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Introduction

Establishing a trust is a popular means of securing one’s wealth for future generations. The primary purpose of a trust is to preserve assets and ensure their efficient distribution to beneficiaries. When setting up a trust, one of the most crucial decisions you must make is the selection of the appropriate assets to include. This comprehensive guide will discuss various asset classes and explore their suitability for inclusion in a trust, with the ultimate goal of transferring wealth to future generations.

Real Property

Real property, often referred to as real estate, includes land and any permanent structures built on it. This asset class is a common choice for inclusion in a trust, as it has the potential for both capital appreciation and income generation through rental income.

Advantages

  • Stable, long-term investment: Real property typically appreciates over time, safeguarding wealth for future generations.
  • Diversification: Including real property in a trust can provide diversification from other, more volatile, asset classes.
  • Tax benefits: In some jurisdictions, transferring real property into a trust may offer tax advantages.

Considerations

  • Illiquidity: Real property is not as easily converted into cash compared to other assets, which may be a concern for beneficiaries with immediate financial needs.
  • Maintenance costs: Real property requires regular upkeep and investment to maintain its value and generate income.

Financial Assets

Financial assets comprise various investment vehicles, such as stocks, bonds, and mutual funds. These instruments are often included in a trust to provide a balanced mix of growth and income.

Equities (Shares)

Equities represent ownership in a company, and their value is linked to the company’s financial performance and prospects.

Advantages

  • Capital appreciation: Equities have the potential to offer significant capital appreciation, benefiting future generations.
  • Dividends: Some equities pay dividends, providing a source of income for beneficiaries.
  • Liquidity: Shares are typically easy to buy and sell on the stock market, offering beneficiaries greater flexibility.

Considerations

  • Volatility: Equities can be volatile, and their values may fluctuate substantially over short periods.
  • Risk of loss: Investing in individual companies carries the risk of loss if the company underperforms or fails.

Bonds

Bonds are debt securities issued by governments, corporations, or other entities. They pay periodic interest to investors and return the principal upon maturity.

Advantages

  • Regular income: Bonds provide a steady source of income through interest payments.
  • Lower risk: Bonds are generally considered lower risk compared to equities, offering more stability for beneficiaries.

Considerations

  • Interest rate risk: Bond values can be negatively affected by rising interest rates.
  • Default risk: There is a risk of default if the bond issuer fails to make interest payments or repay the principal.

Mutual Funds, OEICs (Open Ended Investment Companies) and Exchange-Traded Funds (ETFs)

Mutual funds, OEIC and ETFs are investment vehicles that pool investors’ money to buy a diversified portfolio of assets, such as equities, bonds, or other securities.

Advantages

  • Diversification: Mutual funds and ETFs provide diversification by spreading investments across various assets, geographies and sectors therefore reducing risk.
  • Professional management: These funds can be managed by professional investment managers, potentially improving performance.
  • Liquidity: Mutual funds, OEICs and ETFs can generally be bought and sold with ease, offering liquidity to beneficiaries.

Considerations

  • Fees: Management fees and other expenses can erode the funds’ returns, impacting the wealth passed on to future generations.
  • Market risk: Mutual funds, OEICs and ETFs are exposed to market risk, meaning their values may decline if the broader market performs poorly.

Life Insurance Policies

A life insurance policy can be included in a trust to provide a guaranteed, tax-efficient payout to beneficiaries upon the policyholder’s death.

Advantages

  • Guaranteed payout: A life insurance policy offers a predetermined payout, providing financial security to beneficiaries.
  • Tax efficiency: Proceeds from a life insurance policy held in a trust may be free from inheritance tax or other taxes, depending on the jurisdiction.
  • Flexibility: Life insurance policies can be structured to meet specific needs, such as providing income for a spouse or education funds for children or paying an inheritance tax bill.

Considerations

  • Premium payments: Policyholders must maintain regular premium payments to keep the policy active, which may be a financial burden.
  • Limited investment growth: Life insurance policies typically offer more conservative returns compared to other investment options

Business Interests

If you own a business, transferring your ownership interest into a trust can help protect the business and ensure its continuity for future generations.

Advantages

  • Succession planning: A trust can be structured to facilitate a smooth transition of business ownership to the next generation, preserving the family business legacy.
  • Asset protection: Transferring business interests to a trust can protect the business from potential legal or financial issues, safeguarding its value for beneficiaries.
  • Tax benefits: In some jurisdictions, transferring business interests to a trust can offer tax advantages, such as minimising estate or inheritance tax.

Considerations

  • Control: Placing your business interest in a trust may result in reduced control over the business, as decisions are made by the trustee(s).
  • Valuation and liquidity: Business interests can be challenging to value and may not be as liquid as other assets, potentially affecting beneficiaries’ financial needs.

Collectibles & Tangible Assets

Collectibles, such as art, antiques, or rare coins, and other tangible assets like luxury cars or jewelery, can be included in a trust to preserve their value for future generations.

Advantages

  • Unique value: Collectibles and tangible assets can hold sentimental value and provide a connection to family history.
  • Potential appreciation: Some collectibles may appreciate in value over time, offering potential growth for beneficiaries.

Considerations

  • Illiquidity: Collectibles and tangible assets are typically less liquid than financial assets, which may be an issue for beneficiaries requiring immediate access to funds.
  • Storage and maintenance: These assets often require secure storage, insurance, and ongoing maintenance, resulting in additional costs.
  • Valuation challenges: Accurate valuation of collectibles and tangible assets can be difficult, impacting the equitable distribution of assets among beneficiaries.

Intellectual Property

Intellectual property, such as patents, trademarks, and copyrights, can be included in a trust to preserve and monetise their value for future generations.

Advantages:

  • Income generation: Intellectual property can generate income through licensing, royalties, or sales, providing ongoing financial support for beneficiaries.
  • Capital appreciation: The value of intellectual property may increase over time, offering potential growth for future generations.

Considerations:

  • Valuation challenges: Intellectual property can be difficult to value accurately, complicating the equitable distribution of assets among beneficiaries.
  • Legal complexity: The protection and enforcement of intellectual property rights may require specialised legal expertise and ongoing management, potentially incurring additional costs.

Cash and Cash Equivalents

Including cash and cash equivalents, such as savings accounts, certificates of deposit (CDs), and money market funds, in your trust can provide liquidity and stability for beneficiaries.

Advantages

  • Liquidity: Cash and cash equivalents are easily accessible, providing beneficiaries with immediate access to funds when needed.
  • Stability: These assets are generally considered low-risk, offering a safe haven for preserving wealth during market volatility.
  • Flexibility: Cash can be used to cover expenses, emergencies, or investment opportunities as they arise.

Considerations

  • Inflation risk: Over time, the purchasing power of cash may be eroded by inflation, reducing the real value of the wealth transferred to future generations.
  • Low returns: Cash and cash equivalents typically offer lower returns compared to other investment options, limiting potential growth for beneficiaries.

Incorporating a Diverse Mix of Assets in Your Trust

When selecting assets for your trust, it is essential to strike a balance between growth potential, income generation, and risk management. By incorporating a diverse mix of asset classes, you can create a trust that:

  • Provides financial stability and security for your beneficiaries during times of market volatility or economic uncertainty.
  • Offers income sources to support your beneficiaries’ short-term and long-term financial needs.
  • Maximises the long-term growth potential of your wealth, ensuring its continued benefit to future generations.
  • Takes advantage of tax efficiencies and other benefits specific to certain asset classes, depending on your jurisdiction.

The process of selecting the right assets for your trust can be complex, and the optimal mix will vary depending on your family’s unique circumstances, objectives, and risk tolerance. It is advisable to consult with financial and legal professionals who can help you navigate this process and ensure that your trust is structured in a way that best serves your family’s needs.

By carefully considering the advantages and considerations of each asset class and seeking professional guidance, you can make informed decisions that will enable you to transfer wealth effectively and preserve your legacy for generations to come.

Get Professional Advice

Complete our contact form today in order to discuss your particular situation with a highly qualified, experienced, and fully regulated adviser

  • We promise to NEVER share your data with any third party
  • We operate no email lists
  • All data is managed securely in accordance with the General Data Protection Regulation (GDPR)