With compulsory registration of all trusts from next April is it time to review your provider trusts? This presentation will, i hope, give pause for thought

1. 10 of the most common problems with trust planning
cases

2. The Issue
The advice market around “provider” trust plans has grown expedentially but there
seems to be a lack of consistency in processes
With 4MDL & now 5MDL we will soon have compulsory registration on all trusts.
Also with provider based trusts it is unlikely there is a solicitor or accountant
involved so advisers will need to liaise with clients to ensure registration with TRS
At the same time forward thinking adviser firms are keen to adopt “best practice”
on their trust & estate planning. As solicitors are having to validate choices of
introducer partners (new SRA rules) advisers ought to be marketing a higher
standard as a benchmark

3. 1) Large Whole of life plans in trust
In simple terms if a policy is in trust the proceeds do not form part of the insured
persons estate but there is a gift of premiums. These premiums might also be
exempt if the qualifying criteria is met (ie normal expenditure rules)
First of all they must be funded out of surplus income that means the settlors
normal standard of living is maintained
The bit that is missed is around the definition of income, or rather the lack of a
statutory definition. What will not count as income are bond withdrawals (the first
5% being capital) or the capital content of annuities

4. 2) Bare trusts - beneficiaries not told of rights
In a bare trusts the trustees must inform beneficiaries of their rights but experience
shows that with provider trusts this is commonly missed
It is the flip side of the gift with reservation of benefit rules so the settlor must not
retain an interest but equally the beneficiaries must have unencumbered rights
over the assets that are beneficially entitled to.
Not informing them of their rights is a clear breach of GWR rules
The trustees may have legal title over the assets but the beneficiaries have
beneficial ownership, any attempt to circumnavigate this is a clear breach of trust

5. 3) Discretionary trusts with no letter of wishes
All to often provider based discretionary/flexible POA trusts do not have an
accompanying letter of wishes, in the absence of an instruction to the contrary
trustees will feel obligated to distribute assets on death. Combine this with a lack
of trustee meetings and you can see why trustees will feel they have little choice
Poorly constructed letters also create huge problems. for example being where
the wishes look like a distinct instruction, potentially creating absolute interests
inside the trust. Adding “notwithstanding that the trustees retain overall discretion
I want to make them aware of my current thoughts” should help
A presentation on letter of wishes is available

6. 4) No trustee meetings
Trusts are often set up where the trust pre-dates the investment, specifically loan
trusts. In this case clearly advice must be given to trustees not just the settlor
Regardless on-going advice must be given to trustees as a group & in most
circumstances the settlor separately. Advisers also need to have a clear picture of
where special provisions like delegated investment powers interact
An adviser cannot satisfy their regulatory position & the provisions of the trustee
investment act without being involved in regular trustee meetings
Such meetings represent an obvious opportunity to gain trustees as future clients

7. 5) No record of gifts card
There is a set way to record the history of gifts & each client file must record this
Clients must provide full details of previous gifts both amount, date nature etc. If a
solicitor has been involved you must check to make sure if any gifting involved
discretionary trusts ie not assume PETs
The requirement for all planning to interact gives an opportunity to work with a
clients solicitor to share the record of gifts & work together constructively

8. 6) No proper assessment of business assets
One mistake is to assume shares held as investments are in a clients estate.
These may involve EIS/VCT shares, AIM shares etc that qualify for BPR. Also
even if they are qualifying (IHT exempt) shares does not mean they will remain so.
An adviser should get clarification from a valuation statement
Another mistake is to assume that an interest in an owner managed businesses is
always outside your estate. Lots of businesses have, for example, more liquidity
than is required & have no stated business purpose for these funds. In this case a
proportion of assets would be regarded as excepted assets & will not get BPR.
You may well have to plan on the basis that the asset is exempt but should caveat
your advise

9. 7) No proper record of the trust exists
In many cases adviser files are unclear on where the original trust deed sits or
indeed as to whether it was ever sent to a provider. in other cases clients have
lost it & perhaps where unaware of its significance
Insurance companies do not like retaining a full copy of the trust deed as it may
make them “constructive trustees”. This makes clarity on where the original trust
deed sits doubly important
We have two issues in summary. Potentially a failure to make sure the trustees
have title over the assets but more worryingly doubts as to whether it even exists.
Clairity here and regular trustee meeting records will eliminate any concern

10. 8) No Power of attorney in place
Many clients have planned for death (IHT, trustee instructions etc) but have failed
to plan for the loss of control over assets if capacity is lost
In many cases it is not a pathway issue but can be very sudden eg after a stroke
Advisers should be concerned that clients when gifting have already lost access in
part to trust funds. This increases the need to insure remaining assets are readily
available
What a brilliant opportunity to build your solicitor referral base

11. 9) Whose wealth is used to establish the trust?
It matters not a bit that the settlor box on a trust deed might say Mr Smith if the
wealth used came from Mr & Mrs Smith. If this is the case you have a joint
settlements & may have undermined your planning (Mills V IRC 1973)
HMRC practice suggests that if the funds have been in a sole account for a
minimum of 6 months they may now be regarded as in sole ownership
Do not rush to establish a trust if this is an issue. You may however be able to
invest today and establish the trust in say 6 months

12. 10) Lack of consideration of alternatives
Alternative investments that qualify for BPR are often overlooked. This is despite
BPR only needing 2 years to qualify
Too many firms associate IHT exempt investments with risky EIS/VCT schemes.
These schemes have an IHT break but are primarily aimed at younger investors
with substantial Income or capital gains tax issues
On the other hand there are a number of companies constructing portfolios of
shares purely for the IHT break & often much lower in risk than EIS/VCT schemes

13. Consider other changes in practice
Advisers are used to having a robust repeatable investment process
A similar robust repeatable process may not yet be an absolute requirement for
estate planning but how often have we seen today's best practice becoming
tomorrow's compliance norm
For more help contact me on:
Email: kevinraftery@adviserskills.co.uk
Mobile: 07760 880626

14. The legal bits
Legislative references are based on Adviser Skills Ltd understanding of UK law &
HM Revenue & Customs practice. Tax & legislation are likely to change.
The value of reliefs depends on an individuals circumstances
No guarantees are given as to the effectiveness of any arrangements when
applied to individual clients
These are simply suggestions and Adviser Skills Ltd accepts no responsibility for
advice which may be formulated on the basis of these examples