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Trusts - J02 > Introduction to Trusts > Flashcards

Introduction to Trusts Flashcards

1
Q

Why Trusts

A
  1. Legal & Admin Reason - if children are minor
  2. Flexibility - if settlor wants to provide benefits for a class of settlor
  3. Protection - if beneficiary is mentally impaired/ donor considers too young.
  4. Tax planning purposes
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2
Q

Trust Law

A

Main law: Trustee Act 1925
Others:
Law of Property Act 1925
Administration of Estates 1925
Recognition of Trust Act 1996
Trustee Delegation Act 1999
Trustee Act 2000 - applies to England & Wales
Trustee Act (Northern Ireland) 2001 - applies NI
Perpetuaties & Accumulations Act 1964 & 2009
Inheritance & Trustees Power Act 2014

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3
Q

Trust Rules

A

The trust rules that must be adhered to to create a valid trust.

  1. Words/Intention - the intention to create a trust put in writing.
  2. Subject Matter - Property that is being transferred into trust.
  3. Objects - the beneficiaries of the trust
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4
Q

What is a Trust

A

This is a way of holding property for the benefit of another without giving them full control over it.

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5
Q

Basic Legal Definition of a Trust

A

It is an arrangement where an individual (settlor) creates a legal obligation over property that requires

a) Other persons (trustees)
b) To deal with the property they control (trust property)
c) For the benefit of others (beneficiaries) any onw of whom can enforce the obligation

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6
Q

Hague Convention on Law Application to Trusts - comprehensive dfinition

A

‘trust refers to the legal relationship created ‘inter vivos’ (during lifetime) or on death by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or a specified purposes.

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7
Q

Characteristics of a Trust

A
  1. Assets constitute a separate fund and are not part of the trustees own estate.
  2. Title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustees
  3. The trustees have the power & duty and are accountable to manage, employ or dispose of assets in accordance with the terms of the trust and the special duties imposed upon the trustees by law.
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8
Q

Trustees & Beneficaries

A

Every trust will have division of ownership
Legal Ownership (Trustees) - as trustees are legal owners they can claim against a life office.
Beneficial (Equitable) Ownership - they can claim against the trustees in accordance with the terms of the trust.

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9
Q

Trust Property

A

Any type of property can be subject to a trust
Except ISA’s
If there is a register of property the trustees names will show (i.e. Land Registry)

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10
Q

Trust Property - Asset Terms (1)

A

Realty - freehold interest in land
Chattals Real - leasehold interests in land
Choses in Possession - tangible assets that can be physically handled (jewellry, art, furniture, motor vehicles)

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11
Q

Trust Property - Asset Terms (2)

A

Choses in Action - these are intangible and are rights not physical objects (life assurance policies, capital redemption policies, debts, reversionary interests & shares, OIECs, Unit Trusts).
Divided into:
a) Those that can be taken into possession immediately (debts due now).
b) Those that cannot ( debt repayable in the future or reversionary interest under a trust)

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12
Q

Investments held in Trust

A

Collectives - income or growth producing
Easier to manage if different beneficiaries are entitled to income and/or capital.
Investment Bonds - onshore or offshore.
Are deemed non income producing and so no annual tax returns are required

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13
Q

Trust & Contract Law - Key Differences (Trusts)

A
  1. No offer and acceptance required
  2. No consideration needed
  3. Beneficiaries may not even know about the trust.
  4. Minors can be beneficaries
  5. Trustees are legal owners, but beneficiaries can enforce the trust if a breach occurs.
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14
Q

Trust & Contract Law - Key Differences ( Contracts)

A
  1. Offer and acceptance is required
  2. Consideration is required
  3. Parties must be aware
  4. Agreement is required between parties
  5. A contract made with a minor is usually enforceable
  6. Only parties to a contract generally have legal or equitable rights under it.
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15
Q

Trust Terms - the Settlor

A
  • Person who puts assets into trust is a settlor
  • The settlor transfers legal ownership of the property to the trustees.
  • The transfer is usually made by ‘Deed of Trust/Deed of Settlement’.
  • The settlor can be trustee - allows the settlor to retain some control.
  • Possible to set up trust on joint settlor basis - each person who makes a transfer into the trust is treated as settlor of the trust.
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16
Q

Trust Terms - the Protector

A
  • The protector has powers to veto certain decisions made by trustees or remove them from acting.
  • Exist to ensure that the administration of the trust follows the settlors intentions.
  • Can also be termed advisers, a management committee.
  • A protector is not normally a trustee.
  • Having a protector can be useful when trustees are a professional firm (corporate trustee) so that is necessary, the protector can remove the corporate trustees and appoint a new one.
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17
Q

Trust Terms - the Trustee

A
  • They are the legal owners of the property.
  • Their role is to manage it as if it were their own.
  • There can be any number of trustees (normally 2-5)
  • Where a trust holds land there must be a minimum of 2 trustees, unless the trustees is a trust corporation and the max number is 4.
  • A trust cannot exist without a trustee but a trust doesnt failr or become void because there are not trustees
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18
Q

Who can be a Trustee

A
  • Must be over 18 and of sound mind
  • A prisoner or bankrupt can be a trustee - not good practice.
  • A trustee can be a Professional Trustee or a Lay Trustt
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19
Q

Types of Trustee - Professional Trustee

A
  • Usually has professional knowledge and experience
  • May work for a firm of professional trustees
  • Will not be a beneficiary of the trust
  • Can be a financial adviser, solicitor, accountancy of finance managers.
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20
Q

Type of Trustee - Lay Trustee

A
  • An individual with no specialist knowledge
  • Usually relatives of the settlor and beneficiary
  • Settlor choses them because they trust them to carry out their wishes, look after the trust assets, and distribute accordingly.
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21
Q

Type of Trustee - Corporation

A
  • can appoint a corporation as a trustee (banks)
  • Public Trustee is a Government department offering this service.
    Benefits:
    a) A company cannot die offers continuity without the need to replace an individual trustee on death
    b) Has the professional expertise to run a large or complex trust where investment and taxation needs to be managed.
    Disadvantages:
    a) charges for service - may not be suitable for small trust as they charge % and min annual fee.
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22
Q

Trustees - Duties & Responsibilites

A
  • They must adhere to the trust deed
  • Must protect the trust property (and hold title correctly)
  • Must ensure they are registered if applicable (Land Reg)
  • Must do everything for the benefit of the beneficiaries.
  • Must act impartially among the beneficaries
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23
Q

Trustees - Trustee Act 2000

A 
The trustees have a statutory duty of care under this act which applies to:
1. the exercise of investment powers
2. the aquisition of land
3. the appointment of agents
4. nominees and custodians
5 the insurance of trust property

A higher duty of care applies to professional trustees.

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24
Q
  1. General duty of Investment Powers
A
  • Any cash coming into the trust must invest unless paying out directly and immediately to a beneficiary.
  • Most modern trust deeds contain wide powers of investment.
  • If a trust deed (old) has no specific investment powers then the Trustee Act provided wider scope - BUT DOES NOT OVER-RIDE ANY PROVISIONS IN THE TRUST.
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25
Q
  1. Exercising Investment Powers
A

Trustees must

a) Take account of Standard Investment Criteria - regard to the suitability & need for diversification.
b) Keep investments under review and vary if appropriate. If a professional acts as trustee they must take account of the tax position & beneficaries,
c) Obtain & consider property advice - how the power to invest should be exercised. Unless the trustee considers the cost of obtaining advice would be disproportionate or the trustees have the required skills.
d) Keep proper accounts - the beneficiaries are entitled to see these as well as any reasonable information about the dealings of the trust on demand.
e) Trustees are personally liable to the beneficiaries for losses caused by their default and bad management.
f) must act with utmost due diligence to avoid any loss and will be liable to the beneficiaries for any breach of this duty.
g) Must avoid conflicts of interest; difficult if the trustees is a also a beneficiary.

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26
Q

Powers of Trustees

A
  • The Trustee Act 200 gives trustees the power to invest trust assets in the same way as outright (legal & beneficial owners).
  • Trustees may acquire freehold or leasehold land in the UK as an investment, for occupation by the beneficiaries or for any other reason.
  • All trustees must agree on the exercise of a power unless the trust wording says something different.
  • Statutory powers can be varied by the wording of a particular trust deed and the deed may allow for variations during the trust period.
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27
Q

Powers of Trustees - Trustee Act 1925

A
  • This act contains statutory powers than can be exercised in addition to those given expressly in the trust wording.
    a) Section 31 - trustees can apply trust income to any infant beneficiary to provide for their maintenance, education or benefit. Unless stated in the deed a beneficiary will become entitled to income at aged 18.
    b) Oct 2014 (Section 31) - trustees have the power to advance up to the whole of a beneficiaries presumptive share to them, subject to express provisions in the trust deed. Before, trustees only had the power to apply up to half of the capital of the trust. Any advancements of capital must be taken into account as part of the beneficiaries share if they later become absolutely entitled to trust property jointly with other beneficiaries.
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28
Q

Appointment of Trustees

A

Regardless of the type of trust it should always have at least 1 trustee.

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29
Q

Appointment of Trustees - Initial Trustees

A

Trustees can be appointed in several ways

a) Where a trust is created by deed, the initial trustees ware appointed by the deed itself.
b) Where a trust is created by will, the will should name the trustees, who are usually the executors.
c) Where a trust is set up under the laws of intestate succession, the administrators will be trustees.

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30
Q

Appointment of Trustees - Replacement Trustees

Appointers

A
  • Trust deeds often name the person(s) who are entitled to appoint new trustees.
  • The appointer is frequently the settlor.
  • if the trust deed is silent, and there is no provision to appoint, the power rests with the continuing or surviving trustees or the legal personal representative of the last surviving trustee.
  • the above steps fail to appoint a new trustee one will be appointed by the Court.
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31
Q

Replacement Trustees - when/how

A

Under the Trustee Act 1925 (Section 36) a new trustee can be appointed to replace a trustee who has
a) Died
b) remains outside the UK for more than 1 year
c) Desires to be discharged
d) Refuses to act
e) is unfit or incapable of acting
f) is an infant
If a trustee is mentally incapable and there is no one willing to replace them, those beneficaries who are of full age and capacity and absolutely entitled can direct the trustees receiver or attorney to appoint a specified replacement (Trustee Act 1925 S 36)

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32
Q

Powers of Appointers

A
  • There is no statutory power enabling appointers to appoint themselves as an additional rather than a replacement trustee.
  • Under the Trustee Act 1925 appointers can appoint themselves in place of outgoing trustees.
  • If appointments are made in the trust deed must be carefully examined to see if it gives appointers power to appoint themselves.
  • If the deed gives the appointer powers to remove a trustee, there must be sufficient trustees remaining after the removal.
  • If there are fewer than 4 trustees in any trust, no new appointment can increase the number of trustees to greater than 4 where the trust includes land.
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33
Q

Trusts without appointers

A

Where a trust does not name an appointer and all the beneficiaries of the trust are of full age (at least 18) and capacity (and collectively) and absolutely entitled, the beneficiaries can direct a trustee to retire and direct the trustees to appoint a specific replacement

34
Q

Retirement of Trustees

A
  • A trustee who wishes to retire can be replaced under the Trustees Act 1925 (S36).
  • A trustee can retire without being replaced by the use of a Deed of Retirement only if
    a) a trust corporation or at least 2 trustees remain and /or
    b) the co-trustees and appointer, if any, consent to the deed
35
Q

Death of Trustees

A

The position of the death of a trustee is governed by the Trustee Act 1925 (s18). A trust is not made void by the death of a trustee.

a) If one or more trustees die, their powers can be exercised by the last surviving trustee(s). The only exception is that a sole trustee cannot give a good receipt for the proceeds of the sale of land unless that sole trustee is a trust corporation.
b) if a last or sole surviving trustee dies, their legal personal representatives can act as trustees until the last trustees until an appointment is made by the appointer.
c) if no appointer was specified in the trust deed or the appointer is now dead, the legal personal representatives can continue to act as trustees or can appoint replacement trustees under S36 of the Act.

36
Q

Trustees - Power to Delegate -Agents

A

As a general rule a trustees functions are personal and cannot be delegated to someone else, as trustees cannot effectively transfer their responsibilities fully to another person. Under the Trustees Act 2000, trustees can appoint agents and delegate to an agent any of their powers except
a) powers over distribution of trust funds.
b) how fees are dealt with
c) the appointment of new trustees, nominees or custodians
d) delegation of trust powers
Provided trustees exercise their duty of care in appointing agents, as well as reviewing the appointments and how those appointed exercise their functions they will not be liable for any acts of any person appointed.

37
Q

Trustees - Power to Delegate - Attorney

A

A trustee can delegate the exercise of any or all of their powers to an attorney under a General Power of Attorney (Trust Delegation Act 1999). This allows

a) a delegation for a period of not more than 1 year (used if trustee is having a serious op or going abroad)
b) written notice of the the power, and the reason for it, must be given to the appointer and all the other trustees within 7 days of its execution
c) A specimen Power of Attorney is set out in the Act
d) The donor of the Power of Attorney is liable for the Acts and defaults of the attorney as if they were the donors own.

38
Q

Trustees - Diligence & Integrity (Duties)

A
  • A trustee has to administer the trust for the benefit of the beneficiaries and not for personal profit.
  • Trustees are bound by their statutory duty of care and must use their utmost due diligence to avoid any loss.
  • If the trustees departs from the standard of care, the law will hold them liable for any loss caused by a breach of this duty.
  • Failure to act can amount to a breach of duty
  • A trustee is only accountable for their own acts or omissions. Unless that trustee failed to exercise the duty of care in relation to the appointment of that other person.
39
Q

Trustees - Diligence & Integrity (Discretion)

A
  • Where exercising a discretion as opposed to a duty, a different standard of care is required.
  • They must act in good faith with the diligence that an ordinary person of business would use in managing their own affairs.
40
Q

Trustees - Diligence and Duties (Investments)

A
  • When making investments the duty is to take such care as an ordinary prudent person would take if they were minded to make an investment for the benefit of other people for whom they felt morally bound to provide.
  • It should be appreciated that this is MORE than such care as a prudent person would take if they had only themselves to consider.
41
Q

Trustees - Diligence - Administration & Managing

A
  • Trustees must keep proper accounts of the trust property, which must be produced and shown to the beneficiaries if required.
  • The beneficiaries are entitled to all reasonable information concerning any dealings and investments of the trust.
  • The beneficiaries have no right to receive internal minutes showing why trustees exercised their discretion in a particular way.
  • Trustees should avoid buying property from the trust or selling property to it, to avoid any conflict of interest or allegation of acting for personal profit.
  • Such a transaction can be declared void in court at the request of a beneficiary
  • the purchase of a beneficiarys interest from a beneficiary is treated differently from the purchase of a trust property. Such a purchase is valid unless the trustee has abused their position of exerted undue influence.
42
Q

Trustees - Charges & Expenses

A
  • Lay trustees cannot usually charge for their services. (follows the principals that trustees are not permitted to benefit from their position).
  • Professional trustees can usually charge for their services under an express professional charging clause found in most modern deeds.
  • Where there is no such clause, professional trustees can charge for services performed since 1 February 2001.
  • Under the Trustee Act 2000 - this creates an express professional charging clause applicable to all non-charitable trusts that do not provide for renumeration of professional trustees.
  • Trustees are entitled to be reimbursed from the trust property for expenses properly incurred in the running of the trust i.e.
    a) insuring trust property
    b) paying any taxes on trust property
    c) the cost of proper investment advice
    d) the cost of legal advice to protect trust property
    e) if a trust owns shares in a company, it may protect its investment by arranging for one of the trustees to be appointed as a director of the company. Any directors fees paid to the director/trustee, must be paid into the trust fund, unless the trust wording says otherwise.
43
Q

Trustees - Breach of Trust

A

Examples include

a) not paying to the beneficiaries the proceeds and using it as personal gain
b) inadvertently investing trust money in an unauthorised or inappropriate investment that did not cause loss or did not make the trustee any personal profit.
* If a beneficiary believes has committed/going to commit a breach the beneficiary can take legal action against the trustee.
* the court can
a) issue an injunction preventing the trustee taking the course of action.
b) order the trustee to make restitution by making appropriate payment to the trustee.
c) order the return of any trust property wrongly transferred.
d) The trustee may liable to compensate the beneficiary for the loss.
* If a trustee does commit a breach. despite the fact they have acted honestly and reasonable a court can relive them of liability.
* individual trust wording may have a clause exonerating trustees for a non-fraudulent accidental breach of trust. Trustee exemption clauses are now widely used. These only apply as long as the trustee has not acted dishonestly. Trustee exemption clauses can validly exempt trustees for liability for breaches of trust, except fraud.
* if a 3rd party helps trustees to commit a breach of trust, or persuades them to do so, the 3rd party is liable to the beneficiaries for any consequent losses:
a) if the 3rd party was dishonest and not just negligent
b) if the 3rd party has been dishonest, even if the trustee was not, and only where the 3rd party is aware of the trust or the facts which gave rise to it.
* There is consultation over whether there should be regulation over trustee exemption clauses.
* Proposals include the power to make payments out of the trust fund to purchase indemnity insurance to cover the liability of breach of trust, and that professionals should not be able to reply on clauses that exclude their liability for breach of trust arising from negligence.

44
Q

Beneficiaries

A

Beneficaries under a trust are the equitable owners of the trust property and everything that takes place must be for their benefit.

45
Q

Types of Beneficial Interest - Absolute Interest

A

This means that the beneficiary has full equitable ownership to income and capital that cannot be taken away.

46
Q

Types of Beneficial Interest - Life Interest (Life Tenant)

A

The beneficiary is entitled to the income from the trust property for life, but has no entitlement to capital. Such a beneficiary is called a Life Tenant

47
Q

Types of Beneficiary - Remainderman

A
  • This is the beneficiary to whom the trust property passes after the death of the Life Tenant.
  • The Remainderman only get a full entitlement to a trusts income and capital AFTER the death of the Life Tenant.
  • Until then their interest is known as REVERSIONARY INTEREST (Reversionary in this context means FUTURE).
48
Q

Types of Beneficiary - Contingent

A

This type of beneficiary is one whose interest depends on the occurrence of a particular event - ‘ the contingency’. The event may never happen in which case the interest will not come to fruition.

49
Q

Beneficiaries - who?

A
  • A beneficiary can be sole or one of several joint beneficiaries.
  • Joint beneficiaries will, in general, benefit in equal shares unless the trust deed states otherwise.
  • A beneficiary may be NAMED or defined by CLASS.
  • The use of ‘all my children’ would include a child was born later after the deed was written.
  • It is important that the beneficiaries are described precisely enough so that it is evident who is a member of a particular class.
50
Q

Beneficiaries - Minors

A
  • Beneficiaries who are minors cannot demand their shares.
  • The trustees do have the powers to apply the trust income for any minor beneficiary for that beneficiaries maintenance, education or benefit.
  • Since Oct 2014 trustees can also advance the whole of the capital share of a beneficiary’s contingent interest to them, subject to express provisions contained in the trust.
51
Q

Power to end a Trust

A
  • Under the rule ‘Saunders v Vautier (1841) the beneficiaries can direct the trustees to hand over the trust property if:
    a) all the beneficiaries are ascertained.
    b) there is no possibility of further beneficiaries.
    c) there are all of full age and capacity
    d) there is an unanimous agreement of all the beneficiaries.
    This effectively puts an end to the trust.
52
Q

Types of Trust - Express Trust

A
  • A trust expressly created usually by deed or will.
  • Termed an ‘express trust’ as the terms are expressly set out.
  • A trust of personal property can be made by an express oral declaration (although this is open to ambiguity).
  • Bare/Absolute/Discretionary and Relevant Property Trusts are all types of Express Trust.
53
Q

Types of Trust - Implied Trusts

A
  • This is a trust which is not expressly created, but is implied by the actions and intentions of the parties.
  • Example: where a business partnership purchases property and arranges for the conveyance to be one of the partners only. The partner then holds the property on trust for all the partners, even if there is no formal documentation.
54
Q

Types of Trust - Presumptive

A

This is a trust where one person purchases property in the name of another; it is similar to an implied trust.
Example: where A buys a property in the name of B, there is then a presumption that B holds it in trust for A
* This presumption does not apply where A buys a property in the name of their spouse, child or a person for whom they are guardian.
* In such cases there is a ‘presumption of advancement’; a presumption that the property buyer intended to give the property as a gift to the person in whose name it was purchased.
* The risk is that this presumption can be rebutted.

55
Q

Types of Trust - Purpose Trust

A

A purpose trust exists not to benefit individuals as beneficiaries but for a purpose.
Example: to maintain a building

56
Q

Types of Trust - Successive Trust

A

A successive trust is where property is held in trust for succession of interests, taking effect one after the other.
Example: Interest in Possession trust or an immediate post death interest trust.
I.e. a marriage settlement might provide for property to be in trust for a husband for his life, thereafter for his wife for her life, and then on her death for the the children of the marriage in equal shares. If the wife dies before the husband, the children benefit as soon as the husband dies, in this way the property is subject to a succession of interest.
* The final interest in a successive trust is called the ultimate trust. Typically the ultimate trust would be for benefit of children.

57
Q

Types of Trust - Constructive Trusts

A

A constructive trust is one imposed by law, regardless of the intentions or presumed intentions of those involved.
Example: Where someone is not connected with a trust accepts some items of trust property; knowing it was a breach of trust for it to be transferred to them. That person will be legally deemed to hold it on a constructive trust for the beneficiaries and be accountable to them for it.

58
Q

Types of Trust - Resulting Trust

A

*A resulting trust arises where there is a failure of the trust on which the property is held.
* As the purpose of the trust can no longer be fulfilled, there is said to be a ‘resulting trust’ for the settlor of the trust and ownership of the property reverts to the settlor.
Example: ‘on trust for my wife’ where the settlor is unmarried or divorced and therefore has no wife. This is a resulting trust because the property cannot pass to the intended beneficiary as they don’t exist.

59
Q

BARE/ABSOLUTE TRUSTS

A

This is a trust under which assets are transferred by the settlor to the legal ownership of the trustee (or nominee) for the benefit of the beneciaries absolutely.
Example: A person is named holder of a bank account but holds it as nominee for the legal and beneficial owner.
Example: a life assurance policy in trust for X

60
Q

DISCRETIONARY TRUSTS

A
  • These are a type of relevant property trust, where a beneficiary has no specific right to income or capital in the trust.
  • Distributions are entirely at the absolute discretion
  • The trustees have the power to accumulate income (i.e. it becomes part of the capital). The deed may provide for the income to be accumulated until distributed.
  • These trusts may involve an immediate charge to IHT , usually falling on the settlor and ongoing IHT charges falling on the trust thereafter.
  • Suitability depends on the balance of flexibility and taxation factors
  • Typical wording is wide ‘on trust for my children and grandchildren in such share or shares as the trustees from time to time by deed or deeds revoacble or irrevocable appoint’
61
Q

RELEVANT PROPERTY TRUSTS

A
  • Following changes to trust legislation in the Finance Act 2006 most trusts created on or after 22 March 2006 that create flexible, successive or contingent interests are deemed Relevant Property Trusts and will give rise to an immediate Chargeable Lifetime Transfer (CLT) which may or may not result in an IHT liability dependent on the amount transferred into the trust and the settlors available Nil Rate Band.
  • Since 22/03/2006 flexible power of appointment (Interest in possession) trusts created during lifetime are taxed under the relevant property regime.
  • Prior to 22/03/2006 lifetime gifts into flexible power of appointment were treated as PETS for IHT purposes.
62
Q

Relevant Property Taxation

A

The relevant property contained in the trust (money, shares, property, houses or land) is potentially liable to IHT when
a) it is transferred out of a trust (exit charge) or
b) 10 year anniversary occurs.
The only exception are when property is
a) an interest in possession trust and made before 22/03/06.
b) subject to a ‘transactional serial interest’ made before 05/10/08
c) an IIP trust was created on a persons death (by will or intestate)
d) set aside for a disabled person
e) set aside for a bereaved minor
f) put in an 18-25 trust.

63
Q

LIFE INTEREST/INTEREST IN POSSESSION TRUST

A
  • These are trusts which involves a life interest or an interest in possession.
  • The beneficiary with an IIP for life is known as the ‘life tenant’.
  • An IIP is the right to the income of the trust fund or the right to use trust assets (e.g. right to live in a house owned by the trust).
  • For an IIP to exist there must be an immediate right to the income or enjoyment of property in settlement.
  • it will not exist where the beneficiaries right to receie the income depends on the exercise by the trusts of income powers.
  • it will also not exist where the right to receive income is dependent on the non-exercise of the trustees of a power to accumulate or otherwise divert away from the beneficiary.
64
Q

IMMEDIATE POST DEATH INTEREST (IPDI)

A
  • Introduced in the Finance Act 2006; IDPI is defined as where a person has an interest in possession in settled property and BOTH the following apply
    a) The settlement was effected via Will or intestacy
    b) The beneficiary became beneficially entitled to the IIP on death of the testator or intestate. (Testator is the person who wrote the will)
65
Q

IPDI Trust

A

Where a trust qualifies as an IPDI it will note be a deemed a relevant property trust despite it creating successive interests.
* This means the person with the IPDI trust will be treated as owning the trust fund for IHT purposes and there will be no exit or periodic charges.

66
Q

Examples of IPDI TRUST

A
  • Commonly set up for a surviving spouse
  • In this case there would be no IHT to pay on death if they have the full inter-spousal exemption and the recipient is a UK resident or domicilied in the UK.
  • Under current IHT rules, the first spouses NRB would remain intact and could be used on second death.
  • Such trusts can be set up for the benefit of anyone (i.e. sister, cohabiting partner) and whilst the spouse exemption will not apply, the trust will still benefit from other IHT advantages.
67
Q

POWER OF APPOINTMENT/FLEXIBLE TRUSTS

A
  • These are trusts where the beneficial interest can be altered.
  • This flexibility is achieved by a Power of Appointment, and gives the trustees a power to appoint or vary beneficiaries or the terms of the trust.
  • The class of beneficiary can be worded widely, thereby giving the trustees greater flexibility in the distribution of the trust.
68
Q

FLEXIBILITY OF FLEXIBLE/POWER OF APPOINTMENT

A
  • Gives the trustees power to vary the beneficiaries interests within the stated limits:
  • Can be adjusted to cater for family circumstances
  • Any replacement beneficiary must come from the class of potential beneficiaries.
  • Maximum flexibility can be retained if any appointments are made revocably (revocable only during the trust period)
  • The trust wording should specify a default beneficiary (a gift over) in case an appointment is never made or fails for some reason.
  • The default beneficiary will have a right to income (IIP) and probably also capital if the trustees do not make an appointment to other beneficiaries.
69
Q

FLEXIBLE POWER OF APPOINTMENT - SETTLOR AS BENEFICIARY ISSUES - TAXATION

A
  • Further flexibility can be obtained if the settlor is included in the list of potential beneficiaries to whom an appointment can be made.
  • The inclusion of the settlor in the trust is usually a reservation of benefit for IHT purposes and therefore has taxation disadvantages including income tax and CGT.
  • For this reason, where the settlor is the main or even potential beneficiary these are no longer recommended for tax reasons although the can sometimes be useful.
70
Q

ACCUMULATION & MAINTENANCE TRUSTS

A
  • These are a special type of discretionary trust which at one time enjoyed beneficial IHT treatment (no longer applies).
  • This type of trust is one where one or more beneficaries would become legally entitled to the capital of the trust property or income on attaining a special age not exceeding 25.
  • Until that age the income had to be held by the trustees who had the power to apply income for maintainence, education or benefit of beneficiaries.
  • To qualify for the previous (but no longer applying) preferential IHT treatment the trust could last for no longer than 25 years, unless it was set up for the benefit of granchildren of a grandparent.
71
Q

STATUTORY TRUSTS

A

These are trusts created under a statute
Example1 - Married Women’s Property Act 1882 - gave married women the right to own property and sue in their own right. Main practical effect is in relation to insurance policies effected by a husband in favor of his wife under the act, enabling her to claim on the policy on her husbands death even though she is not party to it.
Example 2 - Trusts created for minor beneficiaries under the laws of intestacy; if minor children are to benefit a statutory trust would need to be created for trustees to protect the property until the children reacg at of majority and take the property absolutely.
* There are no actual trust deeds, and if money is left to be invested there is no requirement to complete a trust deed to attach to that investment. The trustees complete a trustee application form for the investment and submit that to the provider together with proof of the statutory trust.

72
Q

Tax Planning with Trusts

A
  • if assets are put into trust during a settlors lifetime, and they survive 7 years, they are no part of the estate on death and escape IHT.
  • The sooner an individual starts using their IHT NRB, the more Nil Rate Bands they will be able to use in their lifetime as they get a new one every 7 years.
    Example: if a client used at aged 50, next at 64, then ones at 71,78 and 85, assuming the NRB remains at £325K effectively the individual could remove £1.95m, plus all the growth from their estate during their lifetime.
  • The transfer itself is exempt(for example, if it is covered by business reliefs) or chargeable, but within any available IHT NRB and the settlor survives for 7 years, no IHT will be payable at all in relation to the gift, enabling large savings to be made.
  • An individual may produce enough income to be taxed at 40% or 45%; if the surplus is put into trust for the family (excluding the individual and the spouse), the income may only be taxed at the basic rate on other family members. This may increase the family’s net income. However there are anti avoidance rules to prevent this strategy being used where the beneficaries are the settlors minor unmarried children or the settlor/or settlors spouse are beneficaries.
73
Q

Will Planning with Trusts

A

Trusts are frequently created in Wills such as for a minor.
Trusts can also e explicitly created in Wills to ensure that a beneficiary does not benefit until some other age or condition is fulfilled.

74
Q

Other Reasons for Trusts - to provide for families

A

Many trusts are created to provide ongoing financial support for families; either by will or during the settlors lifetime.

  • Funds can be built up to provide protection against the death of the main income earner and this is often combined with insurance and tax planning.
  • Trusts can be set up to protect ‘spendthrift’ beneficiaries from themselves; lesson commonly a power of appointment trust could be used where this individual is the default beneficiary. Because of the overriding power of appointment, they would not be able to insist on being paid their share, if necessary the trustees could appoint it away from the beneficiary.
75
Q

Other Reasons for Trusts - to assist a charity

A

Many charities are run as trusts; the alternative are to be run as a company or an unincorporated association.
A trust is a convenient legal form which allows the charity to be administered effectively and continue indefinately.

76
Q

Other Reasons for Trusts - to give property to those who legally cannot hold it.

A

Under English Law, property cannot be legally dealt with my minors or those who are mentally incapable. The trustees effectively look after the trust property for the beneficiaries.

  • A trust is generally used if a person wishes to arrange property for the benefit of such people.
  • The trustees hold the property for the benefit of the beneficiaries (e.g. physically holding the house in which they live or providing income).
  • Parents/grandparents wishing to hold investments on behalf of their children/grandchildren often use DESIGNATED accounts (GIA). The account could be sett up on a revocable or irrevocable basis and the underlying tax implications will depend on the type of account chosen
77
Q

Other Reasons for Trusts - to provide for a disabled or vulnerable person

A

A special trust may be set up to provide maintenance for a disabled or vulnerable person; these trusts enjoy tax advantages.

78
Q

Other Reasons for Trusts - to gain protection from creditors and business protection

A

If an individual is declared bankrupt, most of their assets can be taken and sold to repay creditors. Property in trust is protected from bankruptcy, subject to a few exceptions, because it does not belong to the bankrupt.
Example: a businessman may build up assets in a trust to protect their family against a possible future bankruptcy. However a trust cannot be used as a means of defrauding creditors.

79
Q

OWNERSHIP OF LAND

A

There are 2 ways in which jointly owned property can be held.
JOINT TENANTS - all joint holders have an indentical and equal interest in property. Where one dies the property automatically passes to the survivor because of the ‘right of survivorship’. The deceased persons share cannot be disposed of by will or intestacy. Because they have equal share this is not a disposal for IHT. It is automatically severed on bankruptcy of one of the joint tenants.
TENANTS IN COMMON - on the death of 1 tenant their share passes as part of the estate, as directed by the Will or intestacy. This does result in a transfer of value for IHT purposes. Normally the survivor can live in the house for as long as they want and it cannot be sold without her agreement.

It is possible that a joint tenancy can be converted during the joint lifetimes to a tenancy in common by an appropriate Deed of Severance, however it could reduce the security of tenure for the surviving spouse.

80
Q

ADVANTAGES OF TRUSTS

A
  • IHT mitigation - trusts can reduce IHT (7 year window).
  • Control - trustees retain control
  • Access - certain trusts allow the settlor access as well as an element of IHT mitigation (i.e. loan trusts, DGT and flexible reversionary trusts).
    Protection - trusts can protect assets from falling into the wrong hands
  • Flexibility - with a discretionary trust the settlor does not need to decide at outset who will benefit and by how much; they can list potential beneficiaries or classes of beneficary and the trust decides who gets what. The settlor can also be a trustee.
81
Q

DISADVANTAGES OF TRUSTS

A
  • Gifting into trust means the settlor does not have access to some or all of the trust funds (depending on the trust used).
  • Bare/Absolute trusts cannot be changed once they are created so the beneficiaries are cast in stone.
  • The settlor/donor must survive 7 years in order for the gift to drop outside of their estate for IHT purposes.
  • Discretionary trusts may suffer tax on entry, exit and 10th annoiversaries - in the form of periodic tax charge.
  • Income tax applying to discretionary trusts are the highest rates (45% income tax and 38.1% dividend rate).

Trusts - J02 (2 decks)

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