There are more reasons now than ever as to why high quality Trust Administration matters. The number of lifetime trusts being created has fallen as have the sums being put into trust. As a result, the administration costs of a trust are scrutinised even harder. In this climate, keeping costs down through driving efficiencies in trust administration functions becomes even more crucial. Outsourcing can provide the solution.
While the provision of advisory services to clients on how to use trusts effectively may focus many businesses’ attention, the need to deliver high quality trust administration (TA) has no less importance. Advisory services may lie at the glamorous end of the trust service spectrum, but without sound TA, client service may be adversely affected and future business even potentially lost.
There are more reasons now than ever as to why high quality TA matters. Since the Finance Act 2006, the number of lifetime trusts being created has fallen as have the sums being put into trust. As a result, the administration costs of a trust are scrutinised even harder. In this climate, keeping costs down through driving efficiencies in TA functions becomes even more crucial.
What has not changed is the fact that TA does not stop the moment the official documents have been drafted and the related trust set up. It is ongoing for the life of the trust (potentially up to 125 years). The impact of even a marginal improvement in administration efficiency over such a long period should therefore not be underestimated.
It is essential for quality TA teams to have good knowledge of trust issues and trustee responsibilities for the smooth management of trusts. It is worth highlighting some of the extensive skills and knowledge a TA outfit should possess.
- Full knowledge and understanding of the terms of the trust and the general law;
- Knowledge of the interests of each and every potential beneficiary;
- Accurately and effectively recording trustee decisions;
- Keeping up to date with any changes in the law and taxation of trusts;
- Full awareness of the obligations and duties imposed on a trustee and where breaches can arise;
- Sound knowledge of investments and The Trustee Act 2000;
- Providing annual accounts to trustees/beneficiaries reporting the value of the trust fund and transactions during the year;
- Notification to HMRC of the existence of the trust and ensure tax returns are filed and liabilities paid throughout the duration of the trust;
The experienced trust team will be fully versed in the above non-exhaustive list. Without sufficient administration one is unable to appropriately advise trustees and therefore the potential for a breach of trust is increased.
Trust Administration Today
Just as many other areas of business have evolved, TA has also come a long way over the years. Gone are the days of trust accounts being completed by hand or data being laboriously manipulated in Excel spreadsheets. Gone too are the days of manual tax calculations and the completion of returns. Instead, trust administrators have access to specialist trust accounting software systems enabling them not only to create year end accounts and returns efficiently, but also to file tax returns quickly online. Not only is the efficiency of TA improved through these advances, but so too is the accuracy of the information produced.
There are a number of specialist trust software systems in the market. They provide a platform for the bookkeeping of accounting records, trust information management and trust accounts and tax return production. These systems allow for information to be recorded immediately and reported as and when required. There is clearly a cost in having these systems in terms of licensing and staff training. However, where businesses provide administration for a large book of trust funds the costs will generally justify the investment into software.
Procuring a trust system is only the first step in providing efficient TA. As with all systems, they require constant investment in the form of system development and staff training to ensure that they are used to their full capacity. Changes in legislation and/or tax reporting will by and large be followed by system updates. Meeting these changes and using software to full capacity ensures that the efficiencies and benefits from these systems are maximised.
Trust software systems have been in existence for a long time now and they too have developed to a phenomenal level so that data entry is now limited and exchanged for the automatic posting of data. These systems not only allow a better place to record data, but to speed up data inputting as well as verifying the accuracy of information entered. With the availability of comprehensive securities data feeds, data management is significantly improved. A robust data feed virtually eliminates the need for manual investment data entry. These feeds facilitate the downloading of fast, reliable and high quality data transfer into software systems providing both historical and up to date prices for a full range of stocks. In addition they can generate automatic entries for dividends, rights and bonus issues and other corporate transactions, globally across each trust client.
The elimination of manual data entry using such a feed saves a considerable amount of time, taking the efficiencies to a new level. Furthermore it provides an accurate 3rd party test on information contained in the statements received from asset managers. Not only is the accuracy of information improved but also the reporting functionality which is beneficial to clients.
With up to date and accurate trust accounting data, the trust accounts and trust tax returns can also be completed instantly at the push of a button, thus eradicating the days of manual completion. Trust accounts can now be completed very quickly after the year end and tax returns ready for submission at any time. Through the automation of data and reporting, the annual trust compliance process can be completely simplified, standardised and streamlined to ensure maximum efficiency for both TA processers and ultimately the client.
A question that faces many businesses is whether the time and investment into achieving a streamlined TA service is something that fits into their plans and the business’s strategy going forward. If the answer to this is in the negative, there is another option that allows businesses to benefit from efficient TA, namely outsourcing.
Outsourcing as a Driver of Business Development
Outsourcing an arrangement between an organisation and a service provider by which that service provider performs a process, a service or an activity which would otherwise be undertaken by the organisation itself. Outsourcing is now an established and mature business model, long applied particularly to accounting functions such as payroll administration. It is also highly appropriate in the private client arena for trust administration.
As the private client market has become more competitive, so firms are increasingly seeking new ways to gain an advantage and enhance business development. Client retention and development has become even more significant in today’s competitive market. One strategy is to outsource the back office TA functions, an option that delivers benefits for both businesses and their clients.
Significant advantages can be gained by adopting an outsourced service model. By transferring the TA to a specialist service provider, the business’s attention can be placed more firmly on the activities that add real value to clients, and that support the future growth and development of the business most effectively.
Many benefits can flow from outsourcing activities, reduced costs being one of those most frequently identified. Lower costs are achievable because a high quality trust administrator will have leading systems and processes and highly trained specialist staff. They are therefore likely to be able to achieve significant process efficiencies. Cost savings bring obvious bottom line benefits for businesses. However, some of the cost savings achieved through the outsourcing of TA could be invested in new business development activities or core roles that have a direct impact on client service, thus enhancing the firm’s ability to attract and retain new valuable clients.
Those process efficiencies also result in a higher quality of TA. A high level of process automation, for example, not only saves time, effort and cost, but also increases the accuracy and reliability of management information. Trust accounts and other accounting and tax information can be provided as and when agreed with firms in order to meet clients’ needs. The provision of accurate, timely information has become a key requirement for modern business success. In the area of TA, with its many complexities and compliance requirements, using a quality service provider can make sound strategic sense. Not only does it provide the quality of service clients expect, but it also provides valuable peace of mind to those running businesses that their compliance responsibilities will be properly met.
Support for Business Development
Though reducing costs and enhancing service quality are valuable contributors to business success, outsourcing goes further in terms of supporting business development. One key advantage of using an outsourced TA provider is that they can offer a flexible and scalable service. A business can therefore set out to attract new clients confident that they will have the back office support they need. They are also freed from concerns about achieving the optimal timing of recruitment or carrying over capacity in anticipation of future growth.
With the transfer of trust administration to an expert third party, management time is suddenly freed up to focus on core business activities and new business generation. Liberation from routine administration tasks and supervisory duties, can release energy and time to pursue new business strategies or follow through on established strategies more thoroughly. Survey research among users of outsourced services has found that the majority believe outsourcing enables them to implement ideas, strategies and change at a faster and more controlled rate.
Control is an important issue to consider. While those unfamiliar with outsourcing models could assume that outsourcing might lead to a loss of management control, the opposite has actually been found to be true. A survey by consultancy Accenture, for example, found that 86% of participants considered outsourcing to give their organisation more control over strategic business results in a range of critical areas, such as shareholder value and revenue.
Another understandable, if misplaced, fear can be that outsourcing exposes businesses to the risk of losing clients. On the contrary, what clients should note is the high quality of information they receive in terms of trust statements and accounts, and the reliability and efficiency with which trust tax affairs are handled. In doing so, their loyalty to their business should only be strengthened, not least because the business retains full control of the face-to-face relationships with their clients.
As already noted, outsourcing is far from a new business model. It has been applied to many back office functions for many years. An outsourced service can be tailored to meet individual business needs. The scope could potentially include completion of tax returns, calculation of tax liabilities, preparation of tax certificates, maintenance of accurate, up-to-date accounting records, and preparation of trust accounts. Other routine administrative activities could also be added, as well as more specialist technical activities such as the completion of inheritance tax computations and proportionate and exit charge calculations. Businesses can specify the outsourced services they require, perhaps expanding these over time as comfort with the model grows through its proven impact.
If the timely reporting of accurate information is possible, it is increasingly being demanded by trustees and to some extent beneficiaries also. We live in an increasingly litigious era, where contentious trust issues can and do arise. Trustees see little value in receiving a set of trust accounts a year after the period end. How does this enable them to keep an appropriately watchful eye to guard against the misappropriation of funds? They need timely information to enable them to meet their trustee responsibilities and mitigate litigation risks.
Timely information is demanded by trustees’ advisers too. Without high quality, accurate and up-to-date information, advising trustees on how to maximise any planning opportunities that exist is extremely difficult.
It is vital therefore to ensure that TA teams are adequately resourced and that continuous investment is made into their development. TA requirements continue to evolve, and so too should the capabilities of the people charged with meeting those requirements.
Achieving this level of professionalism is a big commitment, yet one that must be faced if the interests of clients are to be respected and protected over time. However, businesses may not necessarily, wish to devote the necessary resources (in terms of both management time and investment in systems, processes and trained personnel) needed to achieve high standards of TA. They may see value in focusing their attention on core business activities, including the implementation of business development plans.
Outsourcing can provide the solution. By turning to specialists in TA, firms gain access to the high quality administrative functions their clients expect, while freeing up their own resources to focus on value-adding business activities. Outsourcing can therefore rightly be considered a proven strategic model for supporting the development of successful private client businesses.
By Raj Kataria TEP