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Five investment practicalities for lawyers managing trusts

21 January 19

An investment manager offers five considerations for legal professionals managing trust funds on behalf of a client

by Suzy Thomson

Trusts are increasing in popularity as an investment vehicle. That’s good news for lawyers, who tend to deal with them on behalf of clients, but they inevitably come with their complications.

While in many ways it’s the same as investing for an individual, in others it’s a different beast altogether. Typically, they will have more interested parties, which immediately increases their complexity.

First, there is the person who set up the trust – the trustor or settlor – who relinquishes authority over any assets in the trust. Then there are the trustees, the principal owner and controller of the assets in the trust, and there are also the beneficiaries. While these could be the same people, only the latter are entitled to a benefit from the trust, but they may not have authority over the assets.

How can a lawyer navigate this to ensure the trust investments are structured and managed appropriately? Here are five considerations for legal professionals dealing with one on behalf of a client.

1. What’s the aim?

The most important question is what the trust was set up to do, i.e. how it is intended to help its beneficiaries. This can vary quite significantly – it may have been created to help pay for a child or grandchild’s time at university, or it may be an ongoing concern which pays out a monthly stipend to family members.

Its purpose will have a large bearing on how it is structured. If, for example, it is designed to pay out regular income, the allocation may be weighted towards stocks with higher yields or income-producing funds. If capital growth is the aim, then smaller, expanding companies may be the right option.

Either way, a course of action will need to be agreed for when companies cut their dividends, or a fund doesn’t deliver – or even if it overpays. If a £200,000 trust was designed to deliver an annual income of £12,000 but only yields 2%, a conversation is required around whether to eat into the capital or accept lower returns. If it overpays, the trustees may want to consider reinvesting the proceeds.

2. In it for the long haul

How long the money will stay invested is another key point. If a client wants to use the capital in the trust within fewer than five years, investing it might not be the right call – markets can be too volatile over such a short period. But, if they are still keen to invest, a combination of businesses and funds which are likely to deliver quick growth will most likely be chosen.

If, however, they are looking to the medium or long term, investments will need to be found to match – i.e. which businesses will still be successful in a decade’s time. That may involve investing through several market cycles, which usually builds in recovery time for any economic dips; but, given the vast changes over the past few years, it could also mean some companies’ fortunes suffer.

3. An appetite for risk

A client’s attitude to risk can be another major determining factor. As a general rule, the higher the appetite for risk, the higher the equity content of a portfolio and exposure to industries such as pharmaceuticals or tech. But, any set of investments should consist of a diverse range of assets which provide a good sectoral and geographical balance.

That could take the form of fixed-income products, such as corporate bonds and gilts, or unit trusts and alternative assets, like property funds. A typical portfolio would also have a certain amount of cash, while geographical diversification might be achieved through internationally-focused funds, rather than direct equity investment, to reduce risk.

4. The only way is ethics

Increasingly, people are putting their money where their morals are. Many balk at the thought of investing their money in arms manufacturers or tobacco companies, for example, while others may find pharmaceuticals or large oil producers to be beyond the pale.

While these can be easily avoided with direct equity investment, it may not be as straightforward when investing in funds. There may be a small amount of exposure in income funds that is difficult to detect, for example, with tobacco companies among the highest-yielding shares on the FTSE 100.

5. The overall tax picture

Finally, there is the client’s wider tax situation, which may dictate the trust needs to stay within certain parameters. In practice, this could mean ensuring that the investments do not exceed a defined level of income or capital gains, which may influence the stocks chosen. If inheritance tax is the principal concern, using an offshore bond may be an option.

Suzy Thomson, investment manager, Brewin Dolphin Dundee. This paper was given at the Law Society of Scotland Wills, Trusts and Executries conference in Dundee.

Disclaimers

  • The value of investments can fall and you may get back less than you invested.
  • The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.
  • Past performance is not a guide to future performance.
  • This information is for illustrative purposes only and is not intended as investment advice.

Brewin Dolphin is regulated by the Financial Conduct Authority.

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