Determine where to place your trust

The concept of "trust" in these times is being stretched to its limit in the global financial industry, not only because of the market meltdowns of recent months, but also due to the behaviour of risk-taking institutions and greedy individuals. The world's big banks stopped trusting each other some months ago when it was discovered that more of them had exposure to untenable mortgage-backed debt than was expected. But no one knew exactly how much. This lack of trust was responsible for the credit crisis, so you can see how important the concept is.

And yet, as many of us have become more wealthy over time, the use of trusts has become more applicable to the masses, rather than just the wealthy, so it pays to be wise. Once the domain of the very wealthy, today these vehicles are good financial planning tools for a large cross section of people. A trust can be used for many beneficial purposes, including inheritance tax planning, asset protection in case of divorce or business creditors, and administration of succession planning. By transferring assets into trust, you are able to take them out of your estate (simply put, all of your assets and liabilities as an individual). However, the act of transferral can affect your inheritance tax situation, depending on your country of domicile, so professional advice is a requirement in this area, not a luxury. Great care is needed when looking into trusts, as they are one of the most complex areas of financial planning, and an individual country's laws become critical to understand. We should all be wary of anyone offering advice on only one type of trust, as the options are many, and it's unlikely that one form of trust is right for everyone.

So, we know that trusts can be complicated, but like most things in life they can be examined from a simple perspective. To begin with, there are a minimum of three parties involved in any trust: The settlor (that's you) establishes the trust by transferring the ownership of assets. There can be more than one settlor for each trust. The trustees are the legal owners of the assets within the trust, and are responsible for managing and eventually distributing those assets.

The beneficiaries are those who will ultimately benefit from the assets. The settler and beneficiaries are usually obvious to all involved, but the choice of trustee is worthy of consideration. It is wise to take into account the complexity of tax issues and advantages arising from trusts, so a working knowledge of tax law relating to trusts is important. How many of your family or friends are professional tax advisers? It may be wise to appoint a professional, or corporate, trustee to avoid any misunderstandings.

For those of you with life insurance (which is likely to be most of you), it is possible, and often very beneficial, to place the policy into trust. Imagine a scenario in which the owner of a life insurance policy dies and their life was insured for a lump sum, which the insurance company now must pay out. The deceased policyholder's will now has to be adhered to, which effectively means the life policy proceeds are subject to probate, a potentially lengthy process that delays payout to the surviving family members. If the life policy is in trust this delay can be avoided, which might be crucial for the grieving partner who now needs to take care of their financial situation. This scenario represents a large portion of all life insurance policies written.

The assets you transfer into a trust are owned by the trustees for the benefit of the beneficiaries. These beneficiaries are chosen by you as the settlor, and this structure can be used to ensure your assets go to whom you choose. In some jurisdictions it is not easy, or even possible, to leave assets to whomever you wish, and a trust in a separate geographical location may avoid this. It also provides the advantage of quickly administering your estate by avoiding probate, as described above.

Inheritance tax exists in many countries, and often still apply for citizens of those countries, even if they have not been resident for years. It may be possible to reduce your inheritance tax liability by transferring assets into trust, and out of your estate, but the type of trust has to be suited to your needs. As wealth has increased quite rapidly over the years, as discussed previously, many more people are becoming affected by this tax, so the need for careful planning is increasing. For these reasons, professional advice is absolutely critical. Without this level of planning, your surviving family may face a large and unexpected inheritance tax bill that could have been largely avoided. It would be an awful situation if a grieving partner had to then sell assets to pay this bill - and bear in mind that many countries stipulate that inheritance taxes must paid before probate is granted and the assets are released from the estate.

It is possible for business owners to grant a certain level of protection over their personal assets via a trust. If your business does fail it is possible that creditors could seize your personal assets if the business assets cannot cover the debt. Losing your business, and subsequently, say, your family home would be an unfortunate set of events. It's also possible to protect your family against the difficulties involved in splitting assets in divorces. A trust can ensure that all family assets are held for your children only, rather than for the benefit of your ex-spouse's future husband or wife.

The concept of trust has become formalised and structured for financial planning, and can get complicated very quickly. Do speak to a professional adviser experienced in this area before making any decisions. Trusts might be more applicable to your situation than you think. Stuart Birch is a financial consultant with Acuma Wealth Management in Dubai. He can be reached at sbirch@acuma.ae