Private Trusts in Wealth Planning

Private Trusts in Wealth Planning

Faisal Sheikh

25 years: Wealth and risk management specialist

In this video, Faisal explains Trusts and how they are widely used within wealth management to help facilitate estate and inheritance planning for high net-worth individuals and how they can be used by clients to hold tax wrappers.

In this video, Faisal explains Trusts and how they are widely used within wealth management to help facilitate estate and inheritance planning for high net-worth individuals and how they can be used by clients to hold tax wrappers.

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Private Trusts in Wealth Planning

8 mins 11 secs

Overview

Trusts are used by high net worth individuals (HNWI) for multiple purposes. From reducing future inheritance tax liabilities to ensuring funds are available for future needs, such as the maintenance of young children. Trusts help these individuals to manage their wealth and can facilitate estate and inheritance planning. It is important for wealth managers to understand how each type of trust functions and what unique benefits it provides to their clients.

Key learning objectives:

  • Understand the key differences between the four main types of trusts discussed in this video

  • Understand why wealth management clients use trusts

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Summary

What is a trust?

A trust may be created during the lifetime of the settlor, in which case the terms of the trust will be created in the trust deed. Alternatively, a trust may arise on the death of the settlor, in which case the terms of the trust will be laid down in that person’s will. There are many types of trusts, but four that are particularly common in the wealth management industry. Each trust has a slightly different tax treatment. 

What are the defining features of a ‘Bare trust’? 

In a ‘Bare trust’, also referred to as a ‘simple trust’, the trustee has no discretion over payment of income and capital to the beneficiary. The beneficiary has an immediate and absolute right to both capital and income. The beneficiary can take possession of the trust property at any time. This type of trust gives the beneficiary a huge amount of autonomy and is usually used when there are more knowledgeable children involved. 

Tax

The beneficiary of a bare trust is responsible for paying tax on any income they receive from the trust. 

What are the defining features of a ‘Interest in possession trust’? 

A ‘Possession trust arises when a beneficiary, known as an “income beneficiary” or a “life interest”, has a legal right to the income and any other benefits derived from the trust property as they come about. For example, a life interest might allow the beneficiary to live in a house for a lifetime, before being passed to the ‘reversionary interest’ or ‘secondary beneficiary’ on their death. The beneficiaries of this sort of trust have limited control over the trust assets. 

Tax

When assets are transferred into this type of trust, the settlor is responsible for paying any capital gains tax arising from gains on assets. During the life of the trust, there’s usually no Inheritance Tax to pay as long as the asset stays in the trust and remains the ‘interest’ of the beneficiary. 

What are the defining features of a ‘Discretionary trusts’?

This type of investment vehicle is one where the trustees exercise their discretion as to which beneficiaries will be entitled to receive income or capital on the trust. These trusts are used by wealth management clients when they don’t want beneficiaries to have any control or say in the running of a trust. They usually are set up where the clients' children or grandchildren are minors. If a new grandchild is born after the trust is set up, the grandchild will automatically rank as a beneficiary.

Tax 

Trustees are responsible for paying tax on income received on discretionary trusts when assets are transferred into a trust of this type, it is the settlor who is responsible for paying any capital gains tax arising from gains on assets

What are the defining features of ‘Charitable trusts’?

These are set up for the purposes of charitable deeds, defined as: the relief of poverty or the advancement of education or purposes beneficial to the community. Such trusts enable the settler to give some degree of individuality to a gift, specifying how it may be used.

Tax 

Usually exempt from all forms of tax provided that they meet the stringent requirements for registered charities.  

 

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Expert
Faisal Sheikh

Faisal Sheikh

Faisal is a wealth management professional has spent almost 30 years working in the field of risk management, risk control, internal auditing in the financial services and public sector. Most recently, Faisal was the Head of Risk for the Wealth Management business of UBS in the UK. He has also extensive international experience across Europe, the Americas, Asia and Africa. He has also a served as CISI operational risk expert panel member.

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