Trusts for estate planning: what, when and how?

This article was written by Andrew Chastney, Senior Paraplanner technical specialist, and originally published by Canaccord Genuity Wealth Management (CGWM).

A trust, in its many forms, is often discussed as a solution for individuals or families when they are considering the protection of their wealth, particularly when thinking of others. It can provide a suitable vehicle for planning ahead as part of a strategy for transferring wealth down the generations. Trusts for estate planning can be beneficial, however, it’s clear that trusts are not simple, and many questions should be asked when considering setting one up. We recently sat down with Andrew Chastney, technical specialist, to discuss the details of trusts and how they can work for certain individuals.

Firstly, talk to us about some of the specific situations people find themselves in, which could lead them to consider setting up a trust.

Imagine these scenarios:

1. Setting up a trust for grandchildren

You want to leave your estate to your three grandchildren, but they’re all young adults. If you die tomorrow, and they inherit it all, would this sudden wealth send them off the rails? Would they spend it, frivolously, without an eye on provision for the future as you intended? Or do you not really know who you might leave your estate to?

2. Setting up trusts for family

You don’t have children so would it be your niece and nephew? You haven’t seen your nephew in three years, but your niece visits regularly.

3. Setting up a trust for inheritance

You might simply be undecided who you might want to financially benefit from your estate and when you want them to receive the funds.

If one or more of these scenarios applies to you, setting up a trust for estate planning may well be the way to deal with it.

Can you expand on the definition of a trust, its main components, and the roles involved?

What is a trust?

Trusts have been used for hundreds of years and can be utilised for many reasons, from supporting future generations and paying school fees, to sheltering funds from beneficiaries who aren’t quite able to handle their finances yet and perhaps never will be able to do so. In some places, tax planning has been an important factor in creating trusts, as in some jurisdictions trusts have different tax treatments. Trusts can also be off-putting because they don’t have the best reputation: people often perceive them as overly complicated and tricky, which I will develop on later.

There are different kinds of trusts, and there’s no single definition, but basically, a trust is the legal relationship between a person (or the ‘settlor’ in technical legal language) who puts their assets into a trust, the trustee (the person who manages the trust) and the beneficiary (who benefits from the trust). The trustee manages the trust and, depending on the type of trust, ensures the beneficiary receives the assets at the most suitable time and for the right purpose.

The role of the trustee is important. Their role is to act in the best interest of the beneficiaries, so choosing the right one is vital. And it’s common to see professional trustees, such as a lawyer or a trust corporation, who can provide an impartial approach and deal with practical aspects.

Can you share some more specific reasons why setting up a trust may be beneficial for some people, especially people with complex issues?

Why set up a trust

As mentioned in the examples above, gifting money to people isn’t always simple. You might want to continue to exert a level of control or take steps to ensure your wishes are carried out after you effectively hand over the assets. There can be several reasons why people consider a trust in this regard.

One might be that you want to make a gift, but you don’t want to do that outright. You might want it to be introduced in phases over time. Another reason is that your intended beneficiaries are not in a position where it is a good idea for them to receive funds directly. This could be down to a lack of mental capacity, or they might be too young. In this case, you can structure the trust to ensure beneficiaries can receive the assets at a certain time, or they could be released at certain life stages (for example, to pay for a house deposit, or for children’s school fees).

Furthermore, family circumstances might dictate that a protective arrangement is appropriate. You might be concerned if a family member can be trusted with any funds. They might have a substance use disorder, a problem with gambling or they might simply not be very good at handling finances. Moreover, they might have a partner who in your view can’t be trusted, so you may want to provide some financial protection against the potential of a breakdown in their relationship. You would need some legal advice and, depending on what jurisdiction you are in, setting up a trust can be an effective way of protecting family wealth.

Also, charitable trusts are useful if you want charitable causes that are close to your heart to benefit from a financial contribution or gift. It can mean your trust can benefit charities in the long-term, rather than just gifting to one or two charities now.

In a nutshell, trusts are a way to plan ahead, and to think about how they can benefit others in the future.

Let’s move onto the subject of how complex trusts are and how this complexity can be managed by professionals?

Trusts can be complex to set up and legal and tax advice is essential to ensure they are structured in the right way and managed properly.  There could be various international reporting requirements to be met.

However, professional advice could well be worth the investment. Working with professional advisers can make this process much simpler, from deciding whether a trust is appropriate for your needs, to helping you wade through the paperwork and legalities. Even though they can be complex, it might be the solution to how you want to pass on your assets.  

How does one invest within a trust?

This is an area usually best left to the professionals. Depending on the settlor’s intentions, and the objectives of the trust, a bespoke investment strategy should be created. For example, the trust may need to pay income to defined beneficiaries, or it may be more flexible than that. You’ll probably need a professional to work with the trustees to ascertain the risk profile and investment profile of the trust.

Trustees might also need to be supported in fulfilling their duties, including any ethical criteria they need to meet and any tax considerations. It is also important that trustees are kept aware of the trust’s investment performance and any changes that are made to the trust’s portfolio.

So, although they can be complex, if you are facing certain scenarios with your family regarding your assets or want your assets to be used for specific purposes, a trust may be the solution for you. Be mindful to get the right guidance, support, and expertise to help you.

To speak to an expert at Adam and Company about trusts, please get in touch.

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