Pt 3. Laws and legal concepts relevant to financial advice - Use of Trusts Flashcards
What is a trust?
- A means of arranging property for the benefit of other people, wothout giving them full control over it; often done for those who could not otherwise appreciate or deal with property correctly e.g. minor children.
- A family head must use trust as means of giving property to family while retaining some control over being one of the trustees.
- Many are set up for tax reasons.
What is a legal term for a trust?
This a means by which someone (the settlor) gives away an asset for the eventual benefit of others (the beneficiaries).
The actual control over that asset in the meantime is in the hands of someone else (the trustees) who look after the property in interest of the beneficiaries.
A settlor can also name themselves trustee or beneficiary or both, naming themselves trustee, the settlor can maintain some element of control over trust property.
It is usually unwise to make settlors beneficaries as will make trust assets liable to IHT, once created, the trustees become legal owners of trust property.
What is a trustee?
They usually have legal ownership of trust property, but cannot treat as their own personal property. they have to use property for benefit of beneficaries according to terms of trust.
What are the main differences between trustees and beneficiaries?
- Trustees possess the legal interest, whereas beneficaries possess beneficial or equitable interest.
- The beneficaries enforce their rights against trustees by legal action if necessary.
What are the ways trust can come into existence?
- Express trust, e.g. personal property, life policy
- Implied trust, e.g. property on trust for partners with no formal written document.
- Presumptive trust, e.g. Alice buys house in name of Benny.
- Successive trust, e.g. property of trust held in successive interest, one after another.
- Constructive trust, e.g. pay back profit made by purchaser using trustee funds.
- Resulting trust, e.g. failure on trust of property held, so purpose no longer fulfiled leading to resulting trust for settlor, with ownership reverting to new person.
What are the different types of trusts?
- Bare or absolute trust - trustees sole duty to transfer trust property to appropriate beneficiary.
- Power of appointment trusts’ - this gives trustees powers to vary beneficaries according to family circumstances.
- Interest in possession trusts - A beneficiary has a present right to income from trust property, with beneficary also entitled to capital.
- Discretionary trusts - A power of appointment trust where there is no-one with current interest in possession.
- Will trusts - Only effective when testator dies, it thereafter starts, and normally executors of will are trustees. But assets in trust is still liable for IHT.
- Statutory trusts - One created for minor beneficaries.
- Pension scheme trusts - Set up under an irreovcable trust created in 3 ways, a trust deed, declaration of trust, or deed poll or broad resolution made to establish trust.
What are the main uses of trusts?
- They keep policy benefits outside a life assureds or pension scheme member’s estate, so IHT is not payable on them.
- Flexible/discretionary trusts allow trustees to retain elemnt of control over who will eventually benefiy from trust, and to what extent, hence used to fund and mitigate IHT.
- Trustees only need copies of death certificate and trust deed to provider, to enable benefits to be payable to them. Once paid, they must use money in accordance with terms of trust.
- Occupational pension trustees ensure necessary contributions paid and invested, look after scheme investments, pay beenfits when due, and resposnible for schemes compliance with tax law.
How to administer a trust?
- The settlor executes a deed assigning property, e.g. to trustees A, B, C for the benefit of beneficaries X, Y and Z.
- To be signed by settlor, so trustees show acceptance of duties.
What are the 3 certainties to ensure trust is valid?
- Use ‘on trust for’ to ensure trust is intended.
- Certain subject matter i.e. the property is subject to the trust.
- Objects of the trust i.e. beneficaries must be certain, so ‘on trust for X, Y and Z absolutely.’ - but not brequired if trust is exclusively for charity purposes.
Which trust does not normally allow beneficiaries to change once set up?
- Bare or absolute trust.
In what circumstances can a trustee be removed?
If trustee:
- Resigns or dies
- Is removed or automatically retires under provisions of trust deedn
- Is removed by other trustees (if allowed by trust deed).
- Is removed in accordance with Trustee Act 1925.
- Is removed by relevant court.
What are the types of beneficiary interest?
- Life interest (life tenant) means they are entitles to income from trust property for life but cannot touch capital, and at their death is passed on to revisionary interest.
- Contingent interest is subject to contingency, hence may not come into possession or could be revoked, e.g. in Sue’s death if Eric has already died then Jamie will benefit instead.
What aids beneficaries in ensuring trustees are appropriately administering trust?
- Using their right to insist trust accounts be audited by a solicitor or accountant.
- They can apply to court for determination of a specific question, even directions to general administration of trust.
- They can put an end to the trust if together entitled to the whole beneificial interest, to direct trustees to hand trust property over to them absolutely.
- Aggrieved beneficiary can enforce rights against trustee by legal action if trustee commits a breach of trust or acts fraudulently, liable for any loss caused to beneficiary.
