Operating your own trust? Tread with care

words: Gordon Swan

Since its formation in 1989, Golden Charter has helped many independent funeral directors transfer customer funds for future funerals to the independently managed Golden Charter Trust.

This became a particularly significant benefit in 2002, when a change to the law stated that cash received in advance for funerals had to be independently safeguarded under strict rules overseen by the Funeral Planning Authority (FPA).

It was not unusual for Independents to take instructions and payment from families to cover funeral costs at a later date. However, with changes to the law rendering this practice illegal where the money is not held according to the strict rules set out by legislation, the vast majority of funeral directors affected were eager to transfer the funds to a secure trust, relieving themselves of any burden. Even in recent years, thousands of plans have been transferred to the Golden Charter Trust, with this practice continuing.

While it’s important to note there is nothing illegal in funeral directors operating their own trusts, there is a series of strict requirements for doing so, including annual auditing, actuarial reporting and the need to employ independent investment managers.

Furthermore, it will come as no surprise to learn that meeting these obligations can be costly. One of the main advantages of holding planholder funds in the trust of an established pre-paid funeral plan provider is that you can benefit from economies of scale inaccessible to small, independent businesses.

Graeme McAusland, Chief Executive of the Funeral Planning Authority, explained: “I get asked fairly regularly by funeral directors and others about setting up their own funeral planning companies and trusts. A key question I always ask is what are the likely volumes of plans they intend to sell?

“The reality is that to run a trust properly and in line with the basic rules, there are a number of fixed costs that have to be met. If seeking registration with the FPA, these fixed costs will be higher. Importantly, these costs are generally for professional services and thus are never trivial. Tens of plans a month could result in fixed costs eating into the value of the trust assets in a disproportionate manner.

“So, while we would never say don’t set up your own trust, we would say take care to ensure you are doing it properly. This means ensuring you really understand how the finances will impact your business and your prospective customers.”

And that’s before you consider the practicalities and potential consequences. How would you choose your professional advisers? How, when starting from scratch, can you profile your expected mortality rate? What would you do if you do if you wanted to sell your business? At present, Parliament is debating whether additional regulatory safeguards will be needed in the future. How onerous might these be?

What is clear is that there are numerous questions to ask before making any decision to establish your own trust.

If you are considering your options for funds already held, perhaps you should speak to Drew McAllister, National Sales Manager, on 07711 368 114, and he will be happy to talk through your options with you.

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