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CII J02 > 1 - Trusts > Flashcards

1 - Trusts Flashcards

1
Q

Definition of a Trust

A

A trust is a legal obligation binding a person (the trustee) to deal with property (the trust property) transferred by the settlor, over which they have control, for the benefit of certain people (the beneficiaries).

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2
Q

Two types of trust property

A

Realty: Freehold interest in land

Personalty: Everything else

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3
Q

Types of Personalty

A

Chattels Real

Leashold interest in land

Chattels Personal

Choses in action - Intangible assets (shares, life assurance policies etc.)

Choses in possession - Tangible assets (furniture, works of art etc.)

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4
Q

5 differences between trusts and contracts

A
  • Offer and acceptance are not needed for trusts;
  • No consideration is required for a trust;
  • All parties must be aware of a contract, but beneficiaries may not know about a trust;
  • Minors can be benficiaries, but contracts with minors are not enforceable;
  • Trustees are legal owners but beneficiaries can enforce trust terms, for a contract only the parties to the contract have any rights under it.
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5
Q

Who is the settlor?

A

The settlor is the original owner of the property who transfers ownership to the trustees.

They are often also a trustee, but don’t need to be.

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6
Q

What is a protector?

A

A protector is sometimes established for offshore trusts, they have the power to veto trustees decisions or remove trustees.

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7
Q

Definition of trustees

Number

Requirements

2 types of trustees

A

Trustees are the legal owners of the property

Usually can be any number of them, unless the property is land.

Must be 18 or over and of sound mind.

Can be either individuals or corporations.

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8
Q

Number of trustees required if trust property is land

A

Usually a minimum of 2, maximum of 4.

However you can have a single trustee if it is a corporation.

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9
Q

Advantages (3) and disadvantages (3) to a corporation as a trustee

A
  • Corporations cannot die;
  • they have professional expertise;
  • no conflicts of interest.

Disadvantages:

  • Disadvantage is the scale of charges;
  • They may not understand wishes of the deceased/beneficiaries;
  • Process may be slower.
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10
Q

Summary of the duties of trustees

A

To hold trust property and administer it for the benefit of the beneficiaries, as directed by the provisions of the trust.

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11
Q

Trustee Duties

What are the 3 categories of trustee duties?

A
  • General duties (to do with charges and responsibilities);
  • Administrative duties (registering title etc.);
  • Investment duties (looking after the investment assets).
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12
Q

Trustee Duties

What are the 5 general trustee duties?

A
  • Act for benefit of beneficiaries;
  • Follow the deeds of the trust (or general law);
  • Abide by statutory duty of care;
  • Act in the way a prudent business person would;
  • Only charge fees if they are professional trustees.
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13
Q

Trustee Duties

What are the 4 investment related trustee duties?

A
  • Invest money properly and monitor investments regularly;
  • Invest any cash coming into the trust, unless it is being paid out immediately;
  • Abide by standard investment criteria, considering suitability and diversification, getting advice if required;
  • Use utmost diligence to avoid loss and are liable to the beneficiaries for any breach in this duty;
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14
Q

Trustee Duties

What are the 3 administrative trustee duties?

A
  • Keep proper accounts (they are liable for losses caused by their default);
  • Hold title documents (eg share certificates);
  • Register as legal owners (eg land registry).
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15
Q

What is the expected level of competence of a trustee?

A

They are expected to act as a prudent business person would.

However the law allows for the skills and experience of the trustee.

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16
Q

Trustee Act 1925

What does section 31 say?

A

Section 31 of the trustee act 1925 allows trustees to apply trust income for infant beneficiaries to pay for maintenance or education.

17
Q

Trustee Act 1925

What does section 32 say?

A

Section 32 of the trustee act allows trustees to apply capital for the advancement of a beneficiary.

This was updated in the 2014 Inheritance Tax and Trustees’ powers act so that 100% (up from 50%) can be advanced subject to the agreement of any other beneficiary.

18
Q

Trustee Act 1925

What does section 36 say?

A

A new trustee can be appointed to replace one who is:

  • Dead;
  • Out of the UK for over 12 months;
  • Desires to be discharged;
  • Refuses to act;
  • Is incapable of acting;
  • Is under 18.

Also if a sole trustee dies, their legal representative can act as trustee until a replacement is made.

19
Q

How are trustees appointed?

A

If the trust is created by a trust deed it will name the trustees.

If it is created by a will then the will should name the trustees, who would usually be the executors of the will.

If set up under intestacy laws the administrators will be trustees.

20
Q

Impact of death of a trustee

A

A trust is not void by the death of a trustee.

s36 says their legal representatives can take over until a replacement is found.

21
Q

Can trustees delegate?

A

The role is not usually delegated, but Trustee Act 2000 allows them to appoint agents and delegate all roles except:

  • Powers over distribution of assets;
  • How fees are dealt with;
  • Appointment of new trustees;
  • Delegation of trustees powers.
22
Q

If a beneficiary takes a trustee to court, what could the court order?

A
  • An injunction preventing the trustee taking a course of action;
  • Order the trustee to make restitution;
  • Order return of any property wrongly transferred;
  • Removal of trustees.

Trustees are liable to compensate the beneficiary for their losses in the case of breach of trust.

23
Q

Description of the beneficiary

A

They are the equitable owners of the trust property.

24
Q

Who can be a beneficiary?

A

Anybody can be a beneficiary.

They can be named individually or as a class of beneficiaries (eg the descendants of X).

25
Q

Types of beneficial interest

A
  • Absolute: Full equitable ownership of income and capital;
  • Life interest: Entitled to income (life tenant);
  • Reversionary: Property passes to remaindermen after death of the life tenant;
  • Contingent.
26
Q

Requirements for benficiaries bringing a trust to an end

A
  • All beneficiaries ascertained;
  • All of full age and capacity;
  • All in agreement;
  • No possibility of further beneficiaries.

If some beneficiaries are underage or disagree the others can apply to a court to end the trust.

27
Q

What are the 5 types of trust?

A
  • Express trust: Expressly created by a deed or will;
  • Resulting trust: A failure of the trust on which the property is held;
  • Implied trust: Implied from actions;
  • Constructive trust: Imposed by law, regardless of intentions;
  • Successive trust: Property held in trust for a succession of interests.
28
Q

Definition of a bare or absolute trust

A

Where assets are transferred from the settlor to trustees (or nominees) for the benefit of the beneficiaries, who can’t be changed.

29
Q

Definition of a discretionary trust

A

Where a beneficiary has no specific right to income or capital.

30
Q

What is a relevant property trust?

A

The following are all relevant property trusts:

  • All discretionary trusts;
  • Flexible power of attorney trusts (since 22 March 2006);
  • Any trust created after 22/3/06 which creates flexible, successive or contingent interests.
31
Q

Definition of a life interest/interest in possession trust

A

Where the life tenant has a right to income or enjoyment of the trust property.

32
Q

What is an immediate Post-Death interest?

Is it a relevant property trust?

Impact on tax

A

An Immediate Post-Death interest is where a person has an immediate interest in possession in settled property which was effected by will or intestacy.

If a trust qualifies as IPDI trust then it is not a relevant property trust. It is an IIP trust, but even though it’s post-2006 it gets treated like a pre-2006 IIP trust. So:

  • no periodic or exit charges;
  • no IHT on initial transfer if it’s to a spouse;
  • IHT will be due if the interest passes to a successive beneficiary.
33
Q

What is a Power of Appointment (Flexible) Trust?

A

This is where the beneficial interest can be changed.

34
Q

What is an Accumulation and Maintenance Trust?

A

A special type of discretionary trust when one or more beneficiaries become entitled to capital or income after reaching a specified age (no later than 25).

Until then income is either held or used for their maintenance, education or benefit.

If it’s set up for a child it must last for no longer than 25 years, or can be set up for granchildren and last longer than that.

35
Q

What are the uses of trusts (10)?

A
  • Tax planning/mitigation;
  • Intestacy;
  • Will planning;
  • To provide a pension;
  • To provide for families;
  • To assist a charity;
  • To provide for the disabled/vulnerable;
  • Ownership of land (i.e. joint tenants, tenancy in common);
  • To give property to those who can’t legally hold it;
  • To gain protection from creditors and business protection.
36
Q

Do trustees have to follow the instructions of beneficiaries?

A
  • Trustees are obliged to act in beneficiaries interest, but not obliged to follow their instructions;
  • Beneficiaries can make their wishes known (should be in writing) but trustees don’t have to act on them;
  • They must carry out their duties free from the control of beneficiaries;
  • Duty is to follow the wishes of the settlor as set out in the trust deed;
  • They have a statutory duty to balance the needs of the life tenant and remaindermen.
37
Q

What options are available if the life interest beneficiary doesn’t want to take the income?

A

They can forego their right to income from part of the capital (or all of it).

In this case the trustees have no choice but to accumulate the income for the benefit of the remaindermen.

38
Q

General advantages of bare over discretionary trusts

General advantages of discretionary over bare trusts

A
  • Bare trusts simpler to set up;
  • Bare trusts cheaper to set up;
  • Bare trusts easier for trusts to administer in the long run;
  • Bare trusts have certainty over where assets go;
  • Discretionary trustees can control when income/capital distributed;
  • Discretionary trustees can control beneficiaries

(disadvantages are the opposite, put both in both sides for marks!)

CII J02 (9 decks)

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