General Flashcards
Difference in trustees exercising duty and discretion
DUTY
😇 Bound by statutory duty of care
😇 Must use utmost due diligence to avoid loss
DISCRETION
🥸 Act in good faith (bona fide)
🥸 Act with the diligence they would use in managing own business affairs
Types of trust to avoid a child who isn’t good with money squandering an estate and how
🤩 Discretionary Trust
🤩 Power of appointment trust
😫 Flexibility
😫 Trustees have power of appointment - beneficial interest can be changed & default beneficiary has right to income
😫Caters for changing circumstances
😫Spendthrift can be a beneficiary
😫 Beneficiary won’t benefit until decided appropriate by trustees
Main types of trust (7)
😊 Express trust - expressly created by will/deed
😁 Implied trust - implied by actions
😎 Presumptive trust - 1 person buys property in name of another
🤪 Purpose trust - e.g maintain a building
😡 Successive trusts - property held in trust for succession of interests
🤩 Constructive trusts - one imposed by law, regardless of intentions
🥰 Resulting trust - a failure of the trust on which the property is held
What are the features of an18-25 trust?
👩👦 Trust for minor set up under terms of will/intestacy/ of a deceased parent or under Criminal Injuries Compensation Scheme
👩👦 Trust for benefit of a person under 25
👩👦 Absolute interest of income and capital by 25
👩👦 Beneficiary only treated as owner until 18 - IHT purposes
👩👦 Don’t automatically receive benefits at 18 - income is accumulated
👩👦 Accumulated income and capital can be appointed to beneficiaries at trustee discretion between 18-25
👩👦 Exit charge when absolute entitlement given - calculated on period since 18th birthday - 28 periods
Differences in Master Trust and Deed Poll for pensions
MASTER TRUST
🤩 Pension provider is the trustee
🤩 Holds underlying investments and manages arrangement
🤩 Contractual rights set out in membership document
DEED POLL
🤩 Pension provider executes a deed - set up scheme
🤩 Deed declares - adherence to legislative requirements and will only make payments for approved purposes
🤩 Individual policies to client
🤩
What is a loan trust and how does it work?
Allows investors to have access to original capital while achieving IHT benefits gradually
🥳 Set up a discretionary trust
No transfer of value for IHT on transfer in as settlor has not made a gift
🥳 Interest free repayable on demand loan to trustees - no transfer of value
🥳 Trustees invest in an investment bond
🥳 Loan is repaid using 5% allowance
🥳 Can demand repayment at anytime
🥳 Investment growth held for benefit of beneficiaries - outside settlors estate as can’t benefit for it
Settlors entitlement is limited to value of loan
🥳 Any loan balance remaining = part of estate and passes by will/intestacy
Calculating periodic charges the value of trust fund is reduced by outstanding loan- no exit charges on loan repayments
Settlor usually appointed as one of the trustees
Advantages and disadvantages of a loan trust
ADVANTAGES
👍 Growth outside estate - value of capital frozen in estate
👍 Access to cash for settlor - early repayment/income
👍 Flexibility of beneficiaries - discretionary trust
DISADVANTAGES
👎 Value of loan remains in estate
👎 Outstanding loan forms part of estate
👎 Income only last 20 years if full 5% withdrawals are taken
👎 Gradual IHT saving - long term so negligible if settlor dies early
Circumstances to review a trust
😃 Death of trustee/beneficiary
😀 Serious illness of trustee/beneficiary
😀 Bankruptcy of settlor/trustee/beneficiary
😀 Marriage
😀 Divorce
😀 Separation
😀 Changes in income and wealth
😀 Disputes between settlor/trustees/beneficiaries
😀Legislative changes
😀 Economic changes
😀 Tax changes
What are the exceptions to the relevant property trust regime?
🙄 IIP before 22/02/2006
🙄 Transitional serial interests before 5/10/2008
🙄 IPDI
🙄 Trust for bereaved minor
🙄 18-25 trusts
What is an Accumulation and Maintenance trust?
🤨 Type of discretionary trust
🤨 One or more beneficiaries are legally entitled to capital/income on reaching age no later than 25
🤨 until then income held or applied for the maintenance,education or benefit of beneficiaries
🤨 Last no longer than 25 years or be for benefit of grandchildren
What are the advantages and disadvantages of using a trust?
ADVANTAGES
👍 Reduce IHT payable on death
👍 Retain some control over gifted assets
👍 Stop assets from falling into the wrong hands
👍 Decisions delayed as to who ultimately gets assets
DISADVANTAGES
👎 Possible restricted access to assets
👎 May not be able to alter trust
👎 Survive 7 years for IHT savings
👎 Higher rates of income tax and CGT than individuals
👎 Ongoing IHT charges
What is tenancy in common?
One party dies their share passes to their estate - not other party
Dispose of in accordance with will/law of intestacy
Results in a transfer of value for IHT purposes
Could reduce security of tenure for surviving tenant after first death
What is joint tenancy?
Joint parties have equal and identical interest
Property passes automatically to survivor on death - ‘rights of survivorship’
Can’t be disposed of by will/intestacy of deceased
Not a transfer of value for IHT purposes as equal interest
Severed if one party is declared bankrupt
What can a beneficiary do for a breach of trust by trustees?
Can take legal action against the trustees
What options do the court have when dealing with a breach of trust?
Issue an injunction preventing the trustees taking the course of action
Order trustee to make restitution
Order return of any property wrongly transferred
Can a third party be liable (not a trustee)?
Yes
If dishonest not just negligent
They are aware of the trust
What does a contract require that is not applicable to a trust?
Offer and acceptance required
Agreement between all parties - all parties need to be aware
Consideration required (something of value given for a promise)
Only contracting parties have legal and equitable rights
A contract with a minor is unenforceable
What happens when last trustee dies?
Not void by death of trustees
Personal reps/executor of last surviving trustee can act until an appointment is made by appointer
If no appointer specified in trust/appointer dead personal rep can continue to act
Or appoint new trustees - all fails court can appoint
Advantages of a corporate trustee
Offers continuity - no need to replace on death - can’t die
Professional knowledge/expertise/less risk of not adhering to trustee responsibilities
Less risk of conflict of interest
Disadvantages of a corporate trustee
Charges for services
Less likely to have knowledge of settlor’s/beneficiaries personal circumstances
Family may lose control
What is an implied trust?
Not expressly written/created
Implied by actions
Intentions of the parties
Example = business partnership purchases a property and arranges for conveyance to be to one party only, this party holds on trust for all parties - even though no written document
Methods of creating a trust?
Implied trust
Deed
Will
Intestacy/statute (Married Woman’s Property Act 1882)
Imposed by law/via court order
Secret/half secret trust
What is a perpetuity period?
Maximum period a trust may last
At the end of this period trust comes to an end and powers must cease
What is an accumulation period?
How long trustees can accumulate income within a trust
Perpetuity period prior to 6/4/2010 and post 2010
Lifetime of specified person alive when trust created + 21 years
Or
Fixed period of 80 years from the date the trust was created
Post =125 years from creation of trust
What powers do courts have under Variation of Trusts Act 1958?
Wide, discretionary powers to vary trusts and beneficial interest within
For benefit of any beneficiaries who can’t consent.
Can’t take away interest of adult beneficiary who has not agreed
Power to trustees to act outside of powers if expedient for trust
Divorce/separation
Who can benefit from court varying a trust?
Those who can’t consent
👨👦👦 minors
👨👨👧👧 mentally incapacitated
👫 contingent beneficiaries
🍼 unborn beneficiaries
📜 discretionary interest under a protective trust
Drawbacks of making an application to court to vary a trust?
Costly
Time consuming
No guarantee the judge will agree
Evidence needed to support view that varying the trust would benefit beneficiaries who can’t consent for themselves
What are types of Statutory trust?
Married Womens Property Act 1882
Trusts created for minors under the law of intestacy
What are features of a statutory trust?
Created by law
Provides protection for creditors
Benefit of spouse/CP/children
Doesn’t include step children/grandchildren
Named or my spouse/my children
Potentially more complex to administer/costly
Potentially complex taxation
Describe a Discounted Gift Trust?
Settlor makes gift to trust = PET if bare trust/CLT if discretionary trust
Settlor retains rights to fixed capital sums must be taken - retained rights have no value on death = immediate saving for IHT
Gift is discounted for the purpose of IHT transfer = transfer of value for IHT is less than original investment due to immediate discount, so can original can exceed NRB
Discount only relevant if settlor dies within 7 years - if dies within 7 years gets an immediate IHT saving
Relatively inflexible no access to capital
Beneficiary can’t receive benefit while settlor is alive.
Settlor needs to be medically underwritten
Can set up joint so payments continue for life of surviving settlor
Inflexible
Describe how a a flexible reversionary trust works?
Cash gift - single or double trust
Invests in series of surrenderable single premium endowment polices with multiple lives assured
Each policy has a maturity date - one a year from policy anniversary
If trustees allow policy to mature = value of units payable to settlor as income - chargeable gain on their rate - set date once a year.
Trustees can decide to extend maturity
Trustees can surrender polices at any time and pay cash to beneficiaries or assign policies so tax on beneficiaries not settlor
No discount at outset
When can transitional serial interest arise?
Beneficiary had an IIP before 5 Oct 2008 in a trust created before 22 March 2006
IIP arose on death of a spouse who had IIP before 5 Oct 2008
A current IIP arose on death of any person with serial transitional serial interest where trust fund includes a pre-March 2006 life policy
IHT rules for transitional serial interest
PET - not taxable under relevant property regime
Treated as being on beneficiary’s estate for IHT purposes
No periodic or exit charges
What benefits indicate an adult was entitled to protection of trusts for vulnerable beneficiaries?
PIP
Attendance allowance
Disability living allowance
Increased disablement pension
Constant attendance allowance
Armed forces independence payment
When can the vulnerable beneficiaries provisions be revoked?
Person ceases to be vulnerable
Ceases to be a qualifying trust
Trusts are terminated
Who can be classed as a vulnerable beneficiary? (2)
Disabled person - state benefits
Relevant minor - under 18 and at least one parent died
Domicile status?
Domicile of origin - decided at birth - permanent home of father
Domicile of choice - move indefinitely
Domicile of dependency - under 16 and father changes domicile
Deemed domicile rule - uk tax resident 15/20 years
Benefits of a flexible reversionary trust?
Whole gift outside estate after 7 years
Annual payments but only if needed/will spend
Allows payments to beneficiaries during settlor lifetime
Can remove future growth from estate if maturity or taken
Drawbacks of a flexible reversionary trust?
Death within 7 years whole gift in estate
No discount at outset Ltd NRB if wants no tax charge CLT
Growth realised on maturities - taxable
No 5% allowance during settlor lifetime
Advantages of a DGT?
Immediate IHT mitigation but maintain regular income stream
Transfer of value less than investment
Exceed NRB with not entry charge due to discount
Drawbacks of DGT?
Inflexibility
Funds could be exhausted in lifetime
Most suited to older individuals
Advantages of a loan trust?
Growth outside estate
Settlor has access to cash
Flexibility of beneficiary as a disc trust
Drawbacks of loan trust?
Value of loan remains in estate for IHT purposes
Outstanding loan amount forms part of estate on death
Max 5% withdrawals would cease after 20years
Tax saving gradual and negligible if settlor dies early
Describe a single and double trust in a flexible reversionary trust
Single = settlor assigns polices to discretionary trust
Double trust = settlor assigns policies to bare trust for own benefit then irrevocably assigns beneficial interest in each policy to discretionary trust
