The London Institute of Banking & Finance’s Richard Cooper highlights five of the most common mistakes when using trusts and how to avoid them
For those of you that have dealt with trusts and those that are just starting on the journey there are a number of common mistakes that are made.
You can avoid and manage these to get a greater understanding and buy-in from clients and advisers.
Paraplanners have a great opportunity to make a difference in developing their skills to support the use of trusts in financial planning.
Making trusts too technical
Because of their legal structure, there’s a tendency to make the explanation of the trusts and their use overly technical. This makes it hard for clients to understand. If it’s overly complex, it can totally confuse some clients.
You can avoid this by having a simple and clear explanation of how the trust works and what the trust actually achieves. Avoid using technical terms at outset. Technical terms and descriptions may be more suited to an appendix or you could include them in a separate guide to trusts.
Not making trusts personal
Quite often it is tempting to use phrases like ‘settlor’, ‘trustees’ and ‘beneficiaries’ rather than individual names. There’s also a tendency to be non-specific in what the individual is looking to achieve and why. Sometimes this also excludes how the use of a trust benefits the client at a personal level.
This can be managed by having:
• a clear description of what the client wants to achieve in their own words
• details of who they want to benefit at outset, putting actual names in or use a group like ‘grandchildren’ not ‘chosen beneficiaries’
• an explanation of how the clients’ personal objectives are achieved by using the trust
• a list of who does what within the trust and putting specific names against each role.
Having the wrong trustees
I could undoubtedly write a whole article about whether you include professional trustees? A common thought is that having the wrong trustees can cause major issues and potential conflict during the lifetime of a trust.
Often the clients are also trustees. In such cases, ask who else can they trust to make sensible decisions and act in the best interests of their beneficiaries. Ideally trusts should be managed by at least two to four trustees. These may be close friends or family members or indeed anyone else they trust to manage their assets effectively.
They may decide to include a professional trustee. This is not strictly necessary, as whoever they appoint will be legally required to seek investment or other advice from professionals if they encounter any problems. Professional trustees will normally charge for their services.
To head off any potential issues and conflicts, there are things that you can do to help:
• asking the client why they think someone will make a good trustee
• asking whether that person will be in a position to do this both now and in the future, and
• having a list of suggestions on who make good trustees in similar situations.
Not understanding the duties of trustees
Once appointed, trustees have a range of duties that they need to undertake. Many issues can arise if they are unclear of what they have to do and when.
You can add real value by having a clear guide for trustees, detailing what their duties and responsibilities are in respect of the trust and going into greater detail to show how you can support them both now and in the future.
I have known paraplanners to provide specific summaries for the duties of the trustee and that has avoided any issues arising. This has covered:
• duties on appointment
• investment responsibilities
• protecting the interests of beneficiaries
• keeping accounts and records, including registering the trust with the Trust Registration Service, and
• distributing property to beneficiaries.
It’s essential that trustees know if they need to pay tax on any income received and how to declare and pay it to HMRC
Not having sufficient trust knowledge
A little knowledge can be dangerous thing, but as Thomas Jefferson once said, “knowledge is power”. Not understanding enough about trusts can mean that you don’t clearly explain them in reports, which can lead to confusion and create misunderstanding with clients.
When dealing with trusts you will need to have a good level of technical knowledge to be able to:
• understand and explain how trusts work
• explain how trusts and investments are taxed
• explain which trusts are used in a range of planning situations
• show clearly how they benefit clients
• describe the duties of a trustee and what they need to do and when.
It’s always beneficial to develop your knowledge on the use of trusts in different planning scenarios, and to develop your skills in putting this across to clients in reports and developing the support you provide.
You could undertake additional qualifications around trusts, such as LIBF’s Taxation, Trusts and Tax Compliance (TTTC) Unit. Or you could look for some relevant CPD having first identified the areas you want to develop. There is some great support available from provider technical teams.
