It is common for people to set up a Discretionary Trust in their Will and these arrangements are typically used to support a vulnerable person/family member who would be unable to manage their own affairs, following their death.
The Trust allows assets such as property, cash and investments to be held on behalf of a Beneficiary and placed under the control of the Trustees.
A further advantage of this arrangement is that it is likely to protect the individual’s entitlement to means tested benefits and also potential future care costs.
Example
Simon is 60 years old and up until recently was cared for by his elderly parents. Simon’s parents set up a Discretionary Trust which formed part of their Wills. On their death, this left £120,000 in Trust for Simon and appointed his brother and sister as Trustees.
Simon had little in the way of personal savings and was in receipt of means tested benefits. Now that his parents have passed away, he also needed full-time residential care.
In this example, if Simon’s parents had directly left him £120,000 as an inheritance through their Will, rather than into a Trust, Simon would have lost his entitlement to means tested benefits and he would also have to provide for his own care costs of £30,000 per annum.
In this scenario, Simon’s inheritance would have lasted less than four years. However, by placing the assets in a Discretionary Trust, he retained his benefits and his care was provided.
Trustees
For individuals that have been appointed as a Trustee through a Will this could be and is for many a little daunting. At Nelsons, our expert Investment Management team can assist Trustees with investment and taxation advice, as there are some pitfalls to watch out for when acting as a Trustee and investing or holding assets within a Discretionary Trust.
We also offer legal advice and assistance to Trustees through our specialist Trust Administration team and can act as professional Trustees if required. Any costs involved can be paid out of the Trust funds.
The first point for Trustees, is that there are a number of duties or responsibilities identified in the Trustees Act 2000 and they should familiarise themselves with these. In exercising the power of investment, Trustees should take account of the standard investment criteria. In particular, the Trustees must review the investments regularly, monitor the suitability of the Trust investments and also adhere to the need for diversification. There is also a need to obtain proper advice before exercising any power of investment.
Taxation
In the above example, our Investment Management team would provide advice to Simon’s Trustees on investments within a Discretionary Trust.
The fist £1,000 of income generated in a Discretionary Trust is taxed at standard rate and all other income is taxed at the special rate for Trusts, which is 45%. This can have a significant effect on the overall return of an investment or savings product and therefore the correct investment product is vital. In this case, we would advise the Trustees to invest the funds in an investment bond, as this is a non-income producing asset. This would also reduce the reporting requirements by way of the Trustees completing tax returns each year.
Through the use of an investment bond, withdrawals up to 5% each year of the amount invested can be taken, without triggering an immediate tax liability. This would enable the Trustees to provide Simon with additional spending money by way of return of capital and keeping him under the means tested benefit threshold.
Of course such an investment would not be suitable in all circumstances, but in the above example this would be an appropriate investment choice.
Investment advice for Trustees
For the underlying investments within a bond, we would determine that some risk would be appropriate, in order to achieve a balance of long term growth and the provision of additional spending. We would weigh up the risks, which would include inflation risk, investment risk and the need for diversification.
Our investment solution would be a cautious investment portfolio which holds a range of asset classes and is well diversified. The investment would be continuously managed by our Investment Management Team on behalf of the Trustees and is in line with the Trust objectives and approach to risk.
Annual Trustee review meetings
As part of our Investment Management service we offer annual Trustee meetings to review the suitability of the investments. This provides the Trustees with the opportunity to review the performance, circumstances and objectives of the Trust investments and at the same time fulfils part their duties as a Trustee. Our Trust Administration team can also assist with Trust reviews, tax returns and reporting requirements.
How we can help
Phil Terry is a Partner and Independent Financial Adviser at Nelsons.
A good combination of Will planning and financial advice for Trustees is essential to protect benefits and care costs for vulnerable beneficiaries. Our Investment Management team in Derby, Leicester and Nottingham offers assistance to Trustees and on-going investment advice which fulfils their duties and requirements as a Trustee.
If you would like further information on our investment management service, please contact us on 0800 024 1976 or via our online enquiry form.
