1) Structure of a trust and the roles of the main parties Flashcards
Describe the legal definition of a trust (6)
- Its a arrangement where the settlor/s
- create a legal obligation
- over property
- that requires the trustees
- to deal with property over which they have control
- for the benefit of the beneficiaries
- any one of the beneficiaries may enforce the obligation
Describe the 4 types of beneficial interest an individual could be entitled to under a UK trust (12)
ABSOLUTE INTEREST - Beneficiary has full equitable ownership to income and capital that cannot be taken away
LIFE INTEREST/INTEREST IN POSSESSION - beneficiary entitled to income/enjoyment from the trust for life but has no entitlement to capital
REMAINDERMAN/REVERSIONARY INTEREST
Beneficiary is entitled to income and capital after the death of the life tenant/once life interest comes to an end
CONTINGENT INTEREST
Beneficiary’s interest depends on the occurrence of a particular event that may never come to fruition
Explain how a trustee of a non charitable trust can delegate their powers (2)
Trustees may delegate any or all of their ‘functions’ to an agent
State 5 powers that the trustees of a non charitable trust CANNOT delegate (5)
- a function relating to the distribution of the trust assets
- a power to allocate fees or other payments to capital or income
- a power to appoint a trustee
- a power conferred by the trust instrument or any other enactment which permits a delegation of trustee functions
- or to appoint a nominee or custodian
Explain the benefits of placing a life insurance policy under a discretionary trust for family protection purposes (9)
- the policy is usually outside the policyholder’s estate for IHT purposes
- the policy proceeds can be paid without having to wait for probate
- providing there is at least one surviving trustee
- the settlor does not have to decide at outset who will benefit/there is a class of potential beneficiaries/unborn/minors
- retain flexibility over who benefits
- how much they receive
- when they receive it
- the settlor can be a trustee and retain some control during their lifetime
- protection from divorce /bankruptcy/spendthrifts
State 5 advantages of creating a trust (5)
- IHT mitigation/reduces IHT liability
- Keep some control over gifted assets/as trustee
- Keep some access to gifted assets (loan trust/DGT)
- Prevent assets falling into wrong hands at wrong time/bankruptcy/spendthrifts
- Flexibility/put off decisions regarding ultimate recipient
- Avoid probate
- Protect minors and beneficiaries
State 5 disadvantages of creating a trust (5)
- Access may be restricted depending on trust
- May not be able to change trust once established
- Usually need to survive for 7 years to be effective for IHT purposes
- Potential for immediate/ongoing IHT charges
- Income and CGT rates can be higher for trusts
- Costs/Admin
How can the admin of a trust be continued in the event of the death of 1 or more trustees (7)
- A trust is not maid void by the death of all trustees
- Their powers can be exercised by the surviving trustee(s)
- If a sole trustee dies, their legal representative can act as trustees until an appoint is made by the appointer/continuing trustees
- If no appointer was specified in the trust deed, or if they are now dead, the legal representative can act as trustees or can appoint replacement trustees
Describe the circumstances, excluding death, in which a new trustee can be appointed (6)
If the existing trustee:
- remains out of the UK for more than 12months
- desires to be discharged
- refuses to act
- is unfit (e.g. has become bankrupt)
- is incapable of acting (e.g. mentally incapacitated)
- is an infant
State 3 benefits and drawbacks of appointing a corporate trustee to administer the trust rather than a friend (6)
Benefits
- They have knowledge and experience to manage the trust
- They will not be a beneficiary/unbiased
- Continuity/ they cannot die
Drawbacks
- Charges may be disproportionate for smaller/simpler trusts
- They may be less flexible/may result in disputes with beneficiaries
- Lack of detailed background knowledge of settlor/beneficiaries
State 8 drawbacks of transferring a share portfolio into a discretionary trust for an individual in poor health
- Immediate IHT liability at outset/periodic/exit charges may apply
- Must survive 7years for the CLT to be outside the estate/ free from IHT
- Loss of control over share portfolio
- No access to dividend income
- May not be able to access funds/capital to pay for care
- Complexity/additional admin
- Potential CGT liability at outset
- Income will be taxed at the trustees rates/higher rates
State & describe 3 certainties that need to be present for a trust to be valid (6)
- Words/intention
- Intention to create a trust put in writing
- Subject matter
- Property that is being settled into a trust
- objects
- Beneficiaries of the trust
Explain the 3 main methods by which trustees can be appointed (3)
- A trust created by deed; initial trustees appointed by the deed
- A trust created by a will; the will should name the trustees
- A trust set up under the laws of intestacy; the administrators will be the trustees
Describe how the legal ownership of property will pass following death if joint tenants vs tenants in common (6)
Joint
- The property will pass to the spouse because of the ‘right of survivorship’ as the individuals will have equal interest in the property
Tenants in common
- The deceased’s share of the property will pass as part of their estate to the children as directed in the will
Describe and give 2 examples of choses in action (3)
Intangible assets/not physical in nature
- Life insurance policies/investment bonds
- Capital redemption policies
- Debts/fixed interest securites/corporate bonds
-Reversionary interests
- Shares in a company/collective investments
