If you ask your client if they want to create a trust you will receive varied responses: for example, ‘It’s a good way to save tax’. According to research the main reasons why people want to create a trust is to control the assets: for example, to prevent children from gaining access to money before they are mature enough to handle it safely and effectively. Tax planning was secondary to this.
The suggestion of the creation of a trust is generally as a result of you, as the advisor, after addressing the client’s chosen objectives. You will do this by assessing the client’s objectives first and then offering a particular type of trust as a means to achieve these goals. By addressing the objectives in this way your client will be more interested in the idea of creating a trust.
In order to protect the assets
As we all know, our clients and families work hard for their property, business and the building up of a particular asset and thus wish to protect these from any future unfortunate relationships, connections, poor business decisions and spendthrifts.
Also, it may be that there are no substantial assets, there may be just a reasonable ‘nest egg’ for the family: parents may wish to safeguard funds to prevent them from being dissipated sooner rather than later. For example, your client may have a son or daughter who may have an addiction.
It may be that your client wishes to protect or preserve the assets so that funds will be available to provide assistance for more than one group of beneficiaries.
Another concern of your clients may be that if they die they want to ensure that funds will be available for their surviving spouse, but also that the funds pass to their child/ren in the event that the survivor forms a new relationship.
The protection of beneficiaries
Some clients believe that their children will never learn the value of money and therefore wish to protect their hard-earned savings from their shopaholic children. Unfortunately trusts cannot prevent beneficiaries from making poor choices. They can, however, provide a reasonable hand (in the form of a trustee) to act as a guide or disciplinarian to requests by beneficiaries for money or other resources.
Your client may be concerned as they have a child with learning disabilities who will never be able to manage their own financial affairs. What can be done at a time when both parents have died to protect their vulnerable child from potentially unscrupulous friends and carers? Discretionary trusts are a useful tool to preserve some or all of the family’s estate which can then be used for positive benefits for their disabled child.
There are some parents that have able-bodied children who have sadly chosen the wrong path and have become addicted to drugs or alcohol. Your clients will obviously worry that if they were to inherit a large amount of cash they would endanger their lives. In these circumstances your client may wish for their assets to be managed by someone so as to provide a roof over their child’s head which the child is unable to sell. Small and regular distributions can be provided to the child to meet everyday costs.
For maintaining control over assets and beneficiaries
Your client may wish to transfer assets into a trust but maintain control over these by being one of the trustees.
For treating income and capital of a gift in different ways
Your client may want certain categories of people they would like to benefit, maybe their surviving spouse/partner and their children. It may be that the spouse/partner is financially dependent on your client and would need to have access to the trust funds should your client die. If capital was given outright to the surviving spouse/partner it could be used for any purpose as they see fit, and the children may not benefit from this.
By using an IIP Trust (interest in possession) the trust income can be released appropriately ensuring that the capital fund is preserved for the children.
This particular trust is often used when clients have children from a previous relationship.
It may be that your client has an elderly relative that may require financial assistance with outgoings and will require income to do this but does not require the capital. The capital can then be directed elsewhere upon the demise of the relative.
The provision of income for beneficiaries who are too young to manage large amounts of cash is a popular reason for creating a trust. It may be that your client wishes the fund to be used for the purpose of school fees and day-to-day maintenance whilst they are under a particular age. Upon attaining that certain age the children would be deemed responsible and the capital would pass to them.