leaving a will, the money would pass over to her husband who could then decide to spend it differently. Similarly, trusts can help protect the wealth in the event of a divorce.

Moore says: “Trusts can provide you with control and certainty over how and when your wealth is distributed, and unlike wills, trusts are not public documents, providing privacy over your wealth. 

“There are a wide range of trusts to choose from, which have varying levels of access, flexibility and inheritance tax efficiency to suit the needs of the individual.”

Choosing the best trust

According to Ian Smart, product architect at Royal London, the first thing to consider is the type of trust that will be relevant to the client.

A bare trust, for example, will mean the beneficiaries are fixed from the outset and cannot be changed.  

“This would be appropriate if you don’t want the trustees to be able to choose who to give the benefits from the policy to.”

Bare trusts might be considered the simplest kind with the fewest formalities, which means they are often thought of as little more than family agreements; however Martin Stanley, chartered financial planner at Rowley Turton, says legally there is more to it than that.  

Additionally, the child’s legal interests are sometimes overlooked when family circumstances change – more children arrive or the couple divorces – and generally being of modest value, they are often neglected in terms of sensible investment planning.

But Stanley adds that the child’s own interests are usually taken a lot more seriously if the trust is of a more formal kind, and especially if there are other trustees than just the parents – for example an aunt, uncle or grandparent.  

He adds: “If the money’s also been gifted by one of those – most commonly the grandparent – it also gives them more scope to ensure that their wishes are honoured as to how the money is invested or used.

“If the donor is a trustee, of course, they can determine what happens at every stage. But if not, or after their lifetime, it’s not as simple. It’s possible for a trust deed to include specific restrictions and specifications that the trustees must follow, but it’s normally regarded as best to maintain future flexibility.  

“Instead, the settlor can make known their preferences in a non-binding ‘letter of wishes’. There’s nothing to guarantee that the trustees will honour those wishes – but after all, the essence of a trust is placing your trust in other people.”

Smart says that if a client is looking to be able to add beneficiaries later or wants to give trustees the ability to take the beneficiaries’ circumstances into account, a discretionary trust would be more appropriate. 

He adds: “If using a discretionary trust, you should also leave a letter of wishes setting out what you would like your trustees to consider in deciding how to distribute the benefits from the policy.”

For example, the adviser’s client might want their trustees to consider the needs of a spouse or partner first before paying any benefit to another beneficiary such as a child or grandchild. 

The trustees are not bound by this and could make a different decision, but will usually take the client’s wishes into account in making any decision on who to pay and when. 

A discretionary trust is extremely flexible and allows the trustees to adapt to changes in circumstances such as divorce, new relationships or new children being born.

Moore says choosing the right trust for a client’s specific needs is crucial, as the type of trust will dictate how much it can be amended to suit a changing family structure. 

For example, additional beneficiaries cannot be added to a bare trust but they can usually be added to a discretionary trust, depending on the drafting.

Moore adds: “As trustees of a discretionary trust have considerable influence over the trust, its assets and its distribution, it is crucial that the right people are appointed. 

“To ensure impartiality and avoid conflicts of interest, a professional trustee/trust company might be a reasonable option to avoid any such issues arising.”

If the client wants to have peace of mind that their wishes will be kept, assuming a will trust solution is adopted, the client should choose trustees very carefully, as they will be administering the trust after the client has died, Graeme Robb, senior technical manager at M&G Wealth, says.

Robb says: “That person will charge for their services, payable out the trust fund, but it may be money well spent in less straightforward situations. 

“The client might draw up a letter of wishes for the attention of the trustees, and while that is not legally binding it will at least impose a moral burden on the trustees to recognise those wishes.”

Also, to ensure the trust operates as intended, the client should confirm that the trust wording in the will is crystal clear so the trustees’ powers are not in doubt. 

Robb explains these powers will be “dispositive”, meaning how and in what circumstances the trustees are to distribute trust income and/or capital – and “administrative”, meaning how the trust is to be “run”. 

“Appointed trustees must read the trust deed and be comfortable in the knowledge that they are doing the following:  

  • Acting in the best interest of the beneficiaries. 
  • Acting impartially between beneficiaries.
  • Are responsible for investing the trust fund. 
  • Reviewing investments from time to time. 
  • Keeping accounts/records as necessary.

The trustees’ overarching responsibility is to preserve and safeguard trust property. If that responsibility is compromised then the beneficiaries will be disadvantaged and the trustees might be held to account. 

So clients and advisers need to be aware of the issues that might occur.

Robb says trustee investment duties are critical to ensuring the client’s wishes are kept, as trustees have a duty not to sit on cash and must invest the trust fund. 

He adds: “Almost certainly, the trustees will have wide investment powers thanks to the law, the trust deed or a combination of the two. The counterbalance to these wide investment powers is that the trustees should ensure the proposed investment is suitable and consider the need for diversification.” 

The right adviser

There is then an ongoing requirement to keep the investment(s) under review. Unless the investment is small, or the trustees possess relevant investment skills, “proper advice” should be taken – from an independent financial adviser for example. 

An IFA might recommend that the trustees should consider UK and international insurance bonds or shares in open-ended investment companies, as these can provide a number of potential benefits, such as:

  • Access to professional investment management 
  • Special tax treatment 
  • Diversification within a single holding 
  • Administrative convenience and costs savings

Robb says: “Also, via an insurance bond wrapper, the trustees may be able to enjoy multi-asset investments with a smoothing process to protect them from short-term volatility.” 

Smart says that when picking a trustee, the client needs to consider who is likely to outlive the other and whether client and trustee are likely to stay in touch over the long term.

“If not, this could cause delays while the trustees are traced, or they’re removed and replaced by someone new. It’s also important to check what powers you have to change the trustees in case you fall out or they move away. Once appointed it’s then important to stay in touch with your trustees so that should you need to change them this can be done at the time rather than having to make changes at the time of a claim.”

Bernadette Lewis, financial planning manager at Scottish Widows, says: "If a policyholder wants to continue to ensure that their policy proceeds go to the right hands at the right time, they must review their trustees and any letter of wishes as their circumstances change.

"Usually, a suitable trust was set up at outset, but circumstances change and a claim can occur several years or decades after the policy and trust was set up, by which point the trustees may have died themselves or become estranged or mentally incompetent."