CII Exam Questions - J02 Flashcards
Identify the main differences between contract law and trust law
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
State 6 circumstances under which a new trustee can be appointed to replace a trustee under section 36 of the trustee act 1925
- 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
What is Section 36 of the trustee act 1925?
It covers the powers of appointment
Identify who can appoint a new trustee if there is no appointer or surviving trustees?
- The Courts
- The personal representatives of the last surviving trustee
Outline 7 benefits of using an Immediate Post Death Interest Trust?
- 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.
Explain briefly how a trust can be created by a Will and who the trustees are?
- 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
Describe how a Will would transition into a trust following his death?
- 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- Assuming the Will has not been revoked before death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.
Describe an implied trust?
- Is not created expressly so it is unwritten
- but is implied by actions
- and intentions of the parties involved
Describe an express trust?
- 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
State 5 advantages of holding single premium investment bonds in a relevant property trust
- 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
Explain briefly what trustees should consider when managing cash in a trust?
- 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
Which act gives the court power to vary beneficiaries under a trust?
- Variations of trusts act 1958
Which categories of beneficiary could benefit from a court varying beneficial interest in a trust?
- Beneficiaries that are incapable of assenting due to infancy or incapacity
- Contingent beneficiaries
- Unborn beneficiaries
- Beneficiaries with a discretionary interest under a protective trust
What case allows beneficiaries to bring a trust to an end?
Saunders v Vautier - 1841
Explain briefly the circumstances when an application to the court would be required to bring a trust to an end.
- If any beneficiary is under 18
- Or does not agree to bring the trust to an end
Describe the process of registering a Enduring Power of Attorney
- 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.
Describe the how a LPA differs from an EPA regarding registration
- It can only be used once registered
-with the OPG - In most cases LPA’s will be registered straight away
Compare how EPA’s and PLPA’s differ regarding scope and extent of the donor’s and attorney’s powers?
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
Explain how a Discretionary Will Trust operates
- 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
Name 4 beneficiary circumstances where a Discretionary trust would be better than a Bare trust
- 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
What alternative to bankruptcy exists if county court judgement already exists, for debts upto £5,000
- Administration Order
Describe the conditions for an Administration Order
- 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
How is CGT calculated in a trust for Vulnerable beneficiaries?
- 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
List 3 types of eligible trusts for ‘relevant’ minors
- Statutory trust if no Will is left
- Trusts established under the Will of a deceased parent
- Trusts established under the Criminal Injuries Compensation Scheme
How is CGT insured during the year before death treated and taxed?
- 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
What factors should a trustee of a SIPp consider on death of a member?
- 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
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.
- 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
List 4 types of chargeable events which may occur with an Onshore Bond in a Discretionary Trust
- 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
List the principal factors to consider when selecting an investment for a trust (12)
- 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
Identify 3 requirements that must apply to act with a Health and Welfare LPA
- Donor must have lost mental capacity
- The LPA must have been registered, with the COP
List 6 types of decision an attorney can make for a donor with a HLPA
- daily routine
- personal care services
- medical care
- where donor lives
- end-of-life care
- social services
Explain how a mutual Will works
- 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.
State the requirements for the Will to be legally valid
- 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
Describe the duties of the administrator of an estate
- 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
Explain the impact of CGT holdover relief if shares are transferred into a discretionary trust
- 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
Identify 4 State benefits that would indicate that an adult beneficiary was entitled to the protection of the trusts for vulnerable beneficiaries provisions
- Attendance allowance
- Personal independence payment
- Constant attendance allowance
- Disability living allowance
Describe how the disposal of shares made by the PR during administration period are treated for CGT.
- 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
Describe briefly how Level Term Assurance can be written into trust?
- 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
Explain how an onshore single premium life assurance bond, written under a discretionary trust will be assessed for tax purposes.
- 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
Conditions for WOL, under trust premiums to qualify under normal expenditure exemption
- 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
5 types of income that qualify for the normal expenditure exemption
- Earned income
- Pension income
- Dividend income
- Savings income
- Rental income
Identify principal factors that should be considered when the last surviving life assured on a life policy in trust dies.
- 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
Outline the legal definition of a trust
- 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
State 3 ways trustees may be appointed when a trust is created
- By the deed that creates a trust
- Where a trust is created by a Will
- Under the laws of intestate succession
- By the court
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?
- 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
Explain the rule set by the decision in Knight vs Knight (1840)
- 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
Describe the non-tax features of an 18-25 trust
- 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
Describe the legal consequences of death of one of the owners, if property is held Joint Tenancy
- 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
Describe the legal consequences of death of one of the owners, if property is held as Tenants in Common
- 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
Explain briefly the key assessment factors used to decided If a donor has regained mental capacity
- 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
Outline the steps that a donor would need to take to formally manage their own affairs again following their recovery
- 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
Describe the court of protection considerations in appointing a deputy
- 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
State 4 pieces of guidance from the Mental Capacity Act 2005 Code of Practice that a deputy should adhere to in performing their duties.
- 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
