AF1 Trusts Flashcards
Name and describe 10 types of Trusts
- Bare or Absolute (Minors entitled from age 18)
2 Successive Trust (succession of interests - pass onto different beneficiaries)
3 Life Interest Trust (income for life and on death capital to Remaindermen e.g. Will Trust) Also Interest in Possession Trust
4 Relevant Property Trust (set up after 22nd March 2006). Potential liability to tax on exit of the trust and each 10 year anniversary; with exceptions
5 Discretionary Trust (Capital & Interest apportioned at discretion of trustees. At our set no beneficiary has entitlement. Trustees can accumulate income. As more flexibility more punitive tax regime.
6 A&M Trust. One or more beneficiaries had to become entitled to assets before age 25. Since 2006 lost advantageous tax position. Now taxed like Disc Trust but without flexibility. Now a Relevant Property Trust.
- Flexible or Power of Appointment Trust. Used to be used Life Assurance policies. Vary class of beneficiary; Potential Beneficial or Current Beneficiary- classed as having an interest in possession. Now a Relevant Property Trust and less flexible than Disc Trust.
- Statutory Trust Married Woman’s Property Act(MWPA Trust) created under Statute eg Intestate succession
- Resulting trust - when no trust can be set up due to change in circumstances eg Divorce or no children so the trust has failed not for want of a Beneficiary. The Settlor becomes the beneficiary.
- Constructive Trust - owning property that belongs to someone else. ‘Equitable duty’ to transfer to another to avoid breach of trust.
What is a trust?
A way of arranging property for the benefit of other people without giving them full control
What are the 3 key parties to a Trust?
1 Settlor (creates the trust)
2 Trustees (legal owners)
3 Beneficiary (equitable or beneficial owners)
What is a trustee governed by?
Largely governed by Trustee Act 2000
What must a Trustee do?
Act with a duty of care
Decide on suitable investment policy in light of the circumstances
Introduce rules relating to the appointment of 3rd parties e.g. fund managers
How many trustees are required
Between 2 and 5
What does the Trustee Act 1925 require trustees to undertake ?
Governs new trustees Eg Death Resident overseas Wishes to be discharged Refuses to act
What type of interest can a beneficiary have?
Absolute Interest
Or
Life Interest
Purpose of a trust deed
Names the trustees
Names the beneficiaries
Sets out the powers of the trust and rights of the beneficiaries
What should Trustees do in relation to the Trust Deed?
Trustees should sign the trust deed as later on it will show they have authority to act
Name the 2 ways a trust can be created via a Will
In both cases the Executors take over the responsibilities as trustees
- Can be created by a Statement or Expression of Wishes by Testator of the Will. E.G a life interest trust allowing the surviving Spouse to receive an income. Only on the death of the spouse and when the children are all 18+ can the trust’s assets be distributed to the beneficiaries.
- A bequest is made to a minor. Executors must hold cash, investments or Propery in trust until the minor reaches 18.
What must be completed before the assets pass into trust on death?
The Settlor dies
Letters of Administration or Probate must be granted.
The Will can be revoked by the Testator either destroying the Will or writing another. In either case the Trust is automatically revoked too.
What happens if some dies without a Will?
Died intestate -called the Intestate
Administration of Estates Act 1925, estate must be held on trust with power of sale. Assets must be looked after by the Personal Representative until the estate is distributed under the laws of intestacy.
Have the power to sell assets in order to make the distribution
What does the Married Woman’s Propery Act 1882 allow?
It allows a person to create a trust for a life policy where the policy is on the individual’s own life and intended to benefit;
Spouse
Civil Partner
Children
What is a secret Trust and how is it formed?
There must be clear evidence of a desire to create a trust.
A half secret or secret trust are established outside of the Will.
It can be a half secret Trust (where the Testator leaves Propery to one person (known as the Legate) and avoids having to comply with the Will Act 1837.
A full secret trust accepts the responsibility during the Settlor’s lifetime and accepts the property for himself but in fact the true beneficiary is not mentioned in the Will.
Often the motive is under pinned by fraud prevention.
Does not comply with the rules of intestacy.
What are the main rules in the Perpetuities and Accumulation Act of 1964?
Does not apply to Trusts prior to 1964, or pension schemes or most charitable trusts
Prior to April 2010 the maximum Perpetuity period is either the
The Perpetuity period is made when the Trust is created
Lifetime of Person in Being Settlor + 21 years or
80 years from when it was established
What is the current standard Perpetuity Period ?
125 years or shorter
What is the current standard Accumulation Period ?
125 years or length of Trust perpetuity period if shorter
What are the 10 most common uses of a trust?
- Save tax. Higher tax payer could use a Bare Trust. Won’t work when beneficiaries are Settlor’s unmarried children under 18.
- Mitigation of IHT. Eg life policy in Trust
- Intestacy-unmarried children under 18
- Will trust - held by Executors until children reach 18 or specified age or condition for-filled
- Pension arrangements
- Trustees of discretionary trust decide if and when to pass on the money
- Charity formed under a trust
- Bare Trust for children or grandchildren- a designated account. Less flexible and beneficiary has control from 18
- Disabled or Vulnerable person trust
- Bankruptcy trustee
- Ownership of land
What are the 3 certainties that must exist the create a valid trust?
- Word (verbal or written)
- Subject (Trust property / assets)
- Object (beneficiary)
What are the duties of a trustee ?
- Must maximise the return on the trust fund
- Must not risk trusts assets with risky or speculative returns
- Consider suitability and need for diversification
- Trust may give very specific powers or direction. Trustees are bound by that requirement. If non then can assume absolute power as his their own investment - General Power of Investment.
- Trustee should seek proper and professional advice
- Conversion and apportionment. Must be fair to all beneficiaries, life tenant income and capital for remainder-man
5.
What makes a trust valid?
Subject - assets must be known and clear
Object - naming the beneficiaries and class of beneficiaries
Words to show intent
What are the 8 most common uses of a trust !
- Save Tax
- Mitigate IHT
- Charities or Pensions
- Bear trust for children
- Vulnerable or Disabled Person
- Provide ongoing security for family
- Bankruptcy
- Ownership of land
Examples of why a Charitable Trust is established
Charitable purpose for public benefit include;
The relief of poverty
The advancement of education
The advancement of religion
Other purposes to benefit the community
