Trusts

Question 1

Characteristics of a trust - key points:

Answer 1

• Assets are a separate fund i.e. not art of a trustee’s own estate
• Trustees (or their representatives) have title to trust assets
• Trustees must deal with trust property (manage it, sell it) in line with trust deed and trust law

Question 2

Overview of a Trust - The settlor - key points:

Answer 2

• Original owner(s) of trust property
• Transfers legal ownership to trustees
  
  • Usually via ‘deed of trust’ or ‘deed of settlement’
• May also be a trustee, giving them some control over trust property
  
  • This must be to the advantage of the beneficiary not to themselves
• Can be a beneficiary, but this may have tax disadvantages (becomes gift with reservation) which might defeat purpose of trust
• Offshore trusts may also have a ‘protector’
  
  • Role to ensure trustees follow settlor’s intentions
  • Can veto trustee decisions/ remove trustees

Question 3

Overview of a Trust - The trustee(s) - key points:

Answer 3

• Legal owners of trust property
  
  • Can therefore, say, make a claim on a life policy
• Must use it for benefit of beneficaries
  
  • Cannot use it as their own property
• Can usually be any number of trustees
  
  • Exception when trust property is land: minimum is 2 (1 if trust corporation) maximum 4
• Only legal criteria for trustee: must be over 18 and of sound mind
• Could use a trust corporation instead of an individual
  
  • Trust corporation cannot die, has expertise but may have high charges
• 2 types of trustees - professional and lay
  
  • Professional trustees have professional knowledge/ experience to manage trust, may work for professional trustee firm, will not be beneficiary of trust.
  • Lay trustees are individuals with no specialist knowledge; e.g. relatives
  • Lay trustees cannot charge, professional ones can.
    *

Question 4

Overview of a Trust - The beneficiary(ies) - key points:

Answer 4

• Equitable/ beneficial owner(s) of trust property.
  
  • Cannot, therefore, make a claim on a life policy under trust, but can claim against trustees if terms of trust gives them entitlement to proceeds.

Question 5

Main types of beneficiary:

Answer 5

• Absolute interest
  
  • Full equitable ownership to both income and capital.
  • Cannot be taken away.
• Life interest
  
  • Entitles to income from trust but not capital.
  • Life tenant.
• Remainderman
  
  • Entitled to capital after death of life tenenat
  • Until then have reversionary interest only.
• Contingent beneficary
  
  • Interest depends on particular event that may or may not occur.

Question 6

Beneficiary(ies) - powers:

Answer 6

• Beneficaries can be named (John Smith) or decribed (my grandchildren)
• Cannot control trustees
  
  • Can demand they act in line with trust deed and trust accounts be audited
• Under Saunders v Vautier (1841) beneficiaries can bring a trust to an end providing:
  
  • all beneficiaries are ascertained
  • no possibility of further beneficiaries
  • all of full age and mental capacity
  • all agree

Question 7

Trust property - what can (and can’t) be trust property?

Answer 7

Most property can be placed under trust (not ISAs though). Assets divided into:

• Realty - freehold interest in land
• Personalty - other assets categorised as
  
  • Chattels real - leasehold interest in land
  • Chattels personal
    
    • Choses in action - intangible assets (life asurance, debt, shares)
    • Choses in possession - tangible objects (jewellery, art, antiques)

Question 8

Main types of trust investments - key points and features:

Answer 8

Collectives/ Shares

• Selected for income and/ or growth depending on needs of beneficiary
• Under discretionary trust taxed at 38.1% (dividend income), 45% (all other income) in excess of standard rate band.
• CGT at 20% in excess of up to 1/2 usual annual exempt amount.

Investment bonds

• No incometherefore no need to self-assess until a chargeable gain occurs
• Benefit from 5 tax-deferred withdrawals
• Can assign to beneficiary prior to chargeable event so can be taxed at their rates
• Onshore bond (20% tax at source)
• Offshore bonds: benefit from gross roll up

Question 9

Trust and contract - main differences:

Answer 9

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 10

General duties and responsibilities of trustees:

Answer 10

• Protect trust property by holding title documents
• Ensure they are registered as legal owners for any trust property
• Avoid conflicts of interest including making personal profit as such a transaction can be declared void at request of beneficiary.

Question 11

Appointment of trustees ( at outset) - three scenarios:

Answer 11

• Names (appointed by) in trust deed
• Named in will (usually the executors
• Administrators (intestacy)

Question 12

Replacement/ retirement of trustees - key points:

Answer 12

• The trust deed usually names appointer (who can be the settlor) with power to appoint new trustees (including themselves):
  
  • If no provision either surviving trustees or legal personal representatives last surviving trustee will appoint new trustees
  • Exception for corporate trustees who are expected to remain constant
  • In extreme cases where no other option exists, court can appoint trustees

Question 13

Appointment of new trustees to replace another - Trustee Act 1925, s.36 - key points:

Answer 13

Under the Trustee Act 1925, s.36 a new trustee can be appointed to replace one who:

• Has died
• has been outside the UK for more than a year
• Wants to be discharged
• Refuses to act
• Is unfit or incapable of acting
• Is a minor

Question 14

Trustees powers to delegate - key points:

Answer 14

• Generally trustees functions cannot be delegated
• under TA 2000 trustees can appoint agents and delegate to them any of their powers except:
  
  • power over trust asset distribution
  • fee handling
  • appointment of new trustees/ nominees/ custodians
  • delegation of trustees’ powers
• Trustees can appoint nominees to hold property in their name and custodians to undertake safe custody of trust assets/ documents unless deed says they cannot
• 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 appointer and all other trustees within 7 days of it being ptut into effect
  • donor remains liable

Question 15

Types and uses of Trusts - there are a number of ways in which a trust can come about:

• Express
• Implied
• Presumptive
• Purpose
• Successive
• Constructive
• Resulting

Answer 15

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

Question 16

Types of trust - bare and discretionary:

Answer 16

• Bare Trust
  
  • Assets transferred by settlor to legal ownership of trustee.
  • Benefit of beneficaries absolutely.
• Discretionary
  
  • Type of relevant property trust
  • No beneficiary has the right to income or capital
  • Trustees have power to accumulate or distribute income/ capital at their discretion
  • May be subject to IHT lifetime, periodic and exit charges

Question 17

Relevant property trust - key features:

Answer 17

• Trusts created on/after 22 March 2006 that create flexible/ successive/ contingent interests are relevant property trusts (i.e. discretionary)
  
  • Therefore potentially subjct to IHT, periodic and exit charges
• Exceptions are where property:
  
  • is in an IiP trust set up before 22 March 2006,
  • subject to transitional serial interest made before 5 October 2008
  • IPDI applied (trust created by will/ intestacy)
  • or trust for disabled person/ breaved minor/ 18-25 trust

Question 18

Life interest and IIP trusts - key points:

IIPDI trusts - key points:

Answer 18

IIP

• IIP = right to income of the trust or the right to use trust assets
• Beneficiaries are life tenant(s) and remainderman(men)

IPDI

• Trust where person has an IIP and settlement was affected by will/ intestacy or beneficiary became benficially entitled to IIP on death of testator/ intestate
• IPDI trusts are not treated as relevant property trusts

Question 19

Power of appointment (flexible) trusts - key points:

Answer 19

• Trustees have power to alter beneficial interest within class of potential beneficiaries
• Flexibly 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 20

Accumulation and maintenance trusts - key points:

Answer 20

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

Question 21

Trst rules - three certainties:

Answer 21

• Words
  
  • must unmistakably show that a trust is intended
• Subject matter
  
  • must be certain with property clearly identifieid
• Object must be certain - i.e. beneficiaries
  
  • they can be named
  • described as a class
    
    • wording should be precise capable of legal definition e.g. wife, civil partner
    • children includes illegitimate children but not step-children
  • does not apply to charitable trusts

Question 22

Overseas trusts - key points:

Answer 22

• Trust created overseas subject to laws of that country
• May be tax advantageous if not UK domociled/ deemed domiciled
• Not all countries recognise trusts
• Creation of trust with foreign residence trustees is usually a transfer of value for IHT
  
  • Chargeable unless
    
    • IHT exemption arises
    • property is ‘excluded property’ (property overseas and non-dom
    • HMRC must be told when trust created

Question 23

Excluded property trust - key points:

Answer 23

• Offshore discretionary trust for UK tax resident but not UK dom/deemed dom
• Rin-fence non-UK assets and protect them from UK tax on their death
• Remain excluded even if settlor is a beneficiary and later becomes dom/deemed dom providing
  
  • trust created when non-dom
  • further property added when non-dom
  • no further assets added once UK dom
  • residence status irrelevant

Question 24

Excluded property trust - taxation treatment:

Answer 24

• If EPT criteria is met then:
  
  • Transfers into EPT are not transfers of value for IHT
  • Trust not subject to periodic/ exit charges
  • Beneficiaries can include settlor, spouse, civil partner, children and will not be a gift with reservation
  • On settlor’s death EPT outside the estate (unless returning UK dom on/ after 6 April 2017)