Topic 2 - Trust Classifications Flashcards
What is a trust (settlement)
Trust or Settlement is transfer of ownership of assets to trustee for benefit of a thrid party
Often viewed as preserve of wealthy and complex but have been part of English law for centuries.
Settlor - Original owner.
Trustee - Responsibility of looking after assets and legal owners (Settlor may be trustee).
Beneficiary - Third party and equitable owners of assets. (Setlor and Trusteees may be beneficairies).
Lifetime Settlement - Transfer during settlor’s lifetime. Or Will trust if transfer upon death.
Why Set Up a Trust?
Control - Can say who benefits, to what extent, if property can be sold or whta it is used for and who will benefit in the future. Hold assets on behalf of family members without giving outright ownership.
Bloodline Planning - Prevent assets from passing outside of family. (Widow remarrying, or children divorcing or beneficiary going bankrupt).
Protection – Concerned about use of wealth. Restrictions on amount and type of benefit received.
Flexibility – Trustees can benefit and beneficairies to adapt to changing circumstances and family dynamics.
Law of Trusts
Originating medieval times as part of property law. Developed over centuries through common law with each new decision becoming prescendent. Since 19th century increasingly governed by Statute Law.
Based on law of equity (fairness) so courts could separate legal owner from equitable owner.
- Case Law
- Common Law
- Married Woman’s Property Act 1882
- Law of Property Act 1925
- Trustee Investments Act 1961
- Perpetuities and Accommodations Act 1964 and 2009
- Trustee Delegation Act 1999
- Trustee Act 2000
Knight v Knight (1840)
In this landmark case, Lord Langdale MR stated that there need to be three certainties for a trust to be valid:
Intention: the words used must be imperative – they must clearly demonstrate the settlor’s intention that a trust is to be created.
Subject: the subject (assets which are to be transferred into the trust) must be clearly identifiable and certain.
Objects: the objects or persons intended to have benefit must also be clearly identified and certain. In this context, it is possible to establish objects by naming specific beneficiaries (known as a fixed trust) or by setting out people who could potentially benefit rather than by identifying individuals, typically through a discretionary trust. In this case, the trust deed will usually set out categories of people who could potentially benefit, and the trustees may appoint any person who fits into those categories as beneficiaries.
What are the 5 trust classifications?
- Statutory trusts.
- Non-statutory trusts.
- Public and private trusts.
- Fixed-interest trusts.
- Discretionary trusts.
What is a Statutory Trust? Give some examples?
A statutory trust is a trust that is created in certain situations by an Act of Parliament. This might include the following:
- Administration of Estates Act 1925.
- Married Women’s Property Act 1882.
Administration of Estates Act 1925
Among other provisions and being subject to more recent amendments, this statute sets out the modern laws of intestacy in England and Wales. For example:
- Bernadette dies without will leaing behind husband Kevin and two sons 11 and 13 and assets at £700k plus chattels.
- Kevin recieves £250k and chattels
- 50% of remainder (£225k) leve to Kevin absolutely and other 50% (£225k) left o the two children held in trust until age 18 or earlier marriage.
Therefore trust for children has been created by statute.
Married Women’s Property Act 1882 (MWPA)
Updated from MWPA 1870. Prior a married woman’s property including assets and income were spouses. 1870 Act gave woman their earnings. 1882 Act let earnings and assets separate from husband and inherit up to £200 plus property from next of kin.
Also creation of trust (MPWA Trust) for life assurance policies taken out expressly for benefit of spouse and/or children so will not form part of estate. Insured person is trustee and can appoint trustees. Such trust is inflexible and cannot be changed without agreement of beneficairies who cannot agree until aged 18. Due to inflexibility they are not common and other non statutory trusts offer a better option.
What is a non-statutory trust? Give some examples?
A non-statutory trust is any trust that is not a statutory trust. It is set up through the actions of the settlor, rather than as a consequence of a trust required by legislation, such as the Married Women’s Property Act (1882) or the Administration of Estates Act (1925). Some of the following are examples:
- Express trust
- Implied (resulting) trust)
- Constructive trust
Express Trust
Created by settlor by declaring they hold assets on trust for stated beneficiaries. Unless land (personalty) the intention to create trust can be in writing or oral. If land then must be provided in writing and signed - not necessarily a trust itself but evidenced in a letter or document meeting the three certaainties test of Knight v Knight 1840.
Implied (resulting) trust
A non-statutory trust is not always created by a clear instruction from a settlor. Sometimes the action of a party or the general circumstances can imply a trust arrangement without the formalities of establishing a trust. Such as presumptive or automatic
Presumptive trust - transfer to/purchase for on behalf of unrelataed party without recieivng payment. Presumption that intention was for assets to be held in trust for recipient for benefit of transferor. So if 1 buys property in name of 2 and gets no payment from 2 then presumed that 2 holds on trust for 1. Does not apply in some family situations where outright gifts are commonplace.
Automatic Trust - When settlor not expressed intention to set up trust, property have been transferred but intended trust fails. I.e beneficiary cannot be fully identified or trust purpose ceases to be relevant. Property reverts to the settlor or their estate.
Constructive Trust
Imposed rather than implied by law. Equitable (fair) remedy applied by court to ensure beneficaries are not deprived of assets inteded for their benefit. Prevents a party who accidentally, mistakenly or dishonestly recieved assets thats do not belong to them from gaining unjust enrichment. Would rule the assets held under constructive trust and order to give back assets and gains to beneficary.
What is a Pulic (Charitable) Trust? GIve some examples?
Must be for the public benefit. Unlike Private Trust there is no requirement for a human beneficiary; the purpose can be more abstract.
The Charities Act 2006 sets out range of purposes, one or more of which must be met by a public trust. Purpose can be varied if original becomes obsolete.
Can exist in perpetutity but can only accumulate income for 21 years.
What is Cy-près doctrine and how does it work?
If private trust fails the trust reverts to the settlor. However if public trust no longer meets original objectives then trustees can apply for transfer of property to another public trust that most closely meets objectives of original trust. Known as cy-près doctrine (equitable princicple - name dervied from Norman for “as near as possible”)
Can be applied where shown settlor had a general charitable intention when making gift which means clear intended for charitable purposes but no specific limitations on how it can be used. Wording is key as if there is a specific purpose and it fails then it will revert to settlors estate
Cy-près powers form part of the Charities Act 2011.
There are two types of trust failure:
Initial failure - Gift made to charity in a will but at execution charity no longer exists or purpose is no longer possible. Executors may apply to courts to pass to another charity under Cy-près doctrine.
Subsequent failure - If charity fails and no instruction as to what should happen in that event. Court decides if it can be passed onto another charity through the Cy-près doctrine.
What is a fixed interest trust? Give some examples:
One or more beneficiaries has predetermined right to specified amount of capital or income.
Trustees have no discretion over who the beneficiaries are or distributions. Two common examples are
- Bare (absolute) trust.
- Interest-in-possession trust
Bare (Absolute/Simple) Trust:
How does it work?
Who is it for?
How is it taxed?
Advantages/Disadvantages?
Examples?
General Information
- Beneficiaries cannot be changed
- Beneficiaries have absolute right to capital & income from age 18
- Moves to beneficiaries’ estate for IHT purposes
Advantages
- Easier & cheaper to establish and manage than other trusts
- Trust deed is not always required
- Hold assets for minor who normally unable to such as securities
- Beneficiary can use personal allowances to offset income
Disadvantages
- Inflexible
- Beneficiary has full control from age 18
- Trustees have no discretion
- Not protected from divorce or bankruptcy claims
Taxation
- Potentially exempt transfer - fully IHT exempt if settlor survives 7 years and tapering off after 3 years
- Income and CGT taxable in hands of beneficiary but they can use their personal allowances
Some examples:
- Bank account set up by parents for child
- Assets left to will for grandchild in trust until age of 18
- Life policy in trust with specified beneficiary “my husband”.
Interest in Possession Trust:
How does it work?
Who is it for?
How is it taxed?
Advantages/Disadvantages?
Examples?
Income Beneficiary has immediate & automatic right to trust income after expenses OR right to use assets held by trust. Doesn’t normally have right to capital.
Remainderman will receive capital of assets in trust upon sale.
Might be set up for specified time or lifetime of income beneficiary (Life-Interest Trust) with the Income Beneficiary known as the Life Tenant.
What is a Discretionary Trust? Give some examples?
Trustees have discretion within certain perameteres on income and capital and beneficiaries have no automatic right to benefit from trust. Depending on trust deed they could decide:
- How much income and capital is to be paid, if any
- Which beneficiaries to pay, when and how often
- What, if any conditions to be imposed on beneficiaries
Set up within Settlor’s Lifetime (Inter-vivos) or under terms of Will (Discretionary Will Trust).
Settlor could also provide Letter of Wishes. Not legally binding but guidance to trustees.
No legal ownership or rights for beneficiary unless trustees make absolute gift. Will not form part of beneficiaries’ estate on death, divorce or bankruptcy.
Must have a ‘default’ beneficiary(ies) who will recieve benefit at the end of the trust. Default beneficiaries can be changed during life of the trust so more expression of wishes than a binding instruction.
Some examples are:
- Flexible trust
- Discretionary Will trust and IHT thresholds
- Accumulation and maintenance trust
- Vulnerable person’s trust
- 18-25 trust
- Non-UK resident trusts
- Settlor interested trusts
Different types of Discretionary Trusts and how they work?
Flexible (Power of Appointment) Trusts:
Form of Interest-in-Possession trust. Trustees have power to change or vary beneficiaries. Most common with Life Assurance Policies.
Discretionary Will Trust
Before October 2007, these were used to save IHT between spouses/civil partners. However, since October 2007 unused % of nil-rate band on first deatah trnasfers to surivvings spouse so use of these trusts have declined especially now with the addition of the residence nil-rate band.
Accumulation and maintenance trust
Designed for young beneficiaries which used to enjoy favourable tax treatment. Following Finance Act 2006, trusts set up after 22 March 2006 won’t recieve such tax treatment and fall under normal tax rules for discretionary trusts.
Beneficiaries entitled to trust capital or income upon reaching specified age not exceeding 25. Income can be distributed for maintenance, education or benefit for beneficiaries.
This type of trust can be a:
disabled person’s trust;
bereaved minor’s trust.
Disabled Person’s Trust
Must be eligible (no need to actually claim or recieve) for one of following benefits:
- Personal Independence Payment
- Constant Attendance Allowance
- Armed Forces Independence Payment
- Disability Living Allowance (care at highest or medium rate or mobility at highest rate);
Bereaved Minor’s Trust
Arranged in parent’s Will or through intestacy. Must be under 18 when Will takes effect and have at least one deceased parent. Absolute entitlement to trust assets at 18.
Vulnerable Person’s Trust
Vulnerable person is principle beneficiary with at least one other potential beneficiary. Has right to recieve or benefit from income or capital during their lifetime. Trustees have Discretionary powers if and when to make distributions and can also accumulate income and capital. On death paid to other potential beneficairies.
Special tax treatment but distributions must only be made to vulnerable beneficiary and maintain qualifying requirements:
Property settled into a disabled person’s trust.
Before 17 July 2013 - At least 50% of trust property for benefit of disabled beneficiary
On or After 17 July 2013 - Any distributions from trust during disabled beneficiary’s life must be for their benefit.Small exemption of lower of £3,000 or 3% of trust to other beneficiaries
Covered in the Finance Acts of 2005 and 2013.
18-25 Trust
An extension of the bereaved minor’s trust. Set up in parent’s will or from parent’s intestacy. Must have at least one deceased parent. Absolute entitlement at age 25.
Can only benefit parent’s own children under age of 25, including stepchildren or from parental guardianship.
Any distributions can only be made to child subject to annual limit of £3,000/3% which is same for bereaved minor’s trust.
Non UK Resident Trusts
As trustees hold assets, it is residence of trustees that determines jurisdiction under which trust operates and subject to trust law in that jurisdiction. Only of benefit to locate these trusts where low or no tax applicable such as Cayman Islands or Channel Islands.
Settlor Interested Trusts
Not necessarily trusts as they can take many forms. Common underpin is they provide potential for settlor or close relatives to direclty or indirectly gain a benefit from trust. Term ‘Interest’ varies between taxes so could be tax implications for trustees and settlor. Could also apply to trusts contingent on event with no other beneficiaries to fall back on so trust fails and assets revert to settlor so Settlor therefore has an interest.
Self Assessment Question 1 - Who are the three parties to a trust? Describe each person’s role?
Settlor - The person who relinquishes ownership of assets.
Trustee/s - Those who hold the responsibility for looking after the assets while in trust.
Beneficiary/ies - The third party who will benefit from the trust.
