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PCIAM > Chapter 4 > Flashcards

Chapter 4 Flashcards

1
Q

What is the definition of a trust?

A
  • A trust or settlement arises when someone transfers assets to trustees who hold them
    and the income from them for the benefit of one or more persons
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2
Q

What is a revocable trust?

A

Revocable trust
- Terms (including the trustees and beneficiaries) can be altered after its creation
- Trust can be revoked entirely

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3
Q

What is an irrevocable trust?

A

Terms of the trust cannot be altered

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4
Q

When can a revocable trust evolve into an irrevocable trust?

A

After the death of the settlor

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5
Q

What are the 8 purposes of trusts?

A
  • Someone is too young to handle their affairs
  • Control and protection of family assets
  • Someone loses mental capacity
  • Pass on assets (in lifetime or on death)
  • Tax planning
  • Confidentiality
  • Investment vehicle (unit trusts)
  • Employee incentive schemes (pensions)
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6
Q

What is the most common way of trust creation?

A

It is creation by deed.

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7
Q

What does deed mean in relations to trusts?

A

A deed is a signed legal document that transfers ownership of an asset to a new owner.

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8
Q

What is the prescribed format for a trust created by deed?

A

There is no prescribed format

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9
Q

What must a trust deed specify?

A

Trust property
The name of trustees and their powers
names of beneficiaries and their rights
Name of protector

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10
Q

What are the three ways to create a trust?

A

Creation by deed
Creation by will
Creation by statute

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11
Q

When does a trust created by will come into effect?

A

It comes into effect on the death of the testator

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12
Q

When would we use a creation by statue trust?

A

An example of this is when a legal estate is held by two or more persons as joint tenants

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13
Q

What are the three certainties required to make a trust valid

A

Certainty of intention, certainty of subject matter, and certainty of object

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14
Q

In regards to trusts, there has been two things considered against public policy to allow. What are these?

A
  • Property to be retained in trust indefinitely
  • Trustees to accumulate income indefinitely
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15
Q

What are the broad differences between trusts set up after 06.04.2010 and before 06.04.2010?

A

Trusts set up after 6th of April 2010 have a maximum term of 125 years. The exception to this rule is that it does not apply to a charitable trust or pension scheme. A trust can accumulate over this term.

Trusts set up before 6th of April 2010 have a maximum term of 80 years and the accumulation period is over the life of the settlor or 21 years from the death of the testator.

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16
Q

Who is the settlor?

A

The person who sets up the trust by transferring property

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17
Q

What are the other two words for settlor?

A

Trustor or grantor

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18
Q

Who are the trustees of a trust?

A

These are the legal owners of the trust property

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19
Q

Who can be trustees of a trust?

A

This can be an individual, business entity, or a public body

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20
Q

What are the rules on trustees?

A

More than one, maximum of four for land and will trusts, no maximum for other types of trusts.

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21
Q

What is a “protector” in relation to trusts?

A

THis is a person appointed by the settlor (not required) to oversee the trustees actions.

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22
Q

Where are the scope of powers for the protector set out?

A

In the trust deed

23
Q

What is the difference between the reactive and proactive powers of the protector of a trust?

A
  • Reactive – reacts to the actions of a trustee (e.g. to distribute money to a beneficiary)
  • Proactive – takes initiative and instigates action (e.g. to remove a trustee)
24
Q

What are the two classifications of trusts?

A

Express trust and implied trust

25
Q

What is the difference between express trusts and implied trusts?

A

Express trust:
* Terms are expressly set out, usually in writing but for personal property this could be by a clear declaration (e.g. lifetime settlement, will)
* If created on intestacy – it is called a statutory trust

Implied trust
* Created based on what the law infers as being a person’s intention
There are three types of implied trusts
* Implied resulting trust
* Automatic resulting trust
* Constructive trus

26
Q

What is an implied resulting trust?

A

Arises following a transfer of assets from A to B to hold for C’s lifetime. If there is no instruction as to what is to happen to that property on C’s death, then the property would be held in an implied resulting trust for A (or A’s estate if they too had died)

27
Q

What is an automatic resulting trust?

A

If one person transfers assets to another for a specific purpose, the recipient is under an obligation to carry out that purpose

28
Q

What is a constructive trust?

A

The assets are held in constructive trust for the harmed party, obliging the defendant to look after it.

Can be imposed by law to remedy improper conduct

29
Q

What is a fully secret and half secret trust?

A

A full secret trust is where the testator has during their lifetime communicated to the trystee that they will hold the asset in trust fot others. This can be done verbally or in writing or by sealed letter to be opened upon the testators death.

Half secret trusts is where the asset given are known but the intention of what to do with said assets are unknown.

30
Q

What trust will be used for fully secret and half secret trusts?

A

Constructive trusts

31
Q

In a bare trust, who is responsible for paying the tax due on behalf of minors?

A

The trustees

32
Q

What is the main advantage of a discretionary trust?

A

Flexibility

33
Q

What is an accumulation trust often used for?

A

It is often used to accumulate income within the trust adding it to the trusts capital until the beneficiary becomes legally entitled to the trusts assets.

34
Q

What are the three requirements for a charitable trust?

A

That it is for a charitable purpose, that it is for the public benefit, and that it is wholly and exclusively charitable.

35
Q

Who regulates charitable trusts?

A

The charity commission

36
Q

Which Act governs charitable trusts?

A

The charities Act 2006

37
Q

What are the tax advantages of charitable funds?

A

Within the charity:
* Exempt from income tax
* Exempt from CGT on disposals by the trust
* Exempt from stamp duty

Donors:
* No capital gains tax on gifts to charities
* No inheritance tax on gifts to charities
* Receive relief on donations at their marginal rate

38
Q

What was the five main areas of change for the Trustee Act 2000?

A

Powers of trustees in relation to investment of trust funds
The appointment of agents, nominees, custodians, and advisers
A new statutory duty of care
Trustee remuneration
The power to insure trust property

39
Q

What is the one thing trustees cannot delegate away from themselves?

A

The distribution of income and assets

40
Q

What is the income tax, capital gains tax, and inheritance tax treatment for bare trusts?

A

Income tax: taxed at the beneficiary’s marginal rate of tax
Capital gains tax: taxed at beneficiary’s marginal rate of tax
Inheritance tax: Will only be due if the settlor dies within 7 years, and if the beneficiary dies the trust will be included in their estate for IHT purposes.

41
Q

What is the income tax treatment of interest in possession trusts?

A

Trustees pay basic rate tax on income.

The life tenant of the fund is in control over whether income is distributed and is viable for tax at marginal rate whether income is distributed or not.

A tax credit is given against tax paid by the trust.

42
Q

What is the Capital Gains tax treatment of interest in possession trusts?

A

As for capital gains an interest in possession trust will pay capital gains from within the fund. i.e., the fund stands alone.

43
Q

What is the capital gains allowance for an interest in possession trust?

A

The capital gains is half of the annual exemption.

This scales linearly to the point where there are five or more trusts, in which case the AE is £600 for each fund.

The number of trusts is based on the number of trusts the settlor set up since 1978. For example, if a settlor set up two trusts since 1978 they have £1,500 AE each

44
Q

What is the capital gains tax rate for interest in possession trusts?

A

20%

45
Q

What is the tax rate on creation for an interest in possession trust?

A

20% lifetime tax above the total nil-rate band

46
Q

What are the principal charge for interest in possession trusts?

A

This is a charge that is levied every 10 years and is paid by the trust. The charge is 30% of the current lifetime tax rate (20%), so 6%.

47
Q

What are the periodic charges for interest in possession trusts?

A

This is a charge that is levied every 10 years and is paid by the trust. The charge is 30% of the current lifetime tax rate (20%), so 6%.

48
Q

What is the exit charge for interest in possession trusts?

A

This is used for inheritance tax purposes to determine how much tax to pay on the funds going to the remaindermen.

The tax on the funds leaving the trust is charged at a rate of “effective rate * (n/40)” where n = number of quarters. 40 quarters is 10 years, so it is a proportionate chrarge of the principal charge normally charged on the 10 year annuversary. the effective rate is tax due / value

49
Q

What do we consider the funds passing to the remainderman when the life tenancy in an inteerst in possession trust ends in another reason than death?

A

This will be considered a PET or CLT

50
Q

What is the income tax treatment of a discretionary trust, both for the trust and the beneficiary?

A

The first £1,000 is taxed at basic rate, and the next £1,000 is taxed at the additional rate.

The benefixiary is taxed at marginal rate on income distributed, and credit given for tax paid by trust of 45% regardless of source.

51
Q

What is the capital gains tax treatment for discretionary trusts?

A

Same as interest in possession trusts.

52
Q

What is the inheritance tax treatment for discretonary trusts?

A

The same as interest in possession trusts

53
Q
A

PCIAM (7 decks)

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