Let’s consider five good reasons to use a trust.
1. Managing assets
Trusts are flexible, allowing your clients to tailor them to the needs of their own situations.
Does your client have a beneficiary who doesn’t have the capability (minor or disabled) or desire to manage the assets?
Does your client not trust the beneficiary to own the asset outright (perhaps because they are spendthrifts)?
As a beneficiary is fully entitled to the proceeds under a bare trust, there is no such protection.
Does your client believe that there could be a possible conflict between heirs when their estate is settled (perhaps between children from different marriages)?
Through a trust, managed by trustees, those assets can be distributed to the beneficiaries over time.
2. Protecting assets
Placing assets in certain types of trusts can protect them from creditors, marriage breakdown or from those who might influence beneficiaries.
A discretionary trust would offer protection as the beneficiary has no right to the proceeds until the trustees appoint them. But as a beneficiary is fully entitled to the proceeds under a bare trust, there is no such protection.
Some trusts offer your clients the flexibility to make a gift into trust, for chosen beneficiaries, but still continue to receive a benefit - discounted gift trusts and flexible reversion trusts allow clients this flexibility.
Where the settlor is worried about a beneficiary not being mature enough, some trusts allow the trustees to retain control beyond age 18 but without it being or becoming a discretionary trust.
This more bespoke type of absolute trust is available from Canada Life as the Controlled Access Account. It allows funds to be distributed to the beneficiary in smaller, regular amounts instead of one large lump sum or at periods beyond age 18.
4. Minimising tax
People believe that the main reason for using a trust is to mitigate or eliminate inheritance tax. Simply put, assets that are placed into trusts are given to the beneficiaries and are no longer part of the settlor's estate, provided the settlor survives seven years.
Even if the settlor dies within seven years only the value of the gift is included within their estate, meaning that from day one the growth is outside.
5. Avoid probate
As assets within a trust don’t belong to the settlor, in the event of their death the value of the asset is not included in the estate for probate purposes, which can mean substantial savings in time, legal fees and paperwork.
Also, when dealing with life policies the insurance provider will be able to pay the death benefit quicker as they can pay the surviving trustees (legal owners) and don’t require the grant of representation – this can happen in a matter of weeks.
Trusts are set up for a variety of reasons and are a useful estate planning tool. Choosing the right one is crucial and this is where professional advice is beneficial.
Kim Jarvis is a technical manager with Canada Life’s ican Technical Services Team.