Discretionary Trust >Investment Trusts.

[richill]

I have set up a discretionary trust to provide a lifetime income for my daughter and with provision for the capital to be passed on to my grandchildren on her death.
The trust has not been activated yet, but there is a sum of £230k waiting to be invested, for the provision of an income.(it is necessary to do it this way rather than just distributing the money) There will be further sums invested down the line.
My inclination is for a small portfolio of dividend paying Investment Trusts.
I am anxious about fees and charges I may encounter.
I have been quoted by a broker a 1.5% management fee, which of course will lie on top of the management fees charged by the Trusts themselves.
This all sounds a bit expensive to me, especially as I was hoping for a dividend yield of close to 4% for my daughter.
As we are talking about investment trusts, I cant see them requiring the same level of supervision as say a portfolio of individual shares.
Is there a cheaper way of setting this up?
Any thoughts or advice would be appreciated.

Richill

[monabri]

The choice of where you put the fund for such a long time period might be worth considering. If the money is not to be touched for many a year, then - as a suggestion - you might wish to consider putting a proportion into "growth" biased ITs (such as Bankers/Witan/FCIT) or even a simple collection of ETFs ? (Vanguard products).

In "n" years time, the growthier ITs can be sold and the released funds re-invested in income focused ITs.

[SalvorHardin]

You can save yourself the 1.5% annual management fee by buying the investment trusts yourself and doing the day-to-day administration. You're correct in that they require less work than a portfolio of operating companies.

Bear in mind that the fees charged by the managers of investment trusts are taken from the trusts' assets, not directly from the shareholders (that would be an administrative nightmare!).

My basic living costs are paid by portfolio of 11 investment trusts for which I hold certificates. Bought over the years through online and old style brokers, requesting certificates each time. The certificate fee averaged out at about £20 per holding. Annual management fee is thus a lovely 0%.

You will have the fun of the trust's tax return to deal with, or you may wish to subcontract this to an accountant. You might set up dividend mandates as and when for certificated holdings, so that the dividends go straight into the trust's bank account.

You can buy some investment trust shares directly from some managers; they offer one-off and regular savings plans and charge an annual fee. I have one with BMO (what used to be F&C), they charge £48 per year including VAT.

I'd suggest looking at the trusts monabri has mentioned for starters. Add Caledonia Investments, which is run primarily for the Cayzer family, so it has a very long-term focus. Henderson Far East Income will push up the average yield (it pays 5.9%) and add quite a bit of diversification. Finsbury Growth & Income is popular with quite a few of us on TLF; it favours companies like Unilever and Diageo which are steady growers of both capital and income (well, steadier than most!). Merchants Trust is another high yielder you might want to consider (5.6%).

[richill]

Thank you, both Monabri and SalvorHardin
Yes, I do like the trusts you have recommended. I think I should be able to hit my yield target.
Ideally i would like no more than 10 or 11 investments, to give me a spread of market sectors and global reach.
as you say, Salvor Hardin, I have the ability to select and manage these myself. However, age is against me, and the trust will have to continue after I'm gone. So, thinking of the long term, I can select the investments myself, but would like to have them reviewed on say a quarterly basis by a broker or advisor, preferably on a fixed fee basis.- 1.5% seems too much to me, for what is such a limited service requirement. Any suggestions about who to approach, and how much such a service should cost?
Thanks,
Richill

[StOmer]

As a guide, a broker such as Hargreaves Lansdown 0.365% per year for ongoing advice and 0% per year for Investment Trusts held in their Fund & Share Account. Their initial advice fee after a free consultation is 1%. I appreciate your situation is a little different but perhaps those fees will give some help in finding an appropriate level of fee to be paid.
https://www.hl.co.uk/financial-advice/advisory-charges

[monabri]

With the long timescales involved, i'll put forward the consideration of simply buying something like Vanguard's World tracker ( VWRL) feeding the money in at £x thousand per year over the next y years. No need for any management fees.

Over 20 years, the "advisors" are going to have a significant drag on returns.

[Parky]

I have set up a discretionary trust to provide a lifetime income for my daughter and with provision for the capital to be passed on to my grandchildren on her death.
The trust has not been activated yet, but there is a sum of £230k waiting to be invested, for the provision of an income.(it is necessary to do it this way rather than just distributing the money) There will be further sums invested down the line.
My inclination is for a small portfolio of dividend paying Investment Trusts.
I am anxious about fees and charges I may encounter.
I have been quoted by a broker a 1.5% management fee, which of course will lie on top of the management fees charged by the Trusts themselves.
This all sounds a bit expensive to me, especially as I was hoping for a dividend yield of close to 4% for my daughter.
As we are talking about investment trusts, I cant see them requiring the same level of supervision as say a portfolio of individual shares.
Is there a cheaper way of setting this up?
Any thoughts or advice would be appreciated.

Richill

What you are looking for is a "basket" of investment trusts, a topic which has been discussed extensively on this forum and the previous Motley Fool incarnation. (e.g basket of 7, basket of 8 used by Luniversal). These consist of large ITs with long histories of reliable payouts, and should not require the quarterly reviews you are considering.
Not sure what you mean by the trust being "set up but not activated". Are you going to be one of the trustees (minimum two)? You imply that you are going to have a professional trustee to manage the trust. I have no experience of this, but I would have thought 1.5% reasonable for this, although a fixed fee would be preferable, especially as the amount of work will be much the same whatever the size of trust assets.
A 4% gross yield would be reasonable, but I hope you are aware that income tax will be 7.5% on the first thousand pounds of income, and a swingeing 37.5% on the remaining dividend income above £1000. Whoever is dealing with the trust will need to submit tax returns and deal with other administration issues.

[Nocton]

Why pay for a discretionary trust? If you are going to buy ITs and index funds then the management is taken care off and no need for regular review; you are effectively paying double. So just get a bare trust and put in ITs and index funds of the sort already suggested, with dividends automatically re-invested. It will cost nothing to run (even with HL) and you can review it perhaps every year, if you wish, but no need for any day-today management For our grandchildren, where we invest regularly every month we just have two ITs - Witan and Scottish Mortgage. We have not changed over 16 years, except they used to be separate investments with the IT cos and are now in an HL account after the IT cos gave up offering child saving plans (with bare trust). There are plenty of ITs like Bankers and Witan where you can be pretty confident they will still be paying and increasing their dividends far into the future.

[SalvorHardin]

as you say, Salvor Hardin, I have the ability to select and manage these myself. However, age is against me, and the trust will have to continue after I'm gone. So, thinking of the long term, I can select the investments myself, but would like to have them reviewed on say a quarterly basis by a broker or advisor, preferably on a fixed fee basis.- 1.5% seems too much to me, for what is such a limited service requirement. Any suggestions about who to approach, and how much such a service should cost?

Sorry, I haven't a clue. There's always the nagging thought that when you start paying for these sorts of services you end up with something being done by the adviser/manager in order to justify their fee. From my experience in the industry many clients don't take it well when they are advised to carry on holding and do nothing, which leads to excessive churning. "Don't just stand there, do something" could be the motto of many advisers.

A thought is to increase the number of investment trusts which are used by wealthy families, such as Caledonia Investments (Cayzers), where family members still hold a large proportion of the shares (almost 50%). This means that you have a group of people who have a serious financial interest and will thus pay a bit more attention to what's going on (and have more influence upon the managers) than a disparate group of small shareholders, but you're not having to pay them. Two other family investment trusts which spring to mind are Brunner (Brunner) and RIT Capital Partners (Jacob Rothschild).

Witan was originally set up for the Henderson family, I'm not sure how large their stake is nowadays (there are family members on the board). Hansa is for the Salomon family, it's a bit quirky as it has a large shareholding in Ocean Wilsons Holdings (roughly 75% of which is represented by its shareholding in a Brazilian shipping and port logistics company).

Nick Train, the manager of Finsbury Growth & Income Trust, has a large shareholding in it (the most recent annual report shows 2.04 million shares). That aligns his interests with those of the shareholders, to put it mildly.

https://www.investorschronicle.co.uk/20 ... ticle.html

https://www.moneyobserver.com/family-fo ... led-trusts

[monabri]

What you are looking for is a "basket" of investment trusts, a topic which has been discussed extensively on this forum and the previous Motley Fool incarnation. (e.g basket of 7, basket of 8 used by Luniversal). These consist of large ITs with long histories of reliable payouts, and should not require the quarterly reviews you are considering.
Not sure what you mean by the trust being "set up but not activated". Are you going to be one of the trustees (minimum two)? You imply that you are going to have a professional trustee to manage the trust. I have no experience of this, but I would have thought 1.5% reasonable for this, although a fixed fee would be preferable, especially as the amount of work will be much the same whatever the size of trust assets.
A 4% gross yield would be reasonable, but I hope you are aware that income tax will be 7.5% on the first thousand pounds of income, and a swingeing 37.5% on the remaining dividend income above £1000. Whoever is dealing with the trust will need to submit tax returns and deal with other administration issues.

I thought that tax was zero on the first £2k of dividends and then charged at 7,5% or 32.5% depending on tax bracket. Here's the info from the .GOV pages.

https://www.gov.uk/tax-on-dividends

I personally would not invest in the uk focused basket ( L'uni ) of ITs for several reasons

1. Too much UK biased and the UK is such a small percentage of the investing universe
2. Being UK biased, they are reliant on progress on just a few big companies....mostly 'elephants' whose futures are likely to be pedestrian at best..at best! ( RDSB, BATS).
3 Track record of FTSE in the last 10 years..gone nowhere.


I agree with SalvorHardin's comments about unnecessary "churning"...



I think Parky was referring to income received over £1k from savings accounts being taxed at your tax rate .

https://www.gov.uk/apply-tax-free-interest-on-savings

[Parky]

I thought that tax was zero on the first £2k of dividends and then charged at 7,5% or 32.5% depending on tax bracket. Here's the info from the .GOV pages.

https://www.gov.uk/tax-on-dividends

I personally would not invest in the uk focused basket ( L'uni ) of ITs for several reasons

1. Too much UK biased and the UK is such a small percentage of the investing universe
2. Being UK biased, they are reliant on progress on just a few big companies....mostly 'elephants' whose futures are likely to be pedestrian at best..at best! ( RDSB, BATS).
3 Track record of FTSE in the last 10 years..gone nowhere.


I agree with SalvorHardin's comments about unnecessary "churning"...



I think Parky was referring to income received over £1k from savings accounts being taxed at your tax rate .

https://www.gov.uk/apply-tax-free-interest-on-savings

There is no £2K zero tax band on trust dividend income, here is the info from the .GOV pages https://www.gov.uk/trusts-taxes/trusts-and-income-tax. It's actually 38.1% over £1000. No problem with your comment on which trusts to buy (unless the UK bounces back - unlikely in the short term). I was just referring to the principle of buying large , long-established ITs.

[Chrysalis]

There are two issues here. One is the setting up and administration of the discretionary trust - ie who are the trustees. The second is the investment strategy to be used within the Trust. These should be considered separately when you are thinking about charges.

There is nothing to stop you managing the trust investments yourself as trustee (who else is likely to be trustee?) - you can open trust accounts with Hargreaves Lansdown and probably other brokers too (but not all offer this service). Trustees can also pay for financial advice (in fact they are obliged to take financial advice as part of their duty as trustees). This could be on a fixed fee basis rather than the (extortionate!) 1.5% brokers fees you have been quoted. You can then choose your investment strategy yourself, with input from an adviser as required.

However you should also give consideration as to who will be trustees, particularly in the long term. You can appoint a professional trustee, but again that will be costly and once they are on, it will be hard to get them off. Your daughter and her future children are the beneficiaries, who do you have in mind as trustees?

[OLTB]

Rather than use ITs and pay the rather large tax rate of 38.1% for dividend income over £1,000 p.a., you could invest via an Investment Bond. As Investment Bonds don't generate income, they are perfect for Disc Trusts and you can make 'income' payments (they are treated as return of capital so not immediate taxable unless they payments exceed 5% of the initial capital invested) or assign chunks to the beneficiaries at any time. Details are here (page 14 is where some of the detail is) https://www.oldmutualwealth.co.uk/globa ... ustees.pdf

Some Investment Bonds have a wide range of funds, so you shouldn't be too limited on choice.

Cheers, OLTB.

[Kantwebefriends]

You might like to ask a specialist solicitor about the trust including a Revocable Life Interest to income for your daughter.

I understand that that would mean that the dividends would pass directly to her and be taxed as her income.

[Parky]

You might like to ask a specialist solicitor about the trust including a Revocable Life Interest to income for your daughter.

I understand that that would mean that the dividends would pass directly to her and be taxed as her income.

My understanding is that this only works if the shares are held in certificated form so that the dividend income can be mandated directly to the beneficiary and not to the Trust. If the shares are held on an investment platform they will only pay the income to an account in the Trustees name, making the Trust taxable on the income. If anyone can find a way round this I would be very interested to hear about it.

[Nocton]

The tax issue is another reason for going for a bare trust. The assets are owned by the beneficiary so they have their own tax allowances. See HL's explanation: https://www.hl.co.uk/news/articles/arch ... grandchild.

[Parky]

The tax issue is another reason for going for a bare trust. The assets are owned by the beneficiary so they have their own tax allowances. See HL's explanation: https://www.hl.co.uk/news/articles/arch ... grandchild.

I tend to agree. A discretionary trust would be more appropriate for a situation where the trustees may wish to change or add to the beneficiaries, or restrict their access to the capital after the age of 18, or maybe in the OPs case, where the trust specifies what happens to the trust funds on the death of the initial beneficiary. Can you do that with a bare trust?

[scrumpyjack]

On the investment side, I can't see any point in adding another layer of management. If you invest in Investment Trusts, they are being professionally managed so having a broker, who will probably be far less knowledgeable that the managers of the trust, reviewing it is a complete waste of money.

[Nocton]

or maybe in the OPs case, where the trust specifies what happens to the trust funds on the death of the initial beneficiary. Can you do that with a bare trust?

The point about a bare trust is that the assets in the trust are the beneficiary's. The trustees are simply in charge until the beneficiary comes of age (18). As we are talking about a child, then it is unlikely that the beneficiary would die before the trustees. I have no idea what the rules are for a child's assets if they die, but I imagine a solicitor could deal with it even with a bare trust. The more likely scenario is that the donors who are paying into the trust, unless it was simply a one-off payment, will die before the child reaches 18. In our case we have specified in our wills that the amount 'owing' will be paid into the trust just as if the donors had lived until the child was 18.

[richill]

Gosh! I've received such a wealth of valuable response to my inquiry. Thank you all for participating.
I believe I could and should do this without the services of a broker. If for some reason I am forced to use one, then its reassuring to know that there are cheaper broker services available. (StOmer)
Some of the Trust recommendations certainly resonate with me. I was a bit dispirited by a brokers suggestion that the portfolio should include non dividend paying trusts,and that we would be able to sell down to meet income requirements. I know it seems ok in theory, but I would not be happy!
I have a plan of action, and am fortified by the responses from you all.
Thank you,

Richill