Trusts

Question 1

Definition - What is a Trust?

Answer 1

A Trust is a way to hold property for a person without them having full control of it

Question 2

What are the 3 characteristics of a trust?

Answer 2

1. The assets are a separate fund - not part of the trustee’s own estate
2. Trustees (or their representatives) have a title to trust assets
3. Trustees must deal with trust property (manage it, sell it) in line with the trust deed and trust law.

Question 3

Who is the settlor? 4 points

Answer 3

1. They are the original owner of the trust property
2. They transfer legal ownership to the trustees - usually via a ‘deed of trust’ or ‘deed of settlement’
3. May also be a trustee, giving them some control over the trust property - must be to the benefit of the beneficiary and not themselves!
4. Can be a beneficiary, but this may have tax disadvantages (becomes a gift with reservation) which might defeat purpose of trust

Question 4

Who is the trustee(s)? 5 points

Answer 4

1. Legal owners of the trust property - can make claim on life policy
2. Responsibility - must use it for the benefit of the beneficiaries. They CANNOT use the property as their own
3. There can be a number of trustees - exception… When trust property is land - 2 minimum (1 if a corporation) maximum of 4
4. Must be 18 and of sound mind
5. Could use a trust corporation instead - Trust corporation cannot die - but may come with high charges!

Question 5

Name the two types of trustees

Answer 5

1. Professional trustee.
   - Have knowledge + experience to manage a trust and can work for a professional trustee firm.
   - They will not be a beneficiary to the trust eg. Accountant or Financial Adviser.
   - Can charge under professional charging clause in the deed or s.29 of Trustee Act 2000 (applies to non-charitable trusts only)
   - Trustees can be reimbursed from trust property for expenses (s.31) Provided they have been properly incurred
2. Lay trustee.
   - Individuals with no specialist knowledge - eg. relative.

Trustee could be appointed director of company the trust owns shares in. Any directors fees paid to the director/ trustee must be paid into the trust fund unless deed says otherwise. Re Macadam 1946

Question 6

Who is the beneficiary(ies)?

Answer 6

1. They are the equitable/ beneficial owner of the trust property
2. Cannot make a claim on a life policy under trust, but can claim against trustees if terms gives them entitlement to the proceeds.
3. Can be named eg (John) or described (all my children)
4. Cannot control trustees - can demand act in line with trust deed + trust accounts be audited.
5. Under Saunders v Vautier (1841) beneficiaries can bring a trust to an end providing - all agree, all of full age + mental capacity, no possible further beneficiaries

Question 7

Name the main types of beneficiary - 4 types

Answer 7

1. Absolute interest - full equitable ownership to both income + capital. Cannot be taken away
2. Life interest. Entitled to income from trust but not capital - Life tenant.
3. Remainderman. Entitled to capital after death of life tenant. Until the death of life tenant they have reversionary interest only (future interest).
4. Contingent beneficiary. Interest depends on a particular event occurring - may not occur

Question 8

What are the 2 types of trust property?

Answer 8

Most property can be placed under trust. Assets are divided into;

1. Realty - freehold interest in land
2. Personalty - can be categorised as

• Chattels real. Leasehold interest in land.
• Chattels personal - of which there are two
  1. Choses in action - intangible assets i.e life
  assurance, debt, shares
  2. Choses in possession - tangible objects
     (jewellery, art)

Question 9

Main types of trust investments - Collectives/ Shares

Answer 9

1. Selected for income and/or growth. Depends on the needs of the beneficiary
2. Under discretionary trust taxed at 38.1% (dividend income), 45% (all other income incl interest) in excess of standard rate band (£1,000)
3. CGT at 20% in excess of up to 1/2 usual annual exempt amount. £6,150 for 2020/21

Question 10

Main types of trust investments - Investment bonds

Answer 10

1. No income therefore no need to self-assess until a chargeable gain occurs
2. Benefit from 5% tax deferred withdrawals
3. Can assign to beneficiary prior to chargeable event, so can be taxed at their rates
4. Onshore bonds: 20% tax deemed taken at source (non-reclaimable)
5. Offshore bonds: benefit from gross roll up

Question 11

What is the difference between a trust and a contract ?

Answer 11

Trust

• No need for offer, acceptance or consideration
• Beneficiaries may not be aware of the trust
• Beneficiaries can be minors
• Trustees are legal owners

Contracts

• Offer, acceptance and consideration required
• All parties must be aware of the agreement
• Contract with a minor may or may not be enforceable
• Only parties to contract have legal/ equitable rights

Question 12

What are general duties and responsibilities of trustees? 3 points

Answer 12

1. Protect trust property by holding title documents
2. Ensure they are registered as legal owners for any trust property
3. Avoid conflict of interest including making personal profit. Such a transaction can be declared void by a beneficiary.

Question 13

What are the investment duties and responsibilities of trustees?

Answer 13

1. Follow specific instructions and powers given in the trust deed
2. Ensure everything they do is for the benefit of the beneficiaries, within the terms of trust deed and trust law
3. Invest trust money properly and monitor investments regularly
4. Duty to maximise the return but not to risk fund by investing in hazardous or speculative investments ie. Maximise return and safeguard assets (Cowan v Scargill 1984)
5. Take account of tax position - trust + beneficiary
6. Bear in mind interest of all beneficiaries - Present and future. MUST balance income and capital
7. Must keep proper accounts of all trust property + show to beneficiaries if required (beneficiary is entitled to reasonable information, but not to internal minutes illustrating why trustees exercised discretion in a given manner)
8. Must use utmost diligence to avoid losses and are liable to beneficiaries for any Breach of duty
9. Be honest and prudent - not attempt to invest in a way that results in them making a personal gain (if they do - pay profit to beneficiary)

Question 14

Trustee Act 2000 - investment duties + responsibilities for trustees - what were the main points?

Answer 14

S1. It established a statutory duty of care - must act in way an ordinary prudent business person could be expected to act - must invest cash wisely unless paid out immediately - the duty applies to investment powers, acquiring land, appoint agents/ nominees etc

S1. Must exercise reasonable care + skill bearing in mind own knowledge - professional trustee expected to exercise higher duty of care + skill in comparison to lay trustee.

S3. Has to invest in same range of investments as ordinary individual, unless limited by trust deed where trust was set up after 3rd August 1961. This does not apply to pension trusts, authorised unit trusts and some charitable trusts.

S4. Must pay attention to ‘standard investment criteria’ - ensure investments are suitable + diversified. Keep investments under review and vary as appropriate

Question 15

What powers does a trustee have?

Answer 15

1. Specific powers stated in trust deed - all trustees must agree to any decision - unless clause states otherwise.
2. Trustee Act 1925 contains the following statutory powers;
   - S31. Apply trust income to infant beneficiary for maintenance or education - beneficiary entitled to income at 18.
   - S32. To advance whole (prior to Oct 2014 it was 50%) of beneficiary’s share subject to provisions in the trust. If another beneficiary is entitled to income then their approval is required.
3. Trustee Act 2000 give trustees power to invest trust assets as if they were their own + own property on a freehold/ leasehold basis as an investment - the beneficiary may occupy the property

Question 16

How is a trustee appointed?

Answer 16

1. Named (appointed by) in the trust deed
2. Named in a will (usually the executors)
3. Administrators (intestacy)

Question 17

The replacement/ retirement of trustees - Trust Deed

Answer 17

1. The trust deed usually names appointer (usually settlor) with power to appoint new trustees (including themselves)
   - if no provision either surviving trustees or legal representatives of last surviving trustee will appoint new trustees
   - exception for corporate trustees who are expected to remain constant
   - in extreme cases where no other options exists, court can appoint

Question 18

The replacement/ retirement of trustees - Trustee Act 1925

Answer 18

Under S26 of the act - new trustee can be appointed to replace one who;

• has died
• has been out of UK for more than a year
• wants to be discharged
• is unfit or incapable of acting
• is a minor

Question 19

The replacement/ retirement of trustees - Appointer + beneficiary

Answer 19

An appointer can appoint themselves as a trustee to replace an outgoing trustee if the trust deed permits it (no statutory power to do so, so must be in the deed)

If no appointer is made and all beneficiaries are 18 + have mental capacity & are absolutely entitled, they can order the retirement of a trustee and say who should replace them

• applies when trustee becomes mentally incapable
• these powers exist unless deed says they do not

Question 20

The replacement/ retirement of trustees - Other

Answer 20

1. Trustee who retires should be replaced using a deed of retirement.
   - trustee can only retire without being replaced if there are at least two trustees left, or a corporate trustee who agree to the retirement (S.39)
2. Sole trustee cannot give good receipt for property - I.e at least two trustees for land or a trust Corp if want to sell the land held in trust
3. Death of trustee (S.18) - either others remain as is, or if need more, the legal representatives of the deceased can act on their behalf until another is appointed.

NOTE - the death of the trustees does not void the trust

Question 21

A Trustee’s powers to delegate - what are they?

Answer 21

1. In general - functions can’t be delegated
2. Under Trustee Act 2000 trustees can appoint agents and delegate to them any of their powers except;

• power over distribution of assets
• fee handling
• appointment of new trustees
• delegation of trustees powers

3. Trustees can appoint nominees to hold property in their name and custodians to undertake safe custody of trust assets unless deed says otherwise.
4. Trustees can delegate exercise of any powers under a general power of attorney (Trustee Delegation Act 1999) providing;

• it is for less than a year
• it gives written notice of power and reason for it to the appointer and all other trustees, 7 days prior to being it into effect
• note the donor remains liable for the acts and defaults of their attorney

Question 22

Trustees diligence and integrity

Answer 22

1. If a trustee departs from statutory duty of care they can be held liable for loss caused by own breach of duty, including where they have failed to act
2. They are not liable to acts of other trustees - unless they appointed them without due care
3. Standard of care lower for discretionary acts

• must act in good faith with the diligence that an ordinary person of business would use in managing their own affairs - Speight v Guant 1883

Compared to

• an ordinary prudent person would take if they were minded to make an investment for the benefit of other people for whom thy felt morally bound to provide (Whiteley 1886)
  4. Trustee should not buy or sell to the trust to avoid allegations of conflict of interest/ personal gain
• transaction is voidable by court
• Self-dealing acceptable if deed allows it
• can buy beneficiary’s interest from beneficiary unless trustee is abusing their position by doing so

Question 23

What happens with a breach of trust?

Answer 23

1. Beneficiary can take legal action if breach has been committed
2. Court can issue injunction to prevent trustee taking the course of action + order return of property wrongly transferred + order restitution
3. If guilty, trustee must compensate beneficiaries

• if trustee was acting honestly + reasonably court may relieve then of liability (TA 1925 S25.)
• trustee exemption clauses are now widely used for accidental breaches (Armitage v Nurse 1998)

4. If 3rd party helps breach/ persuades trustee to do so - 3rd party is liable for consequential loss if the party was dishonest and aware of the trust or of the facts which gave rise to the breach

Question 24

What are the various types of trust?

Answer 24

1. Trust expressly created either in writing / orally (Express Trust)
2. Trust not expressly created. Implied by the actions or intentions of parties (Implied Trust)
3. Similar to an implied trust. Where one person buys property in the name of another and holds it for them (Presumptive Trust)
4. Exists not to benefit an individual but a purpose. Such as to maintain a building (Purpose Trust)
5. Property held for a succession of interests e.g. spouse, then children (Successive Trust)
6. A trust that is imposed by law (Constructive Trust)
7. A trust that arises where there is a failure of the trust on which the property is held (Resulting Trust)

Question 25

What is a Bare (Absolute trust)?

Answer 25

Assets transferred by settlor to legal ownership of trustee (nominee) for benefit of beneficiaries absolutely

Question 26

What is a discretionary trust?

Answer 26

- Type of relevant property trust - No beneficiary has a right to income or capital - Trustees have power to accumulate or distribute income and/or capital at their discretion - May be subject to IHT lifetime, periodic and exit charges if in excess of the NRB

Question 27

What is a relevant property trust?

Answer 27

Most trusts created on/after 22nd March 2006 that create flexible / successive / contingent interests are relevant property trusts and therefore potentially subject to IHT lifetime, periodic and exit charges Exceptions are where property is in: an IiP trust set up before 22.3.06, is subject to a transitional serial interest made before 5.10.08, an immediate post-death interest (IPDI) – basically a trust created by will/intestacy, see below, or a trust for a disabled person, bereaved minor, 18 – 25 trust

Question 28

What is a Life interest and interest in possession trust?

Answer 28

Interest in possession (IiP) = the right to income of the trust fund or the right to use trust assets (Pearson v IRC 1980) – beneficiaries are life tenant(s) and remainderman(men)

Question 29

What is an Immediate post-death interest (IPDI) trust?

Answer 29

- A trust where a person has an IiP and settlement was effected by a will/intestacy or beneficiary became beneficially entitled to IiP on death of the testator/intestate - IPDI trusts are not treated as relevant property trusts and no lifetime/periodic/exit charges will apply

Question 30

What is a Power of appointment (flexible) trust?

Answer 30

- Trustees have power to alter beneficial interests within class of potential beneficiaries - Flexibility advantageous - Default beneficiary has right to income /possibly capital if no other appointment is made - Avoid including settlor as potential beneficiary to avoid reservation of benefit for IHT

Question 31

What is an accumulation and maintenance trust ?

Answer 31

- Used to enjoy beneficial IHT treatment - One or more beneficiary becomes legally entitled to capital / income prior to 25 - Prior to that income held by trustees but can be applied for maintenance/ education / benefit of beneficiary - Could last no longer than 25 years unless set up for benefit of grandchildren of a common grandparent

Question 32

What is a statutory trust?

Answer 32

Created under statute e.g. Married Women’s Property Act 1882 or trust created for minor under intestacy rules

Question 33

Why are trusts used? Tax planning, Intestacy, Wills

Answer 33

Tax planning/ Mitigation; Assets transferred into trust are outside estate after 7 years. May be no immediate charge if transfer is exempt or within nil rate band Income-producing assets could be placed into trust to avoid tax being paid at the higher rates (although may not work if beneficiary is spouse of settlor / settlor’s minor children) Intestacy; If no will is made, assets left to minor children are placed under trust Wills; - Asset left to minor under will is held in trust until 18 (unless will states executors can make payment to their parent) - Can leave instruction in will that an asset may not be given outright to a beneficiary until a condition is met (e.g. are 25, marry) – will trust

Question 34

Why are trusts used? Charities, Property, Disabled

Answer 34

Charities; Charities use trusts for ease of administration and indefinite continuance of existence Property; Minors and mentally incapacitated cannot hold property. Property can be held under trust for them so they can enjoy the benefit of it Disabled; Trusts for vulnerable beneficiaries benefit from tax advantages

Question 35

Why are trusts used? Business + Land

Answer 35

Protect business from creditors; Trust property is often protected from bankruptcy (because it belongs to the trust rather than the settlor), unless there has been fraud Ownership of land; Land can be held as either: 1. Joint tenants – both owners have identical and equal interest in property. When one dies, property belongs to surviving owner (right of survivorship). - No transfer of value for IHT purposes. - JT severed on bankruptcy 2. Tenants in common – on death deceased’s share of property goes to their estate and is distributed in line with terms of their will / rules of intestacy. - Transfer of value for IHT - JT can be converted to TIC during lifetime if desired

Question 36

Advantages of a trust ?

Answer 36

1. Reduces liability to IHT 2. Keep element of control over assets that have been given away 3. Keep some access to assets that have been given away 4. Prevent assets falling into the wrong hands 5. Flexibility. Discretionary trusts mean that settlor can put off decisions regarding ultimate recipient of assets

Question 37

Disadvantages of a trust ?

Answer 37

1. Usually need to survive 7 years to be effective 2. May not be able to change trust once established - bare trusts 3. Access may be restricted 4. Income / CGT rates can be higher for trusts 5. Potentially ongoing IHT charges, entry, exit + periodic on 10th anniversaries.

Question 38

Who is a protector?

Answer 38

Usually offshore trusts have a protector. 1. Role is to ensure trustees follow settlor's intentions 2. Can veto decisions/ remove trustees Protector not usually a trustee. Can be useful when the trustees are a professional firm. Can remove one firm and appoint another say