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J02 Trusts > General > Flashcards

General Flashcards

1
Q

Difference in trustees exercising duty and discretion

A

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

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2
Q

Types of trust to avoid a child who isn’t good with money squandering an estate and how

A

🤩 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

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3
Q

Main types of trust (7)

A

😊 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

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4
Q

What are the features of an18-25 trust?

A

👩‍👦 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

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5
Q

Differences in Master Trust and Deed Poll for pensions

A

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
🤩

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6
Q

What is a loan trust and how does it work?

A

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

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7
Q

Advantages and disadvantages of a loan trust

A

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

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8
Q

Circumstances to review a trust

A

😃 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

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9
Q

What are the exceptions to the relevant property trust regime?

A

🙄 IIP before 22/02/2006
🙄 Transitional serial interests before 5/10/2008
🙄 IPDI
🙄 Trust for bereaved minor
🙄 18-25 trusts

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10
Q

What is an Accumulation and Maintenance trust?

A

🤨 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

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11
Q

What are the advantages and disadvantages of using a trust?

A

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

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12
Q

What is tenancy in common?

A

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

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13
Q

What is joint tenancy?

A

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

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14
Q

What can a beneficiary do for a breach of trust by trustees?

A

Can take legal action against the trustees

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15
Q

What options do the court have when dealing with a breach of trust?

A

Issue an injunction preventing the trustees taking the course of action

Order trustee to make restitution

Order return of any property wrongly transferred

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16
Q

Can a third party be liable (not a trustee)?

A

Yes

If dishonest not just negligent

They are aware of the trust

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17
Q

What does a contract require that is not applicable to a trust?

A

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

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18
Q

What happens when last trustee dies?

A

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

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19
Q

Advantages of a corporate trustee

A

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

20
Q

Disadvantages of a corporate trustee

A

Charges for services

Less likely to have knowledge of settlor’s/beneficiaries personal circumstances

Family may lose control

21
Q

What is an implied trust?

A

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

22
Q

Methods of creating a trust?

A

Implied trust

Deed

Will

Intestacy/statute (Married Woman’s Property Act 1882)

Imposed by law/via court order

Secret/half secret trust

23
Q

What is a perpetuity period?

A

Maximum period a trust may last

At the end of this period trust comes to an end and powers must cease

24
Q

What is an accumulation period?

A

How long trustees can accumulate income within a trust

25
Q

Perpetuity period prior to 6/4/2010 and post 2010

A

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

26
Q

What powers do courts have under Variation of Trusts Act 1958?

A

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

27
Q

Who can benefit from court varying a trust?

A

Those who can’t consent

👨‍👦‍👦 minors
👨‍👨‍👧‍👧 mentally incapacitated
👫 contingent beneficiaries
🍼 unborn beneficiaries
📜 discretionary interest under a protective trust

28
Q

Drawbacks of making an application to court to vary a trust?

A

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

29
Q

What are types of Statutory trust?

A

Married Womens Property Act 1882

Trusts created for minors under the law of intestacy

30
Q

What are features of a statutory trust?

A

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

31
Q

Describe a Discounted Gift Trust?

A

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

32
Q

Describe how a a flexible reversionary trust works?

A

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

33
Q

When can transitional serial interest arise?

A

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

34
Q

IHT rules for transitional serial interest

A

PET - not taxable under relevant property regime

Treated as being on beneficiary’s estate for IHT purposes

No periodic or exit charges

35
Q

What benefits indicate an adult was entitled to protection of trusts for vulnerable beneficiaries?

A

PIP
Attendance allowance
Disability living allowance
Increased disablement pension
Constant attendance allowance
Armed forces independence payment

36
Q

When can the vulnerable beneficiaries provisions be revoked?

A

Person ceases to be vulnerable

Ceases to be a qualifying trust

Trusts are terminated

37
Q

Who can be classed as a vulnerable beneficiary? (2)

A

Disabled person - state benefits

Relevant minor - under 18 and at least one parent died

38
Q

Domicile status?

A

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

39
Q

Benefits of a flexible reversionary trust?

A

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

40
Q

Drawbacks of a flexible reversionary trust?

A

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

41
Q

Advantages of a DGT?

A

Immediate IHT mitigation but maintain regular income stream

Transfer of value less than investment

Exceed NRB with not entry charge due to discount

42
Q

Drawbacks of DGT?

A

Inflexibility

Funds could be exhausted in lifetime

Most suited to older individuals

43
Q

Advantages of a loan trust?

A

Growth outside estate

Settlor has access to cash

Flexibility of beneficiary as a disc trust

44
Q

Drawbacks of loan trust?

A

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

45
Q

Describe a single and double trust in a flexible reversionary trust

A

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

J02 Trusts (9 decks)

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