Trusts Flashcards
What are the main duties of a trustee
Must adhere to the trust deed
Protect the trust property
What is the memory mnemonic for duties of a trustee
One - bun = bun terms Two - shoe = shoe of loyalty Three - tree = tree of efficient management Four - door = personally door Five - hive = hive of beneficiaries Six - sticks = sticks of account
What is an express trust
Terms of the trust are expressly set out usually in writing
What is an implied trust
Not expressly created but implied by the actions and intentions of the parties.
An example would be where a business partnership buys a property and arranged for the conveyance you to one of the partners only. That partner then holds the property on trust for all the partners
What is a presumptive trust
Where one person purchases a property in the name of another l.
No presumption where one buys property in the name of a child or spouse that is presumed a gift
What is a set purpose trust
Doesn’t benefit a beneficiaries exists for a purpose eg maintain a building
What is a successive trust
Property held in trust for a succession of interests taking effect one after another.
The final successive trust is called the ultimate trust
What is a constructive trust
A trust imposed by law regardless of intentions of parties involved
What is a resulting trust
Where there is a failure of the trust in which the property is held.
What are the main disadvantages of trusts
The settlor will no longer have access
Bare/absolute trusts cannot be changed once created
Settlor must survive for 7 years for the gift to drop out of estate
discretionary trusts suffer tax on entry exit and tenth anniversary
income tax on discretionary trusts are highest after standard band
What is a discretionary trust
Relevant property trust where the beneficiary has no specific right to income or capital if the trust. Distributions are entirely at discretion of trustee
Trustees have the power to accumulate income
What are relevant property trusts
Trusts that create flexible successive or contingent interests
What kind of trust is a flexible power of appointment trust (interest in possession)
Relevant property trust
Prior to March 2006 they were treated as PET
what are the benefits of an excluded property trust
transfers into trust are not considered transfers of value for UK IHT
the trust is not subject to relevant property charges (exit and periodic
beneficiaries can include settlor, spouse children etc without gift with reservation implications
assets outside of the settlors estate for UK IHT purposes
What is immediate post death interest
Where a settlement into trust was effected by will or intestacy.
Where the beneficiary became beneficially entitled to the interest in posession on death of the testator or intestate
What is the benefit of a immediate post death interest trust
the trust will not be a relevant property trust.
the person with the IPDI will be treated as owning the trust fund for IHT purposes and there will be no periodic or exit charges.
If the trust is set up for a surviving spouse then the nil rate band of the first spouse will remain intact
What is an accumulation & maintenance trust
type of discretionary trust
one or more beneficiaries would become legally entitled to capital of the trust or income from it on reaching a certain age not later than age 25.
until reachin specified age trustees hold the income but could apply income for maintenance education or benefit of the beneficiaries
Used to have preferential IHT treatment if trust did not last for longer than 25 years (unless grandparent set up for grandchildren)
What are statutory trusts
a trust created by statute
What are the main reasons for creatin a Trust
Tax planning and mitigation
Intestacy
Will planning
To provide a pension
To provide for families
To assist a charity
To give property to those who cannot legally hold it
To provide for disabled or vulnerable persons
To gain protection from creditors and business protection
What are the main advantages of a trust
IHT mitigation Control some trusts allow the settlor access as well as IHT mitigation Protection Flexibility
What are the main disadvantages of trusts
The settlor will no longer have access
Bare/absolute trusts cannot be changed once created
Settlor must survive for 7 years for the gift to drop out of estate
discretionary trusts suffer tax on entry exit and tenth anniversary
income tax on discretionary trusts are highest after standard band
What must the trust deed set out
It should specify the trust property name the trustees and beneficiaries set out the power of the trustees set out the rights of the beneficiaries where appropriate fulfil the normal requirements of a deed of assignment - deed to be signed and witnessed by settlor, trustees and witnesses independent of the trust parties to show their acceptance of that position
What is an excluded property trust
offshore trust suitable for UK tax residents who are non UK domiciled and have overseas property. there are IHT advantages as overseas assets can be settled without being liable to UK IHT.
It is a discretionary trust
remains excluded if settlor becomes UK domiciled
What are the key elements of an excluded property trust
Trust should be made when the settlor is non dom
assets settled must be non UK assets and never based in the UK
once settlor is deemed UK dom no further assets should be transferred into trust
residence status of trustees is not relevant
what are the benefits of an excluded property trust
transfers into trust are not considered transfers of value for UK IHT
the trust is not subject to relevant property charges (exit and periodic
beneficiaries can include settlor, spouse children etc without gift with reservation implications
assets outside of the settlors estate for UK IHT purposes
What are the main types of relevant property trusts
Discretionary trusts
Interest in Possession trust (created in lifetime on or after 22/03/06)
Accumulation & maintenance trusts created after 22/03/2006
What types of charges are relevant property trust subject to
entry
exit
periodic
What are the main exceptions to the relevant property trust rules
when the property is: subject to a transitional serial interest made before 05/10/08 under the terms of a IPDI trust set aside for a disabled person set aside for bereaved minor put into an age 18-25 trust
what is transitional serial interest
where a beneficiary of an interest in possession trust passes their interest on to another beneficiary (eg their children) between 22/03/2006 - 05/10/2008
no inheritance tax will be payable
What is the tax position of a Bare trust
asset belongs to beneficiary
income is taxable as beneficiarys income
beneficiary is liable for the tax
beneficiary must include trust income on their self assessment
What is the tax position of a bare trust if the property was settled by a parent for an unmarried minor
it is taxed as the parents income if the income exceeds £100 gross per year.
this rule does not apply if grandparent or other relative or individual settles the property into trust for a minor
How is a trust for vulnerable beneficiaries taxed
income and gains are taxed on the basis of the beneficiaries tax position
What are the categories of vulnerable beneficiaries
disabled person = someone who is eligible for
attendance allowance
personal independence payment
increased disablement pension
constant attendance allowance
armed forces independence payment
someone unable to manage their own affairs because of a mental health condition
Relevant minor children = a child who hasnt reached age 18 and at least 1 parent has died
What are the eligible trusts for relevant minors
statutory trusts
trusts established under the will of a deceased parent
trusts established under criminal injuries compensation scheme, which give absolute entitlement at age 18 and entitlement to income before then
How to obtain favourable tax treatment for vulnerable person
trustees must make a joint election not more than 12 months after 31/01 following the end of the tax year which the effective date of election falls.
Which events revoke the favourable tax treatment of a vulnerable person trust
person ceases to be a vulnerable person
the trust in relation to election ceases to be a qualifying trust
trusts are terminated
How is the tax relief for a vulnerable person trust claimed
Calculate the tax the trust would normally pay
Calculate the amount the vulnerable beneficiary will pay
Deduct the smaller amount from the larger and the difference is the amount the trustees income tax liability is reduced
What is the tax position of a Life interest and interest in possession trust
beneficiary entitled to trust income is taxed on income as it arises
trustees are also liable for basic rate tax on any income actually received effectively paying tax on behalf of the beneficiary
if income is paid directly to the beneficiaries and not to trust then the beneficiary can pay the tax
The beneficiary is entitled to a tax credit for any tax paid by trustees.
The trustees are not liable to higher rate tax but the beneficiary might be
trustees cannot claim the personal allowances etc but the beneficiary can claim a refund of tax paid by trustees
What is the benefit of the mandating the income of an interest in possession trust to the beneficiary
beneficiary can claim personal allowances
save on admin costs of managing the trust as tax relief is not give on trustees expenses
What is the order for deductions of trustee expenses of a interest in possession trust (for calculating the beneficiaries income)
- UK dividends
- Foreign Dividends
3 savings income
4 other income
What is the income tax position of a discretionary and accumulation and maintenance trust
Trustees have a standard rate band of £1,000 (divided by the number of trusts created by the settlor in existence for any part of that tax year min of £200 per trust) income falling within the standard rate band is liable to basic rate tax
Thereafter tax is 45% on non div income
UK div income is 38.1%
How is income distributed to a beneficiary from a discretionary trust taxed
the trustees must have paid 45% tax so if starting rate band reduces liability they will need to pay additional to HMRC and then the beneficiary receives trust income with equivalent tax credit
income distributed to beneficiary ceases to be savings or div income
no PSA or Div allowance available
beneficiary can claim back any additional tax paid over their liability
What is the annual exemption for trusts in relation to CGT
£6,000 - split across all trusts created by settlor subject to a minimum of 1/5th (£1200)
What is the CGT treatment of a bare trust
gains are treated as those of the beneficiary
There is no disposal for CGT on a transfer of the asset to beneficiary if they are already absolutely entitled
How are Gains taxed on property in trusts for vulnerable beneficiaries
the gain is taxable at the rate of the beneficiary
