7 - MANAGING CLIENT'S WEALTH (fin.)

Question 1

Cash flow projection

Answer 1

Forecastng indiv/household future income and expenses over specificed time period to help plan for financial goals

Prepared for ST and LT planning purposes to differentiate between living expenses and anticipated cash needs/surprises

ST (<3yrs)
- estimates of expected inflows/outflows
- plan use of surplus funs
-identify shortfalls that require funds

LT (3-5yrs)
- Identify potential future CF needs
- drive development of strat to fund LT needs
- provide input to need for ST assets within investment portfolio
-pension planning (Estimate how much one needs to save before retirement)

Uses
- scenario analysis
- goal settings
- debt reductions
- scenario analysis

Question 2

Selecting suitable cash accounts

Answer 2

Security = primary concern
- cash represents emergency funds usually so shouldnt rake risks
- risk of default of deposit taker, assess their creditworthiness

Liquidity
- each with which funds can be released
- combo of current/instant access for immediate cash needs and then notice accounts for ST cash - access for penalty?

Yield
- last priority

Question 3

Emergency liquidity reserve

Answer 3

• Readily avail source of funds to meet unexpected events
• Need will revolve around health/home/job/job security/fixed costs/health
• Impractical to plan for all eventualities
• May take 6m to find a new job - 6m of reserves?
• doesnt have to be in instant access - can be ST bonds or notice accounts with penalties etc

Question 4

ISA TYPES

Answer 4

ISA = tax efficient savings/investments

STOCKS AND SHARES - 18y
- corp/gov bonds, UK listed ITs, life assurance prods, AIM shares and listed shares, UK auth unit trusts and OEICS, shares acquired via employee stock plan in past 90 days even if not listed

FLEXI ISAs
- money can be wtihdrawn and replaced in same tax year (not JISAs)

CASH- 16y
- cash on deposit with building society/bank + some NSI prods

H2B
- now closed to new savers, 25% gov contribution up to 3k on 12k investor contribution
- must invest 200pcm with initial 1.2k
- house price 250k, 450k London

LISA - 18 - 40
- 25% gov bonus max investment 4kpa,
- proceeds used for first home 450k house or >60yrs/terminally ill
- 25% penalty for early withdrawal
- can continue contributing until 50

INNOVATIVE FINANCE >18y
- P2P loans and cash investments, must be facilitated by FSMA auth operatory

JISA
- LT saving for children, 9k sub limit
- both cash and stocks and shares

Must be UK resi to subscribe to ISA (except crown employees) but can retain ISA

Question 5

HMRC ISA charging rules

Answer 5

Charges that can be paid outside (to maximise amount invested TF)
- admin fees
- charges for opening/closing/maintaining ISA

Charges that must be paid within an ISA
- Charges relating to sale and purchase of ISA investments
- including dealing comm/stamp duty/inital charges on OEIC/untit trust purchases

Question 6

Innovative finance ISAs

Answer 6

Quali investments are P2P loans, crowdfunding debentures and cash
- eligible P2P loans must be facilitated by FSMA authorized operator

Question 7

ISA on death

Answer 7

Can pass to surviving spouse without losing tax free status = Additional permitted subscription
- get this additional sub amount even if you dont inherit ISA

If no - can remain in wrapper for 3yrs post death or whenever administration of estate is finalised whichever is 1st
- no additional subs can be made
- can’t transfer ISA to another manager

Day after this wrapper is lost and account becomes taxable

Question 8

3 broard types of contract

Answer 8

Conditional - agreement dependent on specified event occuring

Joint and several - several parties make joint promise to perform, each is wholly responsible for the undertaking should some or none of other parties be able to perf

Implied - courts will determine if there is a contract in effect or implied based on the circs

Question 9

Who can enter into contract

Answer 9

• natural persons <18 dont have capacity to enter into contract
• not drunk, mentally ill, or insane
• for partnerships - deeds should be signed by all partners or signed by one/more who has been granted authority by deed to execute on behalf of partnership
• trust isnt a legal entity in its own right - trustees that legally own assets enter into contracts to bind the trust

Question 10

Living together vs marriage

Answer 10

Coupes that lived together but arent married/in civil partnership = have no special rights

• no right to share assets or request ongoing financial maintenance for themselves
• if one dies intestate - survivor doesnt automatically inherit anything unless property was owned jointly
• survivor may have to go to court and claim from estate under inheritance act 1975
• can enter into cohabitation contract to formalise aspects of living together
• sets our how each will support eachother/children and how assets would be split

Question 11

Pre and post nups

Answer 11

Pre = before marriage
Post = after marriage
Not legally binding in England

written contract entered into by a couple before/after marriage
- enables them to select and control many of the legal rights they acquire upon marrying
- what happens when their marriage ends by death or divorce
- records asset ownership and division

Supreme court 2010 ruling = introduction of presumption that family courts should hold spouses or partners to agreements if both understood the implications of entering into the agreement

Question 12

Powers of attornery

Answer 12

Main reason to create is as a protection in case one loses their mental capacity
Once capacity is lost financial institutions cant accept instructions and deputy must be appointed on their behalf

POA = legal doc where a person gives person/s the power to make decisions with regard to financial affairs and/or health and personal welfare on your behalf

Question 13

Answer 13

(Ordinary) POA
- give attorney power to look after financial affairs of donor or undertake specific task on their behalf
- often when donor going abroad
- usually ends at specific time
- doesnt have to be registered with office of public guardian
- not operative once someone loses capacity

EPA (eduring)
- Before EPA - had to go to court of protection and get guardian appointed annually
- EPA avoided this - indiv appoints someone to act for them when the donor can no longer has capacity - for financial affairs only
- can’t make a new one since 07 but old still active
- have to reg with office of public guardian

LPA
- Replaced EPA in 07, allows you to choose someone ot take on decisions if they lose capacity
- LPAs extend into health and welfare matters as well as property and financial affairs
- two types P&A LPA and H&W LPA
- must be registered by office of public guardian

Question 14

Deed of revocation

Answer 14

Can be used to cancel

• OPA = at any time after power has been granted
• EPA = at any time prior to registration of power and whilst donor still has mental capacity
• LPA = at an any time while donor still has mental capacityDe

Question 15

Deputies

Answer 15

Appointed when someone loses capacity but doesnt have an LPA in place
Application made to court of protection to appoint deputy on ongoing basis
Deputy has duty to act in best interest of person and only make decisions the court has authorised them to make
OPG = asseses each case and places in band to receive low/med/intermediate/high level of supervision

Question 16

Wills

Answer 16

= Statement by indiv on how they wish their property to be divided after death
Person making = testator
If you die w/out executing will = intestate

Must be in writing (handwritten/typed)
Signed on last page by testator
Must be witnessed (Attestation) - must see the testator sign in presence of at least 2 witnesses- witnesses themselves must also sign and cannot be beneficiary or will or married to beneficiary

Failure to follow proper formalities can expose will to challenge of vallidity

Question 17

Effect of marriage on a will

Answer 17

Marriage revokes a will - will become intestate + will have to make a new one unless you made a will ‘in contemplation of marriage’ with specific person before

Divorce cancels any benefit due to former spouse under will - law of intestacy decides how these assets are distroed if you dont make a new one

Question 18

Intestacy

Answer 18

= condition of estate if you die without legally valid will. Estate will be subject to intestacy laws

Surviving spouse no issue = full estate to spouse
‘Issue’ = children + their children if they died before you

Surviving spouse + issue = Spouse receives statutory amount £322k (index linked) + chattels + half the residual amount
Issue = receive other half of residual estate at 18 distributed equally (will be held in statutory trust if they are minors)

No surviving spouse =estate shared equally in this order
- Issue
- parents (equally if more than one)
- brothers and sisters whole blood (if deceased then their kids)
- half blood brothers and sisters (if deceased then their kids)
-grandparents
- uncles and aunts (whole blood then half)
- crown as bona vacantia

Question 19

Reasons to make a will

Answer 19

Basically essential - avoids property being distributed in a way you wouldnt want
Allows unequal distribution
COmplex family matters e..g stepchildren
Big issue for those living together but not married particularly if house is owned by one person
Allows you to gift to charity/ friends
Allows you to honour personal wishes - e.g. burial etc
Allows creation of trusts for vulnerable people
Allows you to pass particular items to particular people
Allows funeral instructions
Allows you to appoint testamentary guardians for your kids

Question 20

Grant of representation

Answer 20

Legal doc that gives indiv the right to manage the estate of a person who has died
- necessary to access deceased person’s assets + to pay off debt before distributing estate

3 main times

Grant of Probate: Issued when the deceased left a valid will.
- granted to executors named in will who then have right to administer estate

Grant of Letters of Administration: Issued when the deceased did not leave a will (died intestate).
It’s granted to the administrator(s) (usually the next of kin), who are then responsible for distributing the estate according to the rules of intestacy.

Grant of Letters of Administration with Will Annexed:
Issued when there is a will, but no named executor is able or willing to act, or no executor was named.
This grant allows an administrator (often a close family member) to manage

Question 21

Process of administering the estate

Answer 21

• must 1st register the death
• Executors/administrators (known collectively as Legal Personal Representatives) must obtain grant of representation (= grant of probate or letters of administration legal doc giving power to manage estate on behalf of deceased)
• Submit IHT tax return and start making payments
• Make funeral arrangements
• once probate granted, register copies with banks, registrars to prove title
• Compile a list of assets and liabilities + place statutory notice in gazette for any creditors
• administer the estate - collct/transfer asset, pay liabilities, deal with HMRC regarding income tax and IHT payable - must be paid last day of the 6th month post death
• provide estate accounts to main beneficiaries

Question 22

Diff between executors and administrators

Answer 22

An executor is a person appointed under a Will and who will be seeking to obtain a Grant of Probate.

An administrator is a person who is appointed in accordance with the rules of intestacy when there is no Will

Question 23

Writing policies in trust

Answer 23

• life cover should be written into trust where appropriate

NORMALLY - life assurance policy pays sum assured to estate on death = aggregated with other assets and included for IHT

= way to legally place the ownership of a life insurance policy into a trust rather than having it form part of the PH’s estate
- most people settle pol in trust @ same time as taking it out - standard form - assign death benefit to named beneficiaries
- if policy becomes payable then lump sum paid to trustees and so doesnt form part of deceased estate for IHT purposes
- avoids need of production of grant of probate to access so benefits paid more quickly
- also allows control over the distribution of payout

Means client making a git for IHT purposes and policy normally wont form part of estate (CLT) if client lives for 7y after setting up the trust
- can ensure death benefit is payable without need for grant of probate/letters of administration
- can choose who benefits from assets and who you want to manage them
- protect beneficiaries from IHT
- decision is irrevocable, once done any further decisions must be signed off by named trustees

Question 24

IHT loss relief

Answer 24

Allows executor to substitute sale value of shares with the ones used for probate and claim a refund of the IHT payable (if value has fallen since date of death)

• for quali investments sold in the 12m following death (have 4y after this to claim)
• listed shares and secs listed on a foreign exchange and CIS
  -not AIM and unlisted shares
• only avail where sale proceeds are less than date of death values (all sales of quali investments have to be included in claim not just those that have fallen in value)
• must be sold before transfer to beneficiaries
• need to calc if IHT repayment would be more than the value of the losses carried forward for the beneficiaries )(if they were transferred the assets and then sold themselves)
• also affects the £2m estate limit for the RNRB

Question 25

Deed of variation and reasons for doing

Answer 25

Legal doc that can be used to change distro of estate as set out in will or under laws of intestacy
- equalising distro of estate as set out in the will or clearing up uncertainties
- making provisions for someone who doesnt benefit (e.g. grandchild born after will was made, or someone who laws of intestacy doesnt cover e.g. stepchild)
- intergenerational planning e.g. passing assets to grandchildren rather than children
- tax planning - e.g. will not written in most tax efficient way, gifting to charity to reduce IHT, moving assets into trust

• those giving away interest in estate must be >18 and of sound mind
  -Deed must be signed by anyone giving away anything
• no consideration can be paid for completing the deed
• deed must be completed within 2y of death

Not a CLT or PET - just as if this was originally written in will

Question 26

What is a trust

Answer 26

• way of gifting property
• obligation under which indivs (trustees) are bound to deal with prop over which they have control and legal ownership (trust property) for the benefit of other individuals (beneficiaries)

Question 27

Uses of trusts

Answer 27

• mitigate tax - outside of estate if settlor survives for 7 years
  -preservation of wealth (prevents dilution of ownership)
• asset protection - to protect from claims by future creditors (tho if this is intention it is likely that the trust can be set aside)
• to provide for fams with complicated dynamics
• to gift to charity
• to avoid forced heirship laws in certain countries - divesting so outside of estate
• to pass on assets on death ‘will trust’
• to make confidential disposal of an asset (can be fully secret or half secret trust)
• to give property to someone who cannot legally hold it (minors or those mentally incapable)
• to provide a pension
• to gain protection from creditors and spendthrifts
• statutory trusts can arise from intestacy (when assets given to minors)
• private trust companies to manage large family businesses
• commercial trusts for employee incentive schemes or unit trusts
• pass on proceeds of life assurance IHT free

Question 28

Sham trusts

Answer 28

• vailidity questioned on basis that instrument creating it = sham doc/doesnt fulfil reqs for creation of valid trust
• aggressive tax avoidance devices
• creditors/divorce action seeking to set aside trust and open assets to their claim
• trustees not acting independently and control of prop still vested in settlor

Question 29

Key elements of trusts

Answer 29

Settlor
- person who decides to set up trust and arranges for their assets to be transferred into it (transfers legal ownership to trustees)

Trust property
- assets to be gifted into trust

Trustees
- legal owners of assets held within a trust but beneficiaries have equitable ownership
- obliged to manage assets according to the settlor’s wishes, as set out in the trust deed or their will
- advisable to appoint profesh trustees or corp who is authorised to act as a trustee

Trust deed
- sets out powers and duties of trustees (also statutory powers)
- contains terms of the trust

Beneficiaries
- people for whose benefit peoperty is being held (both settlors and trustees can be beneficiaries but if settlor is there can be tax consequences due to reservation of benefit rules)
- where all beneficiaries >18 they can bring trust to an end by unanimous agreemen
- can be indivs or a class of indivs e.g. grandchildren

Protector
- to ensure trustees act in accordance with settlors wishes
-role is usually to monitor, oversee or exercise a degree of control over the trust by the trustees
- can remove and replace trustees and can nominate further beneficiaries

Question 30

Three certainties

Answer 30

To be valid a trust usually needs to meet the 3 certainties test

Certainty of intention
- must be clear the settlor had the intention to create a trust or the trust is void

Certainty of subject matter
- subject matter/trust property must be clearly defined/identifiable. Benefit must also be clearly defines

Certainty of objects (who can benefit)
- Refers to all intended beneficiaries
- fixed/interest in possession trusts = must be poss to indentify exactly all the beneficiaries
- for disc trusts - trustees must know who to consider when deciding how to distribute the trusts properly

Cy Pres (nearest thing) doctrine aplies to charities which can save a gift to charity from failing due to uncertainty of object (e.g. if charity no longer exists) - gift can go to similar charity

Question 31

Law against perpetuities trusts

Answer 31

• property cannot be tied up for indefinite periods
• max length of settlements made in wills executed post April 2010 = 125yrs (interests must vest within this time)
• doesnt apply to charities or pensions

Question 32

Law against accumulations

Answer 32

No longer have this - abolished for trusts set up after April 2010
Previously

• 21 years from making the disposition (max time before income must be distributed)
• still applies to charities unless set aside by court or charities commission

Question 33

Fixed vs discretionary trusts

Answer 33

Fixed trusts : one where beneficiaries are determined at the outset in the trust deed
- point at which they will benefit also set out

Disc trusts: class of beneficiaries is specified in the trusts deed and trustees given power to determine which beneficiaries of that class will benefit and when

Question 34

Summary of trust types

Answer 34

Bare trusts
- beneficiaries have immediate and absolute right to capital and income held in trust
- trustees have no discretion over what income or capital to pass to beneficiaries
- commonly used to transfer assets to minors - at 18, beneficiaries can demand the trustees tranfer funds to them

IIP trusts
- trustees must pass all trust income to beneficiary as it arise
- can provide person with right to enjoyment of assets during lifetime but no abs right to capital (life tenant)
- remaindermen receive capital on death of life tenant

Disc trusts
- most flexi form
- trustees can appoint additional beneficiaries or remove
- trustees distro capital and income as they see fit
- settlor often writes letter with what they would like to happen with trust in future but not legally binding

Accumulation trusts
- income generated not paid out but accumulated within trust and added to trust capital
-trustees have option to distro but not required to
- often used where growth of capital is the main goal

Question 35

Bare trusts

Answer 35

• beneficiaries have immediate and absolute right to both capital and income (once 18+)
• beneficiaries are fixed and identified @ outset
• aka simple trusts
• commonly used to transfer assets to minors - trustees hold assets on trust until beneficiary comes of legal age @ which point they can demand trust fund is transferred to them
• could be a blind trusts = used by politicians to avoid having to declare an interest (beneficiary has no knowledge of holdings/no right to intervene in handling)
• trustees must manage in a way to produce max benefit for intended beneficiaries
• trust assets held in name of trustee but they have no discretion over what income/capital passes to beneficiaries
• beneficiaries cannot be changed once trust is set up

Question 36

Bare trust tax

Answer 36

Income tax
- assets treated as if beneficiary holds them for tax purposes (as if trust did not exist)
- if set up by parent = parental settlor rule - if income is >£100 it is taxed on the parent to avoid parents hiding income (doesnt apply to CGT)

CGT
- on beneficiary as if no trust

IHT
- settlor: assets placed in bare trusts treated as PETs (beneficiary pays any IHT due since capital and income belongs to them absolutely)
- only subject to IHT if settlor dies within 7y
- if beneficiary dies = included in part of their estate

Question 37

Interest in possession trusts

Answer 37

2 types w/ different IHT
Settlement: CLT made during lifetime
Will trust: instructed in will

Life tenant: has right to receive income generated by the trusts or right to enjoy trust assets for present time (e.g. living in property)
- trustees must pass all income to this person
Capital paid to remaindermen : usually on the death of the life tenant (tho there may be a successive life interest or power of appointment where life tenant can appoint a 2nd on death)

Trustees must maintain a balance between the interests of both sets of beneficiaries (e.g. yield and capital growth)

• trust can give interest in possession to beneficiary for fixed period or indefinitely
  IPDI = IIP trust created by will, leaving estate on trust to named indiv for their lifetime
  Bereaved minors trust = only by will, must be created for benefit of children of deceased. income can be retained or paif out for benefit of child and capital must be pid to chilren @18

Question 38

Tax on interest in possession trusts

Answer 38

Income tax
- taxed at basic rate within the trust by trustees
- life tenant pays at marginal rate (can reclaim if non taxpayer)

IHT
post March 06 - interest in possession settlement = CLT (Along with discretionary trusts)

• will trusts or settlements pre 06 = aggregated with life tenants estate on their death and then trust pays proportion of IHT that trust made up of estate
• 10 yr periodic charges (max 6%) and (proportional to every 10ys) exit charges apply when life tenant dies (no periodic charges for will trust)

CGT
- taxed @ 20% (unless resi prop then 24%)
-£1500 annual exemption but must be divided by total no. of trusts set up (min £300 each)
- disabled person’s trust = 3k annual exemption

Question 39

Discretionary trusts

Answer 39

Trustees have discretion over the use of income and the distribution of capital - exact rights of each beneficiaries not determined in advance

Useful in family situations - settlor may be able to control conduct of beneficiaries with the trustees’ use of disc power

More flexi - can create a class of beneficiaries e.g. grandchildren

Good for complex succession planning e.g. 2nd marriage/step children

Cater for changes in circs like bankruptcy and remarriage

Guard against spendthrift beneficiaries

Can protect family assets from forming part of divorce settlement in certain jurisdictions (not really UK)

Can be used in a will to utilise the NRB on the first death - particularly when assets are expected to grow faster than the NRB

Question 40

Tax on discretionary trusts

Answer 40

IHT = disc trusts are relevant property (along with interest in possession lifetime settlement) so taxed as CLT
- 10 year periodic charges (max 6%) and proportionate exit charges apply unless a vulnerable/disable person’s trust

-vuln/disabled person trust requires receipt of disability allowance
- taxed like a bare trust on beneficiary and IHT tax on settlor like a PET

Income tax
- first £500 of income taxed @ basic rate (shared between trusts, min £100)
- rest taxed @ additional rate (45%/39.95%)
- distributions paid net of 45% tax (no PSA, PA, divi allowance)
- beneficiaries can reclaim some/all tax paid
- trustees must manage the tax pool

CGT
- taxed at 20% (unless resi prop 24%)
- annual exemption 1.5k shared min 300
- vulnerable person’s trust 3k

Question 41

Charitable trusts

Answer 41

Set up for cause/social purpose to benefit a large group of people in society in general (not specific group)

• relief of poverty
• advancement of religion
• advancement of education
• purposes beneficial to community

Charities act 2006 - advancement of
- health or saving lives
- citizenship/community development
- amateur sport
- arts, culture, heritage, science
-human rights, conflict resolution, equality and diversity
- environmental protection or improvement
- relief of those in need (age, disability)
- animal welfare
- promotion of efficiency of armed forces
- or any other charity defined in law

No IT, CGT or stamp duty
Beneficiaries dont have to be named in advance

Question 42

18-25 trusts

Answer 42

Created under will of deceased parent/step parent or under criminal injuries compensations scheme

Property to be held on trust for person under 25 and beneficiary becomes absolutely entitled to whole prop on or before 25th bday

When created on parent’s death - avoids 10y periodic and exit charges of disc trusts

beneficiary is entitled to receive the trust assets outright at an age between 18 and 25, as stipulated by the trust deed

May be an IHT charge on capital transferred out to children between 18 and 25 and when it is paid out at 25

trust assets remain part of the deceased parent’s estate for IHT purposes

Question 43

Trusts for vulnerable people

Answer 43

Special tax treatment
Include
- people under 18 whose parented died
disabled people eligible for any of the below benefits
* Adult disability payment.
* Armed forces independence payment.
* Attendance allowance.
* Child disability payment.
* Constant attendance allowance.
* Disability living allowance (adults and children).
* Industrial injuries disablement benefit.
* Personal Independent Payment (PIP).
* Someone unable to manage their own affairs due to a mental health condition

Income tax
- trustees are entitled to a deduction of tax against the amount they would otherwise pay (calc IT based on type of trust, calc IT if beneficiary recieved it themselves - claim difference as deduction on IT liability)

3k annual CGT allowance

IHT
- no IHT charge is settlor lives 7y and on any transfers out to vulnerable beneficiary
- no 10 yearly IHT charge
- when beneficiary dies any assets held in trust on their behalf are treated as part of estate and IHT may be charrged

Question 44

Discounted gift trust

Answer 44

Allows settlor to give away assets but stil enjoy regular payments for life
IHT planning tool
Single premium bond written irrevocably in trust
Withdrawals set @ outset to 5% max - cannot change in future - taxed as return of capital
Normally a discretionary trust but can be absolute
If bare trust = PET
If disc trust = CLT
- discount will reduce value of the gift if you dont survive 7y

Generally put in amount that will discount down to 325k which uses up NRB but can get around 600k out of estate for this price (depending on age and HMRC discount)

To be effective for IHT, payments should be spent by the settlor and not retained in the estate

The right to the regular payments ceases on the settlor’s death and has no value

Beneficiaries are unable to benefit from the trust until after the settlor has died

‘discounted’ is used because the value transferred on establishing the trust is less than the amount invested.
- accounts for acturarial value of settlor’s income streams

Question 45

Loan and gift plan

Answer 45

Useful where client doesnt want discounted gift trust because they are scared they may need money in the future

Client loans the discretionary trust funds - 5% withdrawal rate is interest on loan

On death - trust pays original amount back and growth only is outside of estate

Can gift the loan to beneficiaries in will (will pay IHT)

Question 46

Two other types of interest in possession trusts (non discretionary for tax purposes)

Answer 46

Immediate post death interest trust
- IPDI only created by a will and is an IIP trust for tax purposes
- Can make a will leaving estate in trust for beneficiaries and for that indiv’s lifetime the trust will not be taxed like a disc trust but like an IIP trust

Bereaved minors trust
- Can only be set up by will
- must be created for the benefit of children of the deceased
- income can be retained within trust or paid out for benefit of the child
- all capital must be paid out to child/children when they reach 18

Question 47

Ownership of trust property

Answer 47

A trust = legal vehicle into which assets are transferred which is then managed by trustees
they have to hold and apply the assets for the benefit of the beneficiaries

legal title to assets is vested in name of trustee
beneficiary has beneficial ownership
assets of the trust = separate fund and not part of trustees estate
trustee has duty to manage the assets on behalf of the beneficiaries and in accordance with the terms of the trust

Question 48

Main powers of trustees

Answer 48

Powers of maintenance
- to be able to pay income to beneficiaries for their upkeep

powers of advancement
- to be able to advane funds from the trust prior to the date specified in the trust deed - e.g. to pay school fees

powers to make dispositions from discretionary trusts
- to appoint funds within names class of beneficiaries

powers of appropriation
- permits trander of assets to beneficiary in settlement of their entitlement rather than having to sell the asset and transfer the cash raised

power to appoint nominees and custodians
- allows trustees to take advantage of the safe custody services offered by brokers and custodians + be able to settle transactions using CREST

power to appoint investment managers
- to manage the trust portfolio on their behalf

power to insure trust property

Must carry these out
- in best interests of beneficiaries
- - only for their benefit not 3rd parties
- not for trustees ownbenefit
- in ccompliance with terms of trust

Question 49

Trustee liability

Answer 49

is joint and several

meaning beneficiaries can claim and execute judgements against one or all of the trustees

if trustee breaches duties = personally liable for a breach of trust - beneficiaries can sue for breach of trust for as long as the trustee lives or against estate if they have died

can claim and execute judgement againt one/all/some trusteesT

Question 50

Trustee Act 2000 main goal and raison d’etre

Answer 50

Before - if trust deed didn’t stipulate wide powers of investment - the old 1961 act requires 50% in narrow investments aka fixed income

Main goal = widen investment powers and powers of delegation for trusts that dont specifically have wide investment powers

trustees must follow Act unless trust deed specifically overrules provisions

Question 51

Trustee Act 2000 main changes (5 areas)

Answer 51

INVESTMENT POWERS
- much wider than previously available - may make any investment of the kind they could if funds were their own except land outside of the UK
- subject to fundamental duty of acting in the best interests of beneficiaries

Investment duties
- be aware of need for diversification + suitability of investments (both = standard investment criteria) - suitability r.e. income/capital growth and meeting needs of beneficiary
-to review investments regularly

statutory duty to obtain and consider proper advice where necessary before exercising investment powers

POWER TO DELEGATE
- can delegate duties to agent - include powers of investment
- Act requires policy statement from trustees if this occurs giving guidance on how IM functions should be managed in the best interest of the trust -
- certain responsibilities cannot be delegated - appointment of trustees, distro of trust asset, whether fees should be allocated out of inc/capital

NEW STATUTORY DUTY OF CARE
- imposes statutory duty of care when employing agents/using nominees/investing trust prop/acquiring land etc - higher standards expected of investment professionals than lay people
-duty to look after interests of all beneficiaries impartially
- must satisfy themselves that advisor is properly qualified

TRUSTEE REMUNERATION
- Regulates arrangement for paying a trustee appointed in their professional capacity
- Allows payment of out of pocket expenses without need for authorizing clause in the deed (for layperson)

POWER TO INSURE TRUST PROPERTY
- Created power for trustees to insure 100% of a trust’s property - purchase of investments with capital guarantees would normally fall within these powers (previously only 75% allowed)
- premiums can be paid of of income or capital

Question 52

Main duties of trustees

Answer 52

• Duty to comply with the terms of the trust: The trustee must be familiar with the terms of the trust, and comply with the powers and duties contained in the trust instrument.
• Duty to take control of trust property: The trustee must ascertain the assets of the trust, and ensure they are vested in the names of the trustees.
• Duty to act impartially between the beneficiaries: The trustee must act in the best interests of the beneficiaries, and impartially between all beneficiaries.
• Duty to keep accounts: Clear and accurate accounts of the trust must be kept and provided to the beneficiaries on request.
• Duty to provide information: The trustee must provide documents and information following a request by a beneficiary.
• Statutory duty to consider financially material factors: The trustee must disclose ‘financially material considerations’ in their statement of investment principles, which sets out the trustee’s investment policy.
• Duty of care: In addition to the other general duties, there has always existed a general duty of care which covers a trustee’s actions.

Question 53

Trustee duty to invest

Answer 53

manage trust assets prudently, in accordance with the trust’s terms and the beneficiaries’ best interests.

• exercise DD and prudeence when exercising power of investment
• demonstrate profesh expertise (profesh trustees held to higher standards
• act impartially/fairly between beneficiaries and diff classes of beneficiaries
• administer trust prop in best interest of pres and future beneficiaries
• make trust productive
  -obtain advice on matters they are not competent to decide themselves

Question 54

Trustee act 2000 standard investment criteria

Answer 54

Diversification
- duty to have due regard for need for diversification
- suitability of trust investments
- spread investments where appropriate
- degree of diversification depends on size of trust

Suitability
- considers size and risk of investments
- produce balance between income and growth to meet needs of beneficiaries
- ethical considerations etc
- beneficiary tax position
- admin costs
-investment term
- requirements of beneficiaries

Question 55

Private trust companies/foundations

Answer 55

When there is a large family bis that professional trustees may find difficult to manage - settlor may also be reluctant to hand over control

• trust holds family bis as asset
• private trust company is create to act as a trustee of family trust
• The private trust company is a limited company and the board of the company can be selected
  to ensure that there are suitably qualified advisers appointed who understand the nature of the
  business along with the settlor.
• Whilst the settlor could own the shares in the private trust company directly it would probably be
  undesirable to have any direct link with its ownership, whether for tax, disclosure or for a variety of
  other reasons. Instead, a non-charitable purpose trust is often created which holds the shares in a
  private trust company as its sole asset.

ADV
- control retention
- privacy
- flexibility
- avoids recurring trustee fees
- continuity of family management

DISADV
- high setup costs , legal advice
- complexity
- regulatory considerations

Question 56

What is a family office

Answer 56

No clear definition - every family office is different. Generally used to describe an organization dedicated to holding and managing the wealth of a family
- flexible and bespoke, supports family’s vision and legacy
- centralised hub for coord wealth management, investment, legal, tax and lifestyle serv tailored to needs of family
- can be single family where offering is fully customized + highest level of confidentiality and only one family served
- or multi family which is wealth managements firms that manage a group of families.

• expensive vs investment management as normal. Average cost = 0.6%. SFOs often dont have economies of scale

Question 57

Equity release

Answer 57

= range of prods that allow clients to borrow money against value of house

sometimes elderly clients are asset rich and cash poor - equity release allows them to utilise their largest asset to generate income/release capital

uses
- repay existing mortgage
- home improvements/essential repairs
- consolidate burdensome debts
- reduce working hours/retire early
- domiciliary/social care
- gifting to children/grandchildren

3 main ways
- lifetime mortages
- home income plans
- home reversion plans

Question 58

Lifetime mortgage

Answer 58

• most common form of equity release
• taking out mortgage that doesnt require monthly repayments - interest can be rolled up until loan is repaid on death or when person moves into LT care
• borrowing money secured on property
• continue to own and live in property

Question 59

Home income plan

Answer 59

• Equity released from property is used to buy a lifetime annuity (can be ifl linked)
• part of annuity payment pays for mortgage interest so not rolled up
• mortgage repaid on sale of home
• not suitable for people <75 really as annuity rates will be too low to cover mortgage generally
• havent been popular recently due to low annuity rates
• obvciously lose out if you die soon after taking out plan

Question 60

Benefits/drawbacks of lifetime mortgages/home income plans

Answer 60

BENE
- moneies can be released as guaranteed income
- can stay in own home for as long as poss
- mortgage repaid on death
- can still benefit from future increase in property val
- fixed interest rates could cap costs
- no negative equity guarantee feature
- some inheritance still possible
- monies released are tax free
- IHT reduces
- can still move subject to new prop being acceptable to provider as continuing security for equity release loan

DRAWBACKS
- certain pension benefits may be negatively affected
- local authority financial support may be negatively affected
- reduces family inheritance
- associated costs (Advice fees, valuation fee, legal fees for conveyancing, application fee)
- inflexibility
- lenders permission required for any property adaptations (BAD, STAIR LIFT)
- allowing interest to roll up may be more expensive than traditional mortgage

Question 61

Home reversion plans

+ bene/drawbacks

Answer 61

• part/all of the property sold (instead of getting a mortgage) for cash lump sum or regular payments
• sold under value transfer (not market value, generally it is a very reduced value)
• you retain life tenancy rent free for the remainder of your life
• peppercorn rent payment (£1/yr)

BENE
- monies released to pay for care
- could be via immediate needs annuity
- can stay in home for as long as poss
- some inheritance still poss if partial reversion utilised
- IHT reduced

DRAWBACKS
- certain pension benefits may be reduced
- local authority financial support may be negatively affected
- reduces family inheritance
- less than market value will be paid
- poor value on early death
- inflexibility if circs change
- need permission to adapt which they will likely not give - can force you to sell if you need adaptions they wont allow you to make - can argue it reduces the value of their share

Question 62

Regulatory position on equity release

Answer 62

• Regulated activity under FSMA 2000
• Subject to COBS rules - packaged prods
• Advisor must hold appropriate quali
• Limited product range makes value for money comparisons difficuly
• Prod specific risks - review of premiums, ADLs (activities of daily lviing, info on perf not given until after point of sale)

FCA review was mixed
- when good advice given - allowed people to release capital from largest asset without monthly payments
- when advice was bad - there was insufficient challenge when customers believed a lifetime mortgage was for them
- also inadequate evidence to demonstrate suitability - suitability letters were generic

Question 63

Long term care insurance

Answer 63

Care home fees v expensive (41k care home, 56k nursing home) - not much government support (anyone over 23k assets pays in full)

2 main types of insurance

Immediate Care LTCI
- lump sum investment paying regular income until death
- immediate needs annuity
- underwriting required
- market not v competitive and only 2 real providers

Pre funded LTCI
- regular prem or lump sum premium (lump sum care bond)
- pays out tax free regular sum if care is needed
- dependent on not being able to perform a certain number of activities of daily living
- similar to income protection in that it pays out when you cant do x no. of ADL - often unit linked so risky if units dont grow

Question 64

What is meant by vulnerable client + what are consequences

Answer 64

Someone who, due to personal circs, is especially susceptible to detriment/harm - particularly when a firm isnt acting with appropriate levels of care

• heightened stress levels
• increased time pressure (due to addition responsibilities)
• increasing preoccupation/brain elsewhere limiting ability to manage
• processing power and ability decreases
• difficulty seeing bigger picture/lack of perspective
• increased recklessness/changed attitude towards risk

Question 65

FCA reqs fair treatment of vulnerable customers

Answer 65

• Identify vulnerabilty - train people to see signs
• Understand the customer’s base need
• Ensure staff have correct training/capability to recognise and respond to vulnerable customers’ needs
• Adapt processes - Respond through product design, flexible customer service provision and comms
• monitor and asses firm is meeting and responding to vulnerable customers’ needs and make improvements if not
• avoid harm: practises and products that could exploit vulnerability

Question 66

4 key vulnerability factors

Answer 66

These act as drivers to actual or potential vulnerability

HEALTH (conditions/illnesses that affect ability to carry out ADL)
- physical disability
- severe/LT illness
- hearing/visual impairments
- poor mental health
- low mental capacity/cognitive disabilities

LIFE EVENTS (major)
- caring responsibilities
- bereavement
-income shock
- relationship breakdown
- non standard reqs e.g. refugee, ex offenders

RESILIENCE (low ability to withstanf financial or emotional shock)
- low/erratic income
- over indebtedness
- low savings
-low emotional resilience
-lack of support structure

CAPABILITY (low knowledge of financial matters/low confidence)
- low knowledge/confidence in handling financial matters
- poor literacy/numeracy
- low english language skills
- poor digital skills
- learning impairments

Drivers can be complex, overlapping, tranient/permanent

Question 67

FCA guidance on understanding needs of vulnerable customers

Answer 67

• understand range of indicators of actual/ potential vulnerability + needs that can arise
• Frontline staff need skills to engage with customers to seek relevant info to understand
• Staff should recognise when info they have suggests vulnerability/when client needs extra support
• Staff should be able to record relevant info on vulnerability in an appropriate way that is
  accessible by other staff
• Responding appropriately to the needs of vulnerable customers.
• Should be sensitive to their needs and consider how to adapt to meet them
• Understand when additional support is available and offer when appropriate
• Firms should offer practical and emotional support to staff
• staff should recognize when they need to escalate to senior management/when support needed is out of firm’s remit

Question 68

Practical action when dealing with vulnerability

Answer 68

PRODUCT AND SERVICE DESIGN
- should consider needs of vulnerable customers at all stages of product design

CUSTOMER SERVICE
- systems should be flexible to allow for adaptations (e.g. text size etc, inclusion of others in meeting)

COMMS
- can be a barrier if firm fails to communicate properly
- may increase risk of harm
- tailored comms channel e.g. interpreter/point etc

MONITORING AND EVALUATION
- monitoring impact of any action taken, progression of vulnerablity, knock on affects (e.g. bereavement leading to bad mental health)