Frequently, tax specialists refer to trusts as “fiduciary structures” which makes them sound quite complicated. This is not the case at all – in the main the structures are quite simple.
Far from being for the preserve of the super rich, trusts provide a highly flexible, and advantageous, way of arranging financial affairs for many people that would not consider themselves wealthy at all. The protection of wealth, however large that wealth might be, for future generations is something that most parents and grandparents would want for their families.
While the wordings of these trust documents might seem complex and full of legal jargon, the principle behind them is quite simple.
Let’s look at one legal definition of a trust:
“A trust is a legal relationship whereby one individual (the “settlor”) transfers his or her assets (the “trust fund”) to another individual or company (the “trustee”) who holds and manages these assets for the benefit of others (the “beneficiaries”) named by the settlor. The trustees are bound by the terms of the trust deed.”
If we were to say that to potential clients, I suspect many of them would look back at their advisers with a look of jaw dropping incomprehension. However, if we use an analogy that everyone can relate to, it might help explain the above definition. So, let’s delegate the Christmas shopping to someone else, using a trust.
You (The Settlor) want someone to buy Christmas presents for the children on your behalf. You write a Christmas shopping list (The Trust Document) and you ask your best friend (Trustee) to use 100 Euros (Trust Fund) to buy presents for the children (The Beneficiaries). Your friend (Trustee) being a responsible person completes the shopping by sticking to the list.
If the potential clients can understand the shopping scenario, then they understand the basics of a trust. As Christmas approaches, isn’t it time advisers started to talk to their clients about shopping lists?
Chris Lean is a consultant at Prague-based Square Mile Financial Services