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The analysis

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Paul and Karen attend an initial meeting with one of Bloomsbury's Certified Financial Planners. At this meeting the planner explores their goals for the trust funds and their values, particularly towards money and how they wish to provide for Michael's future.

They then complete a psychometric risk-profiling questionnaire, which Bloomsbury analyses to understand their attitude to risk. This allows the planner to understand the maximum risk with which they can be comfortable and thus the likely return that they might reasonably expect from the trust consistent with that. This is important since they must take legal responsibility for their actions in relation to the trust and they must therefore be comfortable that the returns sought are consistent with the risk they are prepared to take on Michael's behalf.

Bloomsbury makes further observations about John's situation as follows:

• While gilts offer the advantages of certainty of income and capital return, they are held within an actively managed portfolio which tends to negate these advantages. The costs of ongoing management also contribute towards reducing the return received by the trustees and since the asset class is likely to have relatively low returns, their impact is proportionately greater than for assets with higher returns. The fact that several of the gilts pay a relatively high income also tends to exacerbate the trustees' income tax liability.
• The discretionary management service is expensive (c.2.9% p.a. in total) due to the layers of costs involved, as most of the underlying funds are actively managed and there is an additional layer of costs for the management service. This means that a large part of the extra return which they might expect to receive from accepting the risk of holding equity investments is being consumed by the costs of doing so.
• A similar situation applies to the directly-invested equity portfolio, although the exact costs are hard to determine due to the impact of dealing charges. However, the holding of individual shares is already giving rise to periodic CGT liabilities as the portfolio is managed, a situation which can be expected to worsen in the long term as equity market returns return to positive territory.
• Since the entire portfolio is not being managed in an holistic manner, there is some duplication of holdings between the different elements, which is adding risk of which the trustees are unaware and over which they have no control.
• The two properties are providing an undiversified exposure to the residential property sector and are also illiquid and have ongoing costs for management, maintenance and insurance as well as being expensive to purchase and sell.
• In December 2003, the Inland Revenue proposed a number of changes in relation to simplifying the taxation of trusts, which included the issue of trusts for disabled beneficiaries. Although the intention is that the proposals will not come into effect before April 2005, it is suggested that the trustees of such trusts should be able to elect to have the beneficiary treated for tax purposes as owning all the trust assets. This would avoid income in excess of that which is paid out being taxed at the rate applicable to trusts (now 40%) and allow the trustees use of Michael's full personal allowance and income tax bands as well as his individual annual CGT exemption.