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IMC IE Chapter 7 > 7.4 Legal Concepts > Flashcards

7.4 Legal Concepts Flashcards

1
Q

Define ‘Natural person’

A

The legal term to describe individuals

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2
Q

Define ‘Legal person’

A

The legal term to describe a collection of natural persons who have gathered together to form a single entity for legal purposes. These persons have rights, such as protections and privileges, and responsibilities, such as legal and tax liabilities, under law. They can also shield their members and shareholders from liabilities, such as bankruptcy and other law suits.

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3
Q

Define ‘Partnership’

A

‘Partnership’ – is a business relationship between two or more parties. Note that a partnership does not have a distinct legal entity, meaning that the partners are individually liable for partnership debts.

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4
Q

Define ‘Agent’

A

‘Agent’ – an agent acts on behalf of the principal. For example, an independent financial advisor (IFA) is the agent of the client.

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5
Q

Define ‘Principal’

A

‘Principal’ – gives the legal power to be bound by actions of the agent.

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6
Q

Define ‘A contract’

A

‘A contract’ – a contract is made when an offer stating specific terms and conditions is made and unconditional and willing acceptance is agreed. These could be (and generally are) written or verbal.

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7
Q

Define ‘Wills’

A

‘Wills’ – it is important that everyone has a will to ensure that their wishes are carried out in the event of their death. All parents should ensure that their wills specify who should look after their children in the event of their early death. Also unmarried partners will not be entitled to assets unless they are specified in the will of their partner.

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8
Q

Define ‘Real property’

A

‘Real property’ – refers to land, buildings and rights over property: hence the term ‘real estate’. Real property can also be thought of as immovable property.

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9
Q

Define ‘Personal property’

A

‘Personal property’ – refers to moveable property such as personal possessions. Personal property is also known as ‘personality’.

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10
Q

Define ‘Trust’

A

‘Trust’ – is a legal arrangement governed by a trust deed. A trust is not a separate legal entity. Trusts are used in Inheritance Tax (IHT) planning and to make gifts to people.

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11
Q

Define ‘Settlor’

A

‘Settlor’ – monies are settled into a trust by the ‘settlor’, for the benefit of the trust.

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12
Q

Define ‘Beneficiaries’

A

‘Beneficiaries’ i.e. those who benefit from the trust’s funds.

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13
Q

Define ‘Trustees’

A

‘Trustees’ are charged with managing and distributing the fund’s assets to the beneficiaries according to the terms of the trust deed.

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14
Q

What must happen for a contract to be valid?

A

For a contract to be enforceable, it must involve unconditional acceptance of the offer made.

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15
Q

In addition to acceptance of the terms and conditions set out in the contract, what other 5 elements must be present in a contact?

A
  1. Consideration: Both sides to the contract must gain something, e.g. you pay me, and I provide you with a service
  2. Intention: There must be an intention to form a contract on both sides
  3. Terms and conditions: Must be clear, unambiguous and have legal effect
  4. Types of contract: Although written contracts are easier to defend if one party attempts to avoid it, oral contracts can be legally binding too.
  5. Capacity to contract: All parties to the contract must have capacity
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16
Q

What must a financial advisor ensure before entering into a contract with a client?

A

A financial advisor must ensure that each client has the capacity to enter into a binding contract.

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17
Q

What is ‘Capacity to contract’?

A

Capacity to contract is a legal term meaning the client has the power to enter into a binding contract.

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18
Q

What kinds of individuals does the law protects from entering into binding contracts?

A

Those deemed unable to make important financial decisions.

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19
Q

Name 4 types of people unable to enter certain contracts.

A
  1. A bankrupt person
  2. A mentally incapable person
  3. A drunk person
  4. A minor (someone under 18)
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20
Q

What does the Mental Capacity Act 2004, which came into force on 7 April 2005, state?

A

It is possible for a person to be mentally incapable for some purposes but not for others.

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21
Q

What powers do companies have legally?

A

Companies sometimes have defined powers to enter into contracts in their Memorandum and Articles of Association. Alternatively, they can be given very wide powers by the same documents. Counterparties with companies will often require copies of board meeting minutes, giving the power for the company to enter into a binding contract.

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22
Q

What does a void contract mean?

A

The contract is unenforceable.

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23
Q

List 3 reasons why a contract may be void.

A
  1. Lack of intention to create a legally binding contract
  2. Unclear or ambiguous terms and conditions
  3. No mutual consideration was included, i.e. there was no apparent benefit for one of the parties
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24
Q

Define ‘A voidable contract’

A

‘A voidable contract’ means the contract can continue in force until one of the parties bound by the contract declares it void and decides not to be bound by it.

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25
Q

Define ‘Discharge of contract’

A

‘Discharge of contract’ is where the terms and conditions agreed within the contract come to an end.

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26
Q

List 4 reasons why there may be a discharge of contract.

A
  1. Discharge by agreement: Where both agree to terminate the contract.
  2. Discharge by performance: Where the terms and conditions in the contract have been met in full.
  3. Discharge by frustration: Where external events prevent the contract being fulfilled.
  4. Discharge by breach: Where one party does not fulfil their side of the agreement. This can lead to legal disputes.
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27
Q

What is a document of title?

A

A document of title is evidence that an investor has legal ownership of an asset, e.g. land, real estate or financial securities.

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28
Q

Must the title document be in the same form?

A

No! The title document may be held in different forms.

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29
Q

What is a registered document?

A

A registered document is one whose ownership is recorded on a central register.

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30
Q

List 3 types of registered assets.

A

This is the case for cars, real estate and most securities, where the asset is registered in the owner’s name.

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31
Q

What does registration denote?

A

Registration denotes legal ownership.

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32
Q

Which organisation records the registered owner of cars?

A

The Driver and Vehicle Licensing Agency (DVLA)

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33
Q

Which organisation registers real property?

A

The Land Registry

34
Q

Who maintains a register of shareholders in a company?

A

The Company

35
Q

What are bearer instruments?

A

Bearer instruments are anonymous and freely transferable. They do not show the owner’s name, no register is maintained of legal title and proof of title is in physical possession.

36
Q

What do most bearer instruments have?

A

Most bearer instruments have intrinsic value of their own; for example, gold or diamonds. However, there are many bearer documents in the financial world, such as eurobonds, depositary receipts and bank notes.

37
Q

What is a typical trait of bearer instruments in regards to registration?

A

Although bearer instruments are not registered in the name of the legal owners, they are typically registered in the name of the issuer: a five pound note, for example, is registered in the name of the Bank of England. Even items like gold and diamonds come with a stamp or certificate of authenticity.

38
Q

What name is it becoming increasingly common for investments to be held under?

A

Traditionally, investments are registered in the name of the investor and the investor’s name appears in the register of members. However, to reduce the burden of administering these, it has become increasingly common for investments to be held in the name of a nominee company.

39
Q

What happens with ownership where shares are held under the name of the nominee company?

A

With shares held in this way, the nominee appears on the register of members as the legal owner. However, the investor retains beneficial/equitable ownership, and it is the beneficial owner who receives the rights in relation to a share (e.g. voting and dividends).

We will see this split between legal and beneficial ownership many times. With collective investment schemes we see the trustee as the legal owner of assets, but the unit holders as the beneficial owners.

40
Q

In which 2 legal ways can assets be held jointly?

A
  1. Joint tenancy
  2. Tenants in common
41
Q

What is kind of different impact do joint tenancies and tenants in common have on death?

A

Each method has a different legal implication on death of one of the joint owners.

42
Q

What happens when someone in a joint tenancy dies?

A

Imagine a jointly held deposit account held on a joint tenancy basis. On death of one of the joint holders, the deceased person’s interest in the account automatically passes to the survivor. This means that the survivor now owns all the proceeds of the account. Most joint accounts are automatically set up on a joint tenancy basis unless specifically changed. Inheritance tax planning often involves changing the ownership basis to tenants in common.

43
Q

What happens when someone in a tenants in common dies?

A

If a joint account is held in a tenants in common basis and someone dies. On death, the deceased person’s interest does not go to the survivor but instead goes to their estate and is distributed according to their will.

44
Q

What is a power of attorney?

A

A power of attorney is where a donor appoints a person with capacity to contract (the attorney) to act on their behalf. It must be signed by deed and in the presence of two witnesses.

45
Q

What are the 4 powers included in the power of attorney?

A
  1. Power to sign documents
  2. Power to make purchases
  3. Power to dispose of property
  4. Power to handle financial affairs
46
Q

What are the 3 types of power of attorney?

A
  1. Specific – only gives very specific powers to the POA.
  2. General – gives more general discretionary powers to the POA.
  3. Lasting – replaced enduring powers of attorney in 2007, implementing changes outlined in the Mental Capacity Act 2005.
47
Q

What are the specific details of a lasting power of attorney?

A

A lasting power of attorney (LPA) is made by a person in sound mind to appoint an attorney to handle their affairs if and when they become incapable of making their own decisions. Notice that this must be made in advance, when the donor is in sound mind, and must be registered with the Office of Public Guardian to be effective.

48
Q

What is the difference between an enduring power of attorney (which came first) and the current lasting power of attorney?

A

A difference between an enduring power of attorney (which came first) and the current lasting power of attorney is that a lasting power of attorney has wider powers to make not only financial decisions (property and affairs LPA) but also decisions concerning the donor’s personal welfare (personal welfare LPA).

49
Q

What are the 3 circumstances in which a power of attorney can be revoked?

A
  1. The donor dies
  2. The donor revokes the POA
  3. The donor becomes bankrupt
50
Q

What is insolvency?

A

Insolvency relates to companies and is the term used when a company cannot pay its debts. We often talk about the solvency of a company being the excess of its assets over its liabilities. If a company is insolvent it has more liabilities than assets i.e. it owes more than it owns.

51
Q

What are the 4 approaches that can be taken when a company becomes insolvent?

A
  1. Liquidation – the courts rule the company should be wound up; its assets sold and creditors paid back
  2. Company voluntary arrangement (CVA) – a formal agreement to make repayments is established by the court
  3. Informal arrangement – as above, but in an informal context i.e. not via the court
  4. Administration – the courts grant an order to give a company some temporary breathing space i.e. protection from creditors until a plan can be put in place
52
Q

What is bankruptcy?

A

Bankruptcy is a legal state and relates to companies and individuals as defined in the Insolvency Act 1986. Bankruptcy applies when a person is unable to pay their debts when they fall due and is unable to pay them in the near future.

53
Q

What is bankruptcy intended to do?

A

Bankruptcy is intended to be a fair process to distribute whatever assets the individual has to their creditors.

54
Q

Who is bankruptcy administered by?

A

The official receiver

55
Q

What is a debtor’s petition?

A

A debtor’s petition is where the debtor voluntarily applies to the courts for a bankruptcy order to put his debt problems behind him and begin again.

56
Q

What is a creditor’s petition?

A

A creditor’s petition is where one or more of the individual’s creditors apply to the courts for an enforcement order, where the debt is more than £5,000.

57
Q

What are some examples of people who cannot be made bankrupt?

A
  1. A deceased person
  2. An infant
  3. A spouse of a bankrupt person is treated as a separate individual, meaning the creditors have no claim over their assets
58
Q

What happens once a bankruptcy order has been made against a person?

A

Once a bankruptcy order has been made against a person, the official receiver administers the bankrupt person’s financial affairs. Where there are significant assets, a trustee will be appointed to sell the person’s high value assets and use the proceeds to pay the creditors.

59
Q

What are the 3 reasons why having a will is important?

A

Having a will is very important as it:

  1. Specifies how you want your assets to be distributed
  2. Specifies who you want to be responsible for your children
  3. Specifies who you want to benefit from your estate
60
Q

List 6 conditions that are required in order for a will to be valid.

A

The will must be:

  1. In writing
  2. Willingly made
  3. By a person of mental capacity
  4. By a person over 18 years of age
  5. The person must not have made it as a result of pressure from someone else
  6. Signed and witnessed by two independent persons
61
Q

What is meant by the phrase ‘died testate’?

A

The individual died having a valid will

62
Q

What is meant by the term ‘died intestate’?

A

The individual died not having a valid will or not having a will at all.

63
Q

What is an ‘Executor’?

A

Executors – carry out the terms of the will and obtain the ‘grant of probate’. Probate is the agreement from the tax authorities to release the estate to the beneficiaries. Probate is only granted once any IHT that is due, and any other tax accrued during the administration of the will, has been paid.

64
Q

What is an ‘Administrator’?

A

Administrators – carry out the administration when there is no will. They have the same role as executors but rather than obtain a grant of probate they obtain letters of administration.

65
Q

What rules apply when an individual dies intestate?

A

In the event that an individual has died intestate (without a valid will) the National Intestacy Rules apply. These rules dictate how the deceased person’s estate is to be divided up.

66
Q

What is a trust?

A

A trust is a way of holding or managing money or investments on behalf of a beneficiary who may not be ready or old enough to do it themselves.

For example, if a parent wishes to ensure that their child receives certain investments should that parent die, they could place those investments in trust until the child is old enough to benefit fully from those assets. If the parent dies, then the investments would be held in trust by a trustee who would manage the investments until the child reaches a specified age. Once the child reaches a specified age, the investments would pass into their possession.

67
Q

What is the name of the document which contains the terms of agreement for a trust?

A

The terms of this agreement would be set out in a legal document called a trust deed.

68
Q

What is meant by the term ‘Trustees’?

A

Trustees are the ‘legal owners’ of the trust property and must deal with it in the way set out in the trust deed – the legal document setting out how the trust property is managed. They also deal with the trust administration. There can be one or more trustees.

69
Q

What is meant by the term ‘Settlor’?

A

The settlor creates the trust and puts property into it at the start – in our example this would be the parent
– possibly adding more later. The settlor says in the trust deed how the trust’s property and income should be used.

70
Q

What is meant by the term ‘Beneficiary’?

A

This is anyone who benefits from the trust – in our example this would be the child. The trust deed may name the beneficiaries individually or define a class of beneficiary, such as the settlor’s family. The beneficiaries are the ‘beneficial owners’ of the investments.

71
Q

What is meant by the term ‘Trust property’?

A

This is the property that is put into the trust by the settlor. It can be anything, including land, property, securities, cash, antiques, etc.

72
Q

What are Discretionary trusts?

A

These trusts give the trustees the right to distribute the trust property – both capital and income – to the beneficiaries as they see fit. It gives the trustee the flexibility to respond to unforeseen events when considering the distribution of the property. A “letter of wishes” by the settlor may be left in their will, giving guidance on how the trust assets should be distributed after their death.

73
Q

What is interest in possession (life interest)?

A

In this kind of trust the beneficiaries have the legal right to all the income of the property, but not to the property itself. They are said to have interest in possession. After a specified event, such as the death of the beneficiaries, the asset will pass to the reversionary interest or remainderman.

A reversionary interest is an interest that reverts back to the settlor of a trust once a beneficiary’s interest has come to an end.

A remainderman is the person who inherits or is entitled to inherit the principle of a trust once it is dissolved.

An example of this would be where a settlor leaves the income from investments to their spouse, but the investments to their children once the spouse dies.

74
Q

What are bare trusts?

A

This is where the trustee takes on a nominee role only for the beneficiaries. Although the trustee holds and manages the investments, the beneficiaries are at liberty to take the trust property – both capital and income – from the trust at any time.

75
Q

How may charities be established?

A

Charities may be established either as legal trusts or as companies (usually limited by guarantee). If a trust, a settlor sets up a trust for charitable deeds. The trustees become responsible for the distribution and investment of the assets.

76
Q

What tax benefits do charities have?

A

They do not pay:

  1. Capital gains tax
  2. Income tax
  3. Inheritance tax
  4. Stamp duty

However, they can be liable for value added tax (VAT) on purchases.

77
Q

Who provides the regulatory structure in which charities operate?

A

The Charity Commission, together with the Charity Acts of 1992 and 1993

78
Q

What kind of investments are charities most likely to seek?

A

Charities will typically seek investments that give real capital protection and supply income to spend on charitable causes. They are much more likely to be buy and hold investors, than traders. Suitable investments are likely to be income generating shares and property that can be rented or leased out.

79
Q

What happens if a trust deed does not specify the trustee’s specific investment powers?

A

Trustees are governed by the Trustee Act 2000.

80
Q

What 3 things are required of trustees under Trustee Act 2000?

A
  1. Trustees have a statutory duty of care in selecting investments
  2. Trustees are expected to act with a degree of skill and care which is appropriate to their knowledge, experience and professional status. They should take proper advice where appropriate
  3. Trustees may, subject to these duties, exercise their powers of investment over the same range of investments as they would if they were the beneficial owner of the investments within the trust
81
Q

Trustees are able to invest in a wide range of assets under the act, as long as they which 2 things?

A
  1. The diversification of the portfolio
  2. The suitability of the investments
82
Q

What are trustees expected to do under the Trustee Act 2000?

A

The trustee should also regularly review the investment and seek advice where necessary.

IMC IE Chapter 7 (4 decks)

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