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JO2 > CII Exam Questions - J02 > Flashcards

CII Exam Questions - J02 Flashcards

1
Q

Identify the main differences between contract law and trust law

A

Contracts
- must have offer, acceptance and consideration
- agreement is required between parties and all parties aware of existence
- parties over 18
- only the parties to the contact generally have legal or equitable rights

Trusts
- no offer and acceptance are required as there is no agreement between settlor and beneficiaries
-Beneficiaries may not be aware that trust exists
-Trustees are the legal owners of the trust property
-Minors can be beneficiaries
- No consideration

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2
Q

State 6 circumstances under which a new trustee can be appointed to replace a trustee under section 36 of the trustee act 1925

A
  • Death of a trustee
  • Remains outside the UK for more than a year
  • Desires to be discharged
  • Refuses to act
  • Becomes unfit or bankrupt
  • Incapable or lacks mental capacity
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3
Q

What is Section 36 of the trustee act 1925?

A

It covers the powers of appointment

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4
Q

Identify who can appoint a new trustee if there is no appointer or surviving trustees?

A
  • The Courts
  • The personal representatives of the last surviving trustee
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5
Q

Outline 7 benefits of using an Immediate Post Death Interest Trust?

A
  • Not relevant property trust
  • suffers no IHT periodic charges
  • Or exit charges
  • No IHT on first death where surviving spouse is the beneficiary entitled to an IIP
  • Gives a beneficiary with an IIP an immediate right to income
  • Income would be taxed a beneficiaries rate, not trustees rate of IT
  • Entitlements of the trust can give the settlor certainty and peace of mind.
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6
Q

Explain briefly how a trust can be created by a Will and who the trustees are?

A
  • A trust can be expressly stated in a Will;
    • or arise where a gift has been left to a minor beneficiary in the Will.
    • The executors of the Will are also effectively the trustees;
    • unless other trustees have been specifically named in the Will.
    • The Will can set up a specific type of trust.
    • In this case a statutory trust arises with statutory provisions available to deal with minor beneficiaries
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7
Q

Describe how a Will would transition into a trust following his death?

A
  • A will would not come into force immediately
  • the trust is only created following the death of the testator
  • Assuming the Will has not been revoked before death
  • the trustees will have a ‘chose in action’ which is a duty to ensure that the estate is administered properly
  • The trust will receive assets once the administration of the estate has been completed.
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8
Q

Describe an implied trust?

A
  • Is not created expressly so it is unwritten
  • but is implied by actions
  • and intentions of the parties involved
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9
Q

Describe an express trust?

A
  • Created deliberately
  • usually in writing
  • by deed or Will
  • the terms of the trust are expressly set out stating its purpose
  • a trust of personal property can be made by an express oral declaration
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10
Q

State 5 advantages of holding single premium investment bonds in a relevant property trust

A
  • Do not produce taxable income as they are non-income producing
  • can provide 5%per annum, tax deferred withdrawals
  • are available until 100% of original investment is returned, typically over 20 years
  • Tax returns only when income tax liability has arisen
  • can be assigned to beneficiary, without incurring immediate tax liability
  • admin is simpler and generally less expensive than other investments
  • original gift immediately outside estate
  • no tax on switching funds
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11
Q

Explain briefly what trustees should consider when managing cash in a trust?

A
  • Have a duty to hold or invest cash appropriately
  • a sufficient amount of cash should be held by the trustees to cover trust expenses
  • and immediately needs of the beneficiary
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12
Q

Which act gives the court power to vary beneficiaries under a trust?

A
  • Variations of trusts act 1958
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13
Q

Which categories of beneficiary could benefit from a court varying beneficial interest in a trust?

A
  • Beneficiaries that are incapable of assenting due to infancy or incapacity
  • Contingent beneficiaries
  • Unborn beneficiaries
  • Beneficiaries with a discretionary interest under a protective trust
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14
Q

What case allows beneficiaries to bring a trust to an end?

A

Saunders v Vautier - 1841

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15
Q

Explain briefly the circumstances when an application to the court would be required to bring a trust to an end.

A
  • If any beneficiary is under 18
  • Or does not agree to bring the trust to an end
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16
Q

Describe the process of registering a Enduring Power of Attorney

A
  • It can be used by the donor or attorney before registration
  • Must be registered as soon as mental capacity is lost/becoming lost
  • with the OPG
  • Attorneys power is suspended during registration
  • Once registration is complete the attorney can continue to act.
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17
Q

Describe the how a LPA differs from an EPA regarding registration

A
  • It can only be used once registered
    -with the OPG
  • In most cases LPA’s will be registered straight away
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18
Q

Compare how EPA’s and PLPA’s differ regarding scope and extent of the donor’s and attorney’s powers?

A

EPA’s
- Attorney can deal with property and financial affairs only
- After registration only attorney can act
- Only habitual and seasonal gifts, larger require COP application
- Donor can revoke

LPA’s
- Attorney can deal with property and financial affairs not personal welfare
- After registration attorney or donor can act
- Only habitual and seasonal gifts, larger require COP application
- Donor can revoke

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19
Q

Explain how a Discretionary Will Trust operates

A
  • Can be used to leave estate/part of estate to trust, created in their Will
  • Settlor names individuals/classes to include as potential beneficiaries
  • trustees have discretion on who receives anything
  • trustees not obliged to appoint capital/income to anyone
  • settlor chooses trustees
  • can leave letter of wishes, doesn’t have to be followed
  • may be 10 year anniversary charges
  • may be exit charges
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20
Q

Name 4 beneficiary circumstances where a Discretionary trust would be better than a Bare trust

A
  • B about to divorce
  • B about to go bankrupt
  • Unborn children at time of setting up trust, can benefit if covered by class
  • B is financially irresponsible/addictions
  • Minor B that settlor doesn’t want to have access at 18
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21
Q

What alternative to bankruptcy exists if county court judgement already exists, for debts upto £5,000

A
  • Administration Order
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22
Q

Describe the conditions for an Administration Order

A
  • Make regular payments to the court
  • These are then paid to creditors
  • Court charges unto 10% of the debt as admin fee
  • Only on debts unto £5,000, owed to more than 2 creditors
  • Needs regular income
  • Must have had CCJ against them
23
Q

How is CGT calculated in a trust for Vulnerable beneficiaries?

A
  • 2 stages
  • trustees calculate tax as if the gain was on them
  • then calculate tax if directly on the beneficiary
  • then claim relief on the difference
24
Q

List 3 types of eligible trusts for ‘relevant’ minors

A
  • Statutory trust if no Will is left
  • Trusts established under the Will of a deceased parent
  • Trusts established under the Criminal Injuries Compensation Scheme
25
Q

How is CGT insured during the year before death treated and taxed?

A
  • PR’s are responsible for paying the CGT due at date of death
  • PR’s can claim CGT annual exempt amount
  • Tax calculated as if still alive
  • Payable at appropriate marginal rate
  • PR’s can claim for losses in last tax year
26
Q

What factors should a trustee of a SIPp consider on death of a member?

A
  • Any nominations or expression of wishes
  • Trustees have discretion over who receives benefits
  • Need to consider other reasonable requests and family circumstances
  • may have set up discretionary trust or spousal bypass trust
  • dictated by scheme rules
27
Q

State how a chargeable gain incurred in the 2018/19 tax year will be treated for tax purposes for a UK resident settlor of a discretionary trust holding an onshore bond.

A
  • Will be assessed to Income Tax
  • Assessed on Settlor
  • Using highest marginal rate
  • Subject to any top slicing
  • Receives 20% tax credit for ax paid by bond
  • Offset against liability
28
Q

List 4 types of chargeable events which may occur with an Onshore Bond in a Discretionary Trust

A
  • Death of last surviving life assured
  • Encashment of entire bond
  • Partial encashment
  • On maturity of the policy
  • If any withdrawals in excess of cumulative 5% per annum allowance
29
Q

List the principal factors to consider when selecting an investment for a trust (12)

A
  • What type of trust is being used
  • What are the tax implications of the trust
  • What are the beneficiary ages, timescales and entitlements
  • The Trust management expenses and costs
  • The need for income and capital and the trust objectives
  • The risk profile of the beneficiaries
  • Provisions of the trust deed
  • Trustee Act 2000
  • What are the economic conditions
  • Amount available to invest
  • Historic fund performance
  • Ethical investment requirements
30
Q

Identify 3 requirements that must apply to act with a Health and Welfare LPA

A
  • Donor must have lost mental capacity
  • The LPA must have been registered, with the COP
31
Q

List 6 types of decision an attorney can make for a donor with a HLPA

A
  • daily routine
  • personal care services
  • medical care
  • where donor lives
  • end-of-life care
  • social services
32
Q

Explain how a mutual Will works

A
  • Mutual Wills are an agreement where a couple effect Wills
  • Disposing of their property in an identical way
  • A mutual Will can be revoked prior to the first death
  • With the consent of both parties
  • The testators assets are left to the survivor on first death
  • After the first death the Will of the survivor can not be changed
  • on second death assets are left to the children.
33
Q

State the requirements for the Will to be legally valid

A
  • Signed and witnessed by 2 independent people
  • Testator must be over 18
  • They must be of sound mind
  • Under no pressure to make the Will
  • In writing
  • It must be signed by the testator
34
Q

Describe the duties of the administrator of an estate

A
  • The administrator determines the assets and liabilities of the estate
  • collects the assets of the estate
  • pays liabilities of the estate
  • including taxes
  • completes estate accounts
  • before applying to the probate registry for grant of letters of administration
  • once grant is received
  • the administrator can distribute the estate as per laws of intestacy
35
Q

Explain the impact of CGT holdover relief if shares are transferred into a discretionary trust

A
  • CGT holdever relief for a disctretionary trust allows realised gains to be deferred
  • All the trustees must agree to applying for gains to be held over
  • That would otherwise by chargeable to CGT on disposal
  • No CGT is due on settlor’s gift into the trust
  • The market value of the shares
  • On the day the shares were transferred into trust
  • Would then be reduced by the amount of held over gain
  • Leaving the trustees acquisition base cost as the cost at which settlor acquired them
36
Q

Identify 4 State benefits that would indicate that an adult beneficiary was entitled to the protection of the trusts for vulnerable beneficiaries provisions

A
  • Attendance allowance
  • Personal independence payment
  • Constant attendance allowance
  • Disability living allowance
37
Q

Describe how the disposal of shares made by the PR during administration period are treated for CGT.

A
  • the PR are liable for CGT at 20% on disposals made during the administration period.
  • they will be liable for CGT on the gain made post-death of £20,000
  • they are deemed to have acquired the shares at market value at the date of death
  • they are entitled to deduct the annual exempt amount of £12,300
  • they will pay 20% on the balance between the post death gain and annual exempt amount
38
Q

Describe briefly how Level Term Assurance can be written into trust?

A
  • can write existing policy under trust by executing a suitable trust deed.
  • can then assign the legal ownership of the policy to trustees using a deed of assignment
  • for the benefit of the beneficiaries
  • a notice of the assignment should be given to the life office
  • and the deed should be kept with the life policy
39
Q

Explain how an onshore single premium life assurance bond, written under a discretionary trust will be assessed for tax purposes.

A
  • As settlor not alive in the tax year when the bond is surrendered
  • The gain will be assessed to income tax
  • On the trustees
  • Trustees eligible for the starting rate band of £1,000
  • Which will usually be taxed at 20%
  • As the bond is UK based a notional 20% tax credit is offset against the IT liability
  • On the remaining taxable gain, the trustees will be taxed at the rate applicable to trusts
  • Which is 45%
  • The net tax liability is 45% (trust tax) – 20% (tax credit) = 25%
  • NO top slicing
40
Q

Conditions for WOL, under trust premiums to qualify under normal expenditure exemption

A
  • They should be regular/habitual
  • They are made out of income
  • Gifts should not reduce the transferor’s standard of living
  • Gifts are made as part of the settlors normal expenditure
41
Q

5 types of income that qualify for the normal expenditure exemption

A
  • Earned income
  • Pension income
  • Dividend income
  • Savings income
  • Rental income
42
Q

Identify principal factors that should be considered when the last surviving life assured on a life policy in trust dies.

A
  • Trustees should claim the policy proceeds
  • Review trust document
  • Consider if they need to invest
  • Consider other beneficiary needs
  • Consider if the life assureds death requires a payment to their estate
  • Tax implications
43
Q

Outline the legal definition of a trust

A
  • A trust is an arrangement where the settlor,
  • Creates a legal obligation over property
  • To transfer the property to the trustees
  • Over which the trustees have control
  • For the benefit of beneficiaries
  • Any one of whom may enforce the obligation
44
Q

State 3 ways trustees may be appointed when a trust is created

A
  • By the deed that creates a trust
  • Where a trust is created by a Will
  • Under the laws of intestate succession
  • By the court
45
Q

what action can a trustee in bankruptcy take on a regular premium life assurance policy, held under a MWPA 1882 trust, if the settlor becomes bankrupt?

A
  • The trustee in bankruptcy cannot claim the policy
  • Even if it was taken out with intent to defraud creditors
  • The only claim that the TOB can make is on the premiums paid by the bankrupt and even then,
  • Only if it can be proved that the policy was taken out with the intent to defraud the creditors
  • This protection does not extend to any beneficial interest of the bankrupt
46
Q

Explain the rule set by the decision in Knight vs Knight (1840)

A
  • The rule set by Knight v Knight is that for a valud trust to be created, there needs to be three certainties
  • Words/intentions
  • The most obvious was to demonstrate an intention to create a trust is by putting that intention in writing
  • Subject matter
  • The subject matter, the property to be held upon trust, must be certain
  • Objects
  • The objects of the trust, the beneficiaries, must be certain
47
Q

Describe the non-tax features of an 18-25 trust

A
  • A trust for the benefit of a person under age 25
  • Set up under a Will or intestacy of a deceased parent
  • Or under the Criminal Injuries compensation scheme
  • The beneficiaries do not automatically receive the trust benefits at 18
  • Until then income is accumulated
  • Accumulated trust income and or capital can be appointed to the beneficiairies
  • At the discretion of the trustees any time between 18 and 25
  • Beneficiaries must become entitled to trust income and capital by age 25
48
Q

Describe the legal consequences of death of one of the owners, if property is held Joint Tenancy

A
  • When property is held under a joint tenancy, all joint holders have an identical and equal interest in the property
  • When one joint tenant dies, the property passes automatically to the surviving joint tenant
  • Because of right of survivorship
  • The deceased person’s share of the property cannot therefore be disposed of by their Will or Intestacy
  • This is not a transfer of value for IHT purposes
49
Q

Describe the legal consequences of death of one of the owners, if property is held as Tenants in Common

A
  • Where the property is held under a TIC, on the death of one joint tenant their share passes as part of the deceased tenants estate
  • As directed by their Will or the law of intestacy
  • This does result in a transfer of value for IHT purposes
  • This could reduce the security of tenure for the surviving tenant following the first death
50
Q

Explain briefly the key assessment factors used to decided If a donor has regained mental capacity

A
  • Can donor understand the information required to make a decision
  • Can donor understand the consequences of making or not making a decisions
  • Can donor weigh up information to make a choice
  • Can donor communicate the decision
51
Q

Outline the steps that a donor would need to take to formally manage their own affairs again following their recovery

A
  • An application should be made to revoke the EPA
  • To the COP
  • Accompanied by medical evidence that the donor now has capacity
  • And a fee of £365 needs to be paid
52
Q

Describe the court of protection considerations in appointing a deputy

A
  • If a person loses mental capacity
  • And there is no valid lasting power of attorney or EPA
  • The COP will have to decide who would be a suitable deputy
  • The deputy will usually be a close friend or family member of the person who needs help
  • But they can be a professional
  • Deputy must be over 18
  • The deputyship will be evidenced by the court
53
Q

State 4 pieces of guidance from the Mental Capacity Act 2005 Code of Practice that a deputy should adhere to in performing their duties.

A
  • To only make decisions in the persons best interests
  • To only make the decisions allowed by the court
  • And always apply a high standard of care when making decisions
  • And keep a record of any decisions made in the role

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