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AF1 > Trusts > Flashcards

Trusts Flashcards

1
Q

Name 5 reasons/uses for trusts.

A

-Reduce tax, particularly IHT
-Most pension schemes set up under a form of trust
-Protect spendthrift beneficiaries from themselves
-Special reasons i.e. maintenance for disabled person
-Protection from creditors/business protection

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2
Q

Who are the three main parties to a trust?

A

Settlor
Trustees
Beneficiaries

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3
Q

Name three objectives a settlor may have when setting up a trust.

A

-Control/protect family assets
-Hold assets for an individual who is too young or incapacitated to handle their affairs
-Pass on property during their lifetime/on death

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4
Q

True or false. A settlor can also be a trustee.

A

True - they often are

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5
Q

Why are investment bonds often used within trusts?

A

Not deemed income producing assets –> income treated as return of capital –> saves admin work for trustees

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6
Q

What are two main drawbacks to using investment bonds within trusts?

A

-Can’t use beneficiaries’/trustees’ CGT exemption
-Can’t use beneficiaries’ dividend allowance

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7
Q

What are two main benefits to using UTs/OEICs within trusts?

A

-Can use beneficiaries’/trustees’ CGT exemption
-Can use beneficiaries’ dividend allowance/PSA for certain trust types

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8
Q

What are three main drawbacks to using UTs/OEICs within trusts?

A

-Extra administration
-Ongoing tax returns
-Need to account for income/gains as they arise

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9
Q

What two conditions must an individual meet to be a trustee?

A

-Over 18
-Of sound mind

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10
Q

What are the thirteen duties of a trustee under the Trustee Act 2000?

A

-Reasonable care and diligence
-Act as a prudent business person would
-Ensure they’re registered as the legal owners
-Read & understand the trust deed and comply with the terms of the trust
-Act impartially between beneficiaries so as to act in the best interests of all beneficiaries
-Take into account the tax position of the trust and beneficiaries
-Avoid conflicts of interest & keep their own finances separate
-Invest any cash received into the trust appropriately
-Invest trust money property, using standard investment criteria and taking advice where necessary to ensure adequate diversification
-Monitor & review investments regularly
-Keep proper accounts & accurate records of all trust property
-Use utmost diligence to avoid any loss
-Ensure they make the correct returns and payments to HMRC

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11
Q

What three ways can trustees be appointed?

A

-Via trust deed when trust is created
-When a trust is created by a will
-Under laws of intestacy

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12
Q

What six ways can trustees be replaced?

A

-They’ve died
-They’ve been outside the UK for >1 year
-They desire to be discharged
-They refuse to act
-They’re unfit/incapable of acting
-They’re an infant

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13
Q

What power does an appointer have?

A

To remove a trustee

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14
Q

What is the process by which a trustee can retire? (8)

A

-Execute a deed of retirement
-If mental capacity maintained - trustees can retire as trustees
-If mental capacity lost - remaining trustee(s) can remove/replace trustee using Trustee Act 1925 Section 36
-If no trustee appointed, one can be appointed by the Court
-Trust cannot be left without a trustee
-New trustee would need to be appointed
-Or corporate trustee could be used
-If land is within the trust, then there must be at least 2 trustees

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15
Q

What are seven investment duties of a trustee?

A

-Obtain proper advice
-Duty of care to act as if the assets were their own
-Note the standard investment criteria
-Consider suitability of investments within the trust
-Diversification
-Monitor & review the investments
-Make changes to investments if appropriate to rebalance

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16
Q

What are the four different types of beneficial interest?

A

-Absolute interest
-Life interest
-Remaindermen
-Contingent beneficiary

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17
Q

What four conditions must be met for beneficiaries to request that a trust be terminated?

A

-All the beneficiaries can be ascertained
-No possibility of further beneficiaries
-All beneficiaries of age and mental capacity
-Unanimous agreement of all beneficiaries

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18
Q

What three certainties must be present for a trust to be established?

A

-Words
-Subject matter
-Objects

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19
Q

True or false. Transfers into a trust on death would be eligible for the annual exemption.

A

False

20
Q

Name five issues that may be caused by an individual dying without a will.

A

-Deceased’s wishes not catered for.
-Care/custody of minor children not arranged.
-IHT inefficient
-Assets may not automatically go to spouse
-No control of assets if all passed to spouse

21
Q

How can a will be revoked? (3)

A

-Deliberate destruction
-Making a new will
-Marriage/civil partnership

22
Q

If an individual dies intestate with a spouse/RCP and issue, how will their estate be distributed?

A

Spouse receives:
-Personal chattels
-First £270k
-Half of any residue

Issue receives:
-Other half of any residue

23
Q

What seven conditions must be met for a deed of variation to be used?

A

-All affected beneficiaries over 18 & of sound mind.
-To be IHT effective, it must refer to Will/intestacy being varied.
-Must be signed by all those who would/might have benefitted from the original provisions.
-Must be done within 2 years of death.
-Must be a statement that the variation is to have effect for IHT as if the deceased had made it.
-If the variation increases IHT, must also be signed by the personal representatives.
-Must be no consideration for money/money’s worth.

24
Q

What is a disclaimer?

A

If an individual has inherited property, they can disclaim it as long as it hasn’t already been accepted and is actioned within two years from the date of death.

25
Q

What issue may be caused by executors not having access to any of the assets within the estate?

A

They may potentially need to find a large amount of money to pay the IHT liability.

26
Q

When was the relevant property regime introduced?

A

22 March 2006

27
Q

Which types of trust are in the relevant property regime?

A

-IiP trusts (including flexible trusts) created after 22/6/06
-Discretionary trusts

28
Q

What is the problem that is caused by changing the beneficiaries of a trust created before 22/6/06?

A

It creates a transfer for IHT purposes

29
Q

What is the tax treatment of IiP/flexible trusts?

A

-Benefits taxed on trustees at basic rate
-Income is paid out to beneficiary with BRT tax credit
-Income can be mandated to be paid directly to the beneficiary, in which case it is paid gross

30
Q

What is the standard rate band?

A

It is the amount of income at which a discretionary trust can be taxed at basic rate.

31
Q

What is one reason why an individual might consider using an IPDI/Will Trust?

A

To control direction of assets after death of a second spouse

32
Q

What is the order of income in which trustees can set their expenses against?

A
  1. UK dividends
  2. Foreign dividends
  3. Savings income
  4. Other income
33
Q

What three options were available to existing holders of A&M trust post-2006?

A

-Amend trust deed so beneficiaries became absolutely entitled at age 18
-Change to mirror 18 to 25 trusts if the age 25 qualification was still wanted
-Don’t change, with rules reflecting other discretionary trusts

34
Q

What defines a vulnerable beneficiary in the context of a Vulnerable/Disabled trust?

A

-Relevant minor children
-Person with mental illness under Mental Health Act 1983
-Person in receipt of AA/DLA based on entitlement to mobility component at higher rate.
-Person in receipt of PIP

35
Q

What must be done in order to get the favourable tax treatment of a vulnerable beneficiary trust?

A

-Trustees & vulnerable person (or their attorney)
-Must make joint election
-Not more than 12 months after 31/1 following the end of the tax year concerned

36
Q

How is taxation calculated for a vulnerable beneficiary trust?

A

-Amount of taxation for the trust normally.
-Amount of taxation for the vulnerable beneficiary.
-The amount of tax the beneficiary would pay is deducted from the trust’s tax bill.
-Trustees then claim a relief to reduce their tax bill by this amount.

37
Q

True or false. The amount of discount given by the life office on a DGT will always be accepted by HMRC.

A

False - although if following proper underwriting HMRC will likely accept it

38
Q

What is a drawback of a DGT?

A

Inflexible - can’t be changed once set up

39
Q

In order to get maximum benefit from a DGT, at what level should the income be set?

A

An income that will be spent entirely by the settlor

40
Q

What is a drawback of a loan trust?

A

Potentially low tax saving

41
Q

What are the benefits for an individual from gifting into a charitable trust?

A

-Exempt transfer
-May qualify them for 36% charitable rate

42
Q

Name three differences between ordinary and charitable trusts.

A

-Charitable trusts can continue indefinitely vs 125 years
-Charitable trusts can accumulate income indefinitely
-If their purpose becomes impractical, the funds can be applied to a similar charitable purpose.

43
Q

What is the tax treatment of a charitable trust?

A

Funds are exempt from income tax and CGT

44
Q

How should LTA/WoL policies be set up to ensure that the personal representatives have the money required to pay any eventual IHT liability?

A

-Set up in trust
-Beneficiaries as the personal representatives

45
Q
A

AF1 (5 decks)

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