'Families are complicated': Three ways a trust can help

Understanding blended families can unlock IHT trust opportunities for financial advisers and add significant value to their business, writes Vitality tax expert Kim Jarvis.

According to research by the Society of Trust and Estate Practitioners (STEP) into modern families, blended families represent 63% of an adviser’s business¹. As a result of complex family composition, more than 87% of advisers have seen more demand for trusts. It’s therefore clear that understanding trusts and how they can help each individual clients’ situation can add significant value to an advisers’ business.

Most people are aware that trusts can help mitigate inheritance tax (IHT). So, a lot of clients that don’t have an IHT liability may ask why they should use a trust.

If a protection plan is not written in trust, the death benefit is payable to the legal personal representatives and is distributed in accordance with the deceased’s will or the laws of intestacy.

Take Kyla and Zach as an example. Kyla, who has two adult children from her previous marriage, is married to Zach. Her protection plan is not written in trust, and she has no will, so on her death the death benefit goes in accordance with the laws of intestacy (which is to Zach). Kyla has now lost control of the death benefits destination; on Zach’s death any remaining benefit will pass in accordance with his will or the laws of intestacy. Meaning Kyla’s children potentially don’t benefit at all.

In recent times, advisers have seen more estate challenges and complaints based on absence of knowledge. However, discussing trusts with clients and their families can help alleviate this and provide a number of additional benefits for your business. Here are just three.

1. Strengthens relationships

If Kyla had put her protection plan into a discretionary trust naming Zach, her children and remoter descendants on her death, the trustees can then decide who benefits and when. Therefore, discussing trusts with Kyla and her family, from day one, is a way to strengthen your relationship as a financial adviser - with not just Kyla but her family too. By talking about trustees and their duties, Kyla can make an informed decision on who she wants to appoint as a trustee. This might not necessarily be immediate family members; it could be a solicitor or a close family friend. Also, by giving the trustees a non-legally binding letter of wishes, Kyla can give instructions on how she would like the trustees to deal with the benefits after her death.

2. Business retention and growth

Including the family in Kyla’s discussions can help you forge relationships with new clients. Early and open conversations within the family helps them understand Kyla’s wishes and prevents conflict and challenges later. Each year, Kyla’s wishes should be reviewed to ensure that they are up to date, and this can help you retain business. When Kyla took out the protection plan, she wanted the trustees to consider paying some of the benefits to her two children. At the regular annual review, Kyla explains that she wants to exclude her son as a beneficiary under the trust as he has just sold his software business for £2.5m. You explain that her son can remain within the class of potential beneficiaries and Kyla should update her letter of wishes for the trustees. By knowing the extended family from day one, you may potentially be able to grow your business by advising family members when their circumstances change.

3. Professional connections

When it comes to the question of trusts due to the complexity and diversification of the family unit, interaction with other professionals is often required. When advising Kyla’s son on his succession planning you may need to communicate with his solicitor or accountant which can help to establish a relationship, which you can build on to help grow your business.

Find out more about putting policies into trust and how they can benefit of you and your clients.

Sources:
1. Meeting the needs of modern families, STEP report, 18 November 2021