Module 6 Trusts

Question 1

Main types of beneficiary

Answer 1

Absolute interest – full equitable ownership to both income and capital. Cannot be taken away

Life Interest – entitled to income from the trust but not capital – life tenant

Remainderman – entitled to capital after death of life tenant. Until then have reversionary interest only

Contingent beneficiary – interest depends on a particular event that may or may not occur

Question 2

Saunders V Vautier (1841) determined that beneficiaries can bring a trust to an end and are what circumstances?

Answer 2

All beneficiaries are certain
No possible further beneficiaries
All of full age and mental capacity
All agree

Question 3

Types of trust property?

Answer 3

Realty – freehold interest of land

Personalty
– Chattels Real - leasehold interest in land
– Chattels personal
– – Choses in action – intangible assets (life assurance that shares)
– – choses in possession– tangible objects (jewellery art antiques)

Question 4

Collectives/shares

Answer 4

Selected for income or growth depending on the needs of the beneficiaries
And a discretionary trust text at 38.1% (dividend income), 45% (all other income) in excess of the standard rate band
CGT at 20% in excess of up to 50% of the usual annual exempt amount

Question 5

Investment Bonds

Answer 5

No income therefore no need to self assess until a chargeable gain occurs
Benefit from 5% tax deferred withdrawals
Can assign to beneficiary prior to a chargeable event so can be taxed at their rates
Onshore bonds: 20% tax deemed taken at source (non-reclaimable)
Offshore bonds: benefit from gross rollup

Question 6

Difference between a trust and a contract

TRUST

Answer 6

No need for offer acceptance or consideration
Beneficiaries may not be aware of the trust
Beneficiaries can be minors
Trustees are legal owners

Question 7

Differences between a trust and a contract

CONTRACTS

Answer 7

Offer, acceptance and consideration required
All parties must be aware of the agreement
Contract with a minor may or may not be impossible
Only parties to contract have legal/equitable rights

Question 8

What are the general duties and responsibilities of trustees

Answer 8

Protect trust property by holding title documents
Ensure they are registered as legal owners for any trust property
Avoid conflicts of interest including making personal profit as such a transaction can be declared void at the request of the beneficiary

Question 9

There are 13 Investment duties and responsibilities of trustees which I have split for in relation to the Trustee Act 2000 and the other nine more general
First of all this the other nine

Answer 9

Follow a specific instructions and power is given in the trusted
Ensure everything they do is for the benefit of the beneficiaries within the terms of the trusted
Invest trust money properly and monitor investments regularly
Duty to maximise return on trust fund (Cowan V Scargill 1984) but not to risk fund by investing in has this or speculative investments
Must take account of tax position of both trust and beneficiaries
Must bear in mind and interests of all beneficiaries present and future (balance income and capital)
Must keep proper accountable trust property. Show them to beneficiaries if required
Must use utmost diligence to avoid losses and are liable to beneficiaries for any breach of duty
Be honest and prudent – not attempt to invest in any way that results and then making a personal gain (if they do pay profit to the beneficiary)

Question 10

Now these specific investment duties under the Trustee Act 2000

Answer 10

Trustee Act 2000 S.1 established statutory duty of care – must act in a way and Audrey print business person could be expected to act and must invest cash wisely and appropriately (unless it is paying pay that immediately). This duty applies to investment powers, acquiring land, appointing agents/nominees/custodians and the insurance of trust property

T a 2000 S.one must exercise reasonable care and skill bearing in mind and knowledge/expertise (professional trustee expected to exercise higher duty of care and skill then layperson)

T a 2000 S.3 – have to invest in the same range of investments as an ordinary individual (and there is less limited by the trust deed where the trust was set up after third of August 1961). Does not apply to Pension trusts, authorised unit trusts, some charitable trusts.

T a 2000 S.4 – must pay attention to standard investment criteria – ensure investments are suitable and appropriate diversified, keep investments under review and vary as appropriate, obtain appropriate professional advice (does not need to be in writing but may be a good idea), unless they decide it is unnecessary or have the necessary skills themselves

Question 11

Where do trustees powers come from

Answer 11

Specific powers are stated in the trust deed – all trustees must agree to any decisions made and this stated otherwise in the deed

In addition the trusty act 1925 contains further statutory powers

Question 12

What are the further statutory powers provided by the trusty act 1925

Answer 12

S.31 – apply trust income to infant beneficiary for maintenance or ecucation. Unless Deed says otherwise the beneficiary becomes entitled at age 18

To advance hole (prior to October 20001450%) of a beneficiaries presumptive share subject to any provisions of the trust. But – if another beneficiary is entitled to income, their permission needs to be obtained. The amount advanced will be taken into account later on if the beneficiary becomes absolutely entitled to at a later date with other beneficiaries (it will be proportioned accordingly)

Question 13

What other power is under the trustee act 2000

Answer 13

Gives trustees the power to invest trust assets in the same way as if they own them out right and to own land on a freehold/leasehold basis as an investment (the beneficiary may occupy the property)

Question 14

How are trustees normally appointed at the outset

Answer 14

Named (appointed by) in deed
Named in the will (usually the executors)
Administrators (intestacy)

Question 15

If a trust deed names an appointer(Who could be the settlor)What is his power

Answer 15

The power to appoint new trustees (including themselves)
– if no provision either the surviving trustees or legal personal representatives of the last surviving trustee will appoint new trustees
– exception for corporate trustees who are expected to remain constant
– an extreme cases where no other option exists court can appoint trustees

Question 16

What circumstance can I new trustee be appointed to replace one under the trusty act 1925 section 36

Answer 16

– Has died
– has been outside the UK for more than a year
– wants to be discharged
– refuses to act
– is unfit or incapable of acting
– is a minor

Question 17

Some other ways of replacing a trustee

Answer 17

Appointer can appoint themselves if the trustee permits it
If no appointer is named and beneficiaries all over 18 with mental capacity and absolutely entitled they can order retirement of a trustee and nominate the replacement
– same applies if trustees become mentally incapable – these powers exist unless the trustees so that they do not

Question 18

What Deed is used if a trustee wishes to retire

Answer 18

A deed of retirement
– a trustee can only retire without being replaced if there are at least two trustees left or a corporate trustee, who agreed to the retirement

Question 19

What is the situation with a sole trustee and property (i.e. land)

Answer 19

A sole trustee cannot give a good receipt for property so if there is land or property as a trust investment there must be at least two trustees or a trust corporation if they want to sell it

Question 20

What happens on the death of a trustee (section 18)

Answer 20

The remaining trustees continue as they are
If their numbers are insufficient they legal personal representatives of the deceased trustee can act on their behalf until another is appointed
– death of the trustees does not void the trust

Question 21

Generally trustees functions cannot be delegated but on what situations is some power possible to delegate

Answer 21

T A 2000 trustees can appoint agents and delegates to them any of their powers apart from
– as distribution
– fee handling
– appointment of new trustees/nominees/custodians
– delegation of trustees powers

Trustees can appoint nominees the whole property in their name and custodians in respect of safe custody of trust assets/documents and that’s the day says otherwise

Trustees can delegate exercise any powers under general power-of-attorney (trustee delegation act 1999 providing
– Less than a year
– written notes given to appointer and other trustees inSeven days
– note the donor remains liable for the acts and the faults of their attorney

Question 22

Trustees diligence and integrity
If a trustee departs from the statutory duty of care they can be held liable for loss caused by in breach of duty including where they failed to act.
Wouldn’t be liable for acts/omissions of other trustees unless they appoint them without due care

Name some acts which gives some caselaw in this area

Answer 22

Speight v Gaunt 1883– Standard of care is lower for discretionary acts – in good faith with the diligence of an ordinary person

Re Whitely 1886– An ordinary prudent person would take if they are minded to make an investment for the benefit of other people

Benningfield V Baxter 1886 – buy/sell transactions with the trust can be voidable by the court

Question 23

Breach of trust a beneficiary can take legal action against the trustee if a breach i.e. the trustee does something they shouldn’t have done or doesn’t do something I should have and if this has been committed the court can

Answer 23

Issue an injunction preventing the trustee taking that course of action order the trustee to make a restitution order the return of the property wrongly transferred

If guilty the trustee must compensate the beneficiary

If I third-party helps the trustee committee breach of trust up twice and to do so the third-party is liable to the beneficiary for the consequential loss if the 33rd party was dishonest not just negligent dishonest even if the trustee was not aware of the trust all the facts which gave rise to it

Question 24

A 3rd party can be liable if helps trustee commit a breach of trust/persuades them to do so.
Will be liable in 3 situations?

Answer 24

Dishonest not just negligent
Dishonest even if trustee was not
Aware of the trust or the facts which gave rise to it

Question 25

Ways that Trust can come about (7)

Answer 25

Express - writing/oral Implied - by actions or intentions Presumptive - e.g. one person buys property in name of another Purpose - e.g. to maintain building Successive - Succession of interests e.g. spouse then children Constructive - imposed by law Resulting - when failure of trust on which property held

Question 26

Different types of Trust (8)

Answer 26

Bare Discretionary - type of RPT Relevant Property - after 22/3/2006 that creates successive or contingent interests. Potentially liable to IHT lifetime, periodic and exit charges Exception where IiP set up after 22.3.06, is subject to transitional serial interest made before 5.10.08, IPDI or Trust for Disabled or Bereaved Minor Life Interest and IiP - Pearson v IRC 1980 IPDI - not relevant property so no lifetime, periodic or exit charges apply Accumulation and Maintenance Statutory Trust e.g. Married Women’s Property Act 1882

Question 27

Advantages of Trust (5)

Answer 27

Reduce liability to IHT Keep element of control over assets given away Keep some access to assets that have been given away Prevent assets falling into wrong hands Put of decisions as regards ultimate recipient

Question 28

Potential disadvantages of a Trust

Answer 28

Usually need to survive 7 years for IHT benefit May not be able to change trust once established Access may be restricted Income/CGT rates may be higher for Trusts Potentially ongoing IHT charges

Question 29

Popular AF 1 Question List general duties of a Trustee (7)

Answer 29

Hold title deeds to any Trust property To act in best interest of all beneficiaries To exercise care in management of the trust To invest in accordance with the trust deed, or general trust law (Trustee Act 2000) To invest any cash unless it is to be paid out Take into account tax position of trust and its beneficiaries To keep proper accounts and produce them if required

Question 30

Married Woman’s Property Act

Answer 30

???

Question 31

Describe trustees

Answer 31

Legal owners of trust property – can therefore say make a claim on a life policy – must use it for the benefit of beneficiaries – cannot use it as their own property – can usually be any number of trustees – exception when trust property is land: minimum is two (one if trust corporation) maximum four – only legal criteria: must be over 18 and of sound mind – could use a trust corporation instead of an individual – trust corporation cannot die, has expertise, but may have high charges – two types of trustee – professional and lay – lay trustees cannot charge and professional ones can under a professional charging closing the date or section 29 of trustee act 2000 – directors fees paid where a trustee has taken directorship of a companyIn which the trust owns shares must be paid into the trust unless Dade says otherwise

Question 32

What are the main types of beneficiary

Answer 32

-Absolute interest – full equitable ownership to both income and capital. Cannot be taken away – Life interest: entitled to income from Trusts but not Capital. Life tenant – remainderman: entitled to capital after death of life tenant. Until then has reversionary interest only – contingent beneficiary: it’s just depends on a particular event that may or may not occur

Question 33

How can beneficiaries bring a trust to an end (Saunders Vautier (1841)

Answer 33

– All beneficiaries are a certain – no possibility of further beneficiaries – all of full age and mental capacity – all agree

Question 34

What are the three certainties (Knight versus Knight 1840)

Answer 34

– Words: must unmistakably show that he trusts intended – subject matter: must be certain the property which is clearly identified – object: must be certain i.e. the beneficiaries – – they can be named – – described as a class – – – wording should be precise capable of legal definition e.g. wife, civil partner – – – – and the children includes illegitimate and adopted children but not stepchildren – does not apply to charitable trusts

Question 35

Variation of trusts act 1958 allows court to vary a trust for?

Answer 35

Beneficiary incapable due to infancy Contingent beneficiary Unborn born person Person with discretionary interest under a protective trust

Question 36

Charitable trusts benefit from a number of tax advantages that ordinary trust do not state through such advantages giving a brief explanation of each

Answer 36

Perpetuity period – can continue indefinitely and can be varied if become obsolete Certainty – a gift to a charity cannot fail: instead trust property can be given to a similar charity Tax – trust exempt from income tax and CGT – – gifts exempt from CGT and IHT – – IHT reduces to 36% of the estate we are 10% or more of their letter states is left to charity – – income tax relief with gift aid/payroll giving is used

Question 37

Perpetuity period of non charitable trust

Answer 37

Perpetuity period of 125 years (overrides trust deed) No restriction on accumulation Shorter term can be chosen and written into the trust deed

Question 38

What are the conditions were a trust can be varied under Saunders Vautier 1841

Answer 38

All beneficiaries are established Allbeneficiaries are over 18 and mentally capable No possibility of further beneficiaries All agree

Question 39

Conditions where trust can be varied under the variation of trusts act 1958

Answer 39

– Beneficiary incapable due to infancy – unborn person Contingent beneficiary Person with a discretionary interest under a protective trust

Question 40

Explain the situations leading to a trustee being replaced

Answer 40

– Has died – Stays out of the UK for more than one year – wishes to be discharged/retired – refuses to act, unfit, incapable, and suitable Discovered to Be below the age of majority

Question 41

What is required for a fully secret trust

Answer 41

– Not mentioned in the will Apparently legatee should be made aware that the property is subject to a fully secret trust – Can be communicated at any point in the testator’s life time either before or after the date of the will – terms of the trust must be clearly communicated (can be in a sealed letter) – testator must communicate legally binding obligation on the Legatee and legatee must except fully secret trust Trust files if not communicated to the legatee during testators lifetime, takes effect as beneficial gift instead

Question 42

Requirements for a half secret trust

Answer 42

– There is a mention in the world that property will be held on trust but the terms of the trust are not disclosed – details must be communicated to the Legatee before the will is executed or it will fail – if it fails the trustees will hold property for those in total to residue/intestacy