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
How are disposals made by the trustees of a life interest and in interest in possession trust taxed
Normal rules and taxed at rate of 20% (28% for property)
Gains made on the value of the asset between the trust creation and death of life tenant are not taxed
What is the capital gains tax position of an accumulation & maintenance trust
the beneficiary becoming absolutely entitled to the assets is regarded as trustees making a disposal of assets at market value
What is the tax position of gains on a discretionary trust and relevant property trusts subject to periodic and exit IHT charges
Capital gain can be held over on creation
What is the definition of a trust
A legal obligation binding a person to deal with property over which he has control for the benefit of certain people
Person - trustee
Property - trust property
People - beneficiaries
What is realty
Freehold interest in land
What is personality
Assets not freehold interest in land
What is personality divided into
Chattels real
Chattels personal
What is chattels real
Leasehold interest in land
What is chattels personal
Tangible and intangible assets
What is chooses in action
Intangible assets (life insurance policies reversionary interests shares)
What is choses in possession
Tangible objects
Furniture art
What are the main types of investments used by trusts
Collectives and shares Ian’s investment bonds
How can a trustee avoid a trustee tax rate liability on an investment bond
Assign the policy to beneficiary
What are the main differences between a trust and contract
No offer and acceptance needed for a trust
Consideration not needed in a trust
Beneficiaries may not be aware of trust but a contract must ensure all parties are aware
Minors can be beneficiaries of a trust and contracts are usually unenforceable for a minor
Trustees own trust but beneficiary can enforce terms of the trust if a breach occurs - only parties in a contract have legal or equitable rights under it
What benefit is there to a settlor of a an offshore trust
Some have a protector who can veto decisions of trustees or remove trustees
What is minimum number of trustees for a trust with land as its property
Two unless one is a trust corporation
What is the maximum number of trustees for a trust with land as the property
4
What is the minimum age to be a trustee
18 and of sound mind
What are the advantages of using a trust corporation as a trustee
Company cannot die unlike individuals
They have the professional expertise particularly if the trust is complex
What are the disadvantages of using a trust corporation as a trustee
Charges
When does a trustee have to invest cash that comes into the trust
Immediately unless it is being paid out immediately
What do trustees have to abide by when carrying out their duties
Statutory duty of care
They must act in a way that a prudent business person could be expected to act taking into account their expertise
What duties does the statutory duty of care apply to
Exercise of investment powers Acquisition of land Appointment of agents Nominees and cjstodians Insurance of trust property
What is the standard investment criteria of a trust
Regard the suitability of an investment
The need for diversification
Take advice unless appropriate
Review
If a trustee has caused a loss to the trust which could have been avoided if the utmost diligence had been used who are they liable to
The beneficiaries
What can trust income be used to do for infant beneficiaries
Maintenance or education
Under a trust created by a deed how are the initial trustees appointed
By the deed
Under a trust created by a will how are the trustees appointed
The will should name them - they are likely to be the executors
Under a trust set up by the laws of intestacy how are the trustees appointed
They are the administrators
When can a new trustee be appointed to replace a trustee
When the previous trustee: Dies Remains out of the UK for more than 12 months Desires to be discharged Refuses to act Is incapable of acting as a trustee Is under the age of 18
Who should act as trustee of the sole or last trustee dies
Their legal representatives until a new appointment is made
What powers can a trustee not appoint an agent to do
Powers over distribution of assets
How fees are dealt with
Appointment if new trustees
Delegation of trustees powers
What actions can a court take if they agree there has been a breach of trust
Issue an injunction to prevent the trustee from taking a course of action
Order trustee to make restitution
Order return of property wrongly transferred
What types of beneficial interest are there
Absolute
Life interest
Reversionary
Contingent
When can beneficiaries bring an end to a trust
If they are All ascertained All of full age and capacity All in agreement There is no possibility of further beneficiaries
What are the advantages of a trust
Reduce iht
Retain some control of gifted assets
Retain some access to gifted assets
Ensure assets don’t fall into wrong hands
Delay decisions as to who ultimately receives assets
What are the main disadvantages of a trust
Access to assets may be restricted
May not be able to alter once set up
Must generally survive 7 years for IHT reduction
Trust may pay income tax and cgt at higher rates
May be ongoing iht charged
What is a relevant property trust
A trust created after 22/03/2006
That creates flexible, successive or contingent interests
What are examples of trust created by statute
Creation of a trust for sale of an intestates estate - admin of estates 1925
Where a legal estate is held by 2 or more people as joint tenants - law of property act 1925
Creation of a trust of a life policy - Married women’s property act 1882
What is the objective of a secret trust
Preserve the identity of a beneficiary
What are the 3 certainties of a trust
Words - must show trust is intended
Subject - must be certain property assets
Object - beneficiaries must be certain
What is the perpetuity period of a trust
125 years for all trust created after 5/4/10
Deed can specify shorter terms
What is maximum accumulation
Period for a charitable trust
21 years
What is the perpetuity period of a trust created prior to 5/4/10
Lifetime of a specified person plus 21 years or
80 years from creation
What is the maximum accumulation period of a trust created prior to 5/4/10
Life of settlor
21 years from death of a testator or settlor
Minority of any person living at death of testator or settlor
Minority of any person entitled under the trust
1964 act added
21 years from disposition
The minority of a person in being at that date
The court has the power to vary a trust for the benefit of who?
Any beneficiary incapable due to infancy
Any contingent beneficiary
Any unborn people
Anyone with a discretionary interest under a protective trust
What is the main purpose of an excluded property trust
To
Ring fence overseas assets and protect them from UK IHT on death
How does a loan trust work
Settlor creates trust
Settlor makes an interest free loan which repayable on demand
Trustees invest in an investment bond
Growth on the bond is outside the settlers estate
Trustees use a 5% withdrawals to repay the settlor
Settlor only entitled to repayment of the loan
Settlor must spend the loan repayments
How does a discounted gift trust work
Settlor makes gift to a trust
Settlor retains the right to fixed capital sums or income
Gift is discounted for iht purposes
Settlor retained rights have no value on death
Discount is only relevant if settlor dies within 7 years
Not a GwR or POAT
Relatively inflexible
How many settlers can there be in a flexible reversionary trust?
One
What types of flexible reversionary trusts are ther
Double and single
What type of investment does the settlor of a flexible reversionary trust make
A series of surrenderable sublet premium endowment policies with multiple lives assured
How does a double trust for a flexible reversionary trust work
Settlor assigns policies to a bare trust for own benefit then irrevocably assigns beneficial interest in each policy to a discretionary trust
How does a single trust for flexible reversionary trust work
Settlor assigns policies to a discretionary trust
How many days a year can the settlor of a flexible reversionary trust access benefits
One
How are the maturity dates of policies in a flexible reversionary trust spread out
Over 10 years
If the policies in a flexible reversionary trust mature how are the benefits paid
Units are paid to settlor as an income - chargeable gain at settlers marginal income tax
When can the trustees of a flexible reversionary trust surrender the policies
Any time and pay cash to beneficiaries even if settlor is still alive
If a trustee decides to not let a policy under flexible reversionary trust mature by extending the maturity date is this a new gift from settlor
No
Did flexibke reversionary trust liable to POAT
No
Is a flexible reversionary trust a GWR
No
How is the initial investment into a flexible reversionary trust treated for IHt purposes
As a CLT
What are the advantages of a flexible reversionary trust
Make a gift for IHT
Retain option to receive payments
GWR and POAT do not apply
Whole gift outside of estate after 7 years
Settlor can receive annual payments if required
Payments can be made to beneficiaries
Future growth outside of estate
What are the disadvantages of a flexible reversionary trust
Gift inside of estate for 7 years
No discount available
20% tax charge at outset of CLT exceeds nil rate band
Income tax charge on maturity or surrender
Cannot benefit form 5% tax deferrals during the settlers lifetime
How does a back to back trust work
Individual buys an annuity on their own life
Takes out a life policy on their own life under trust
On death annuity has no value and the life policy is outside of the estate for IHT
Who is a back to back trust good for
Those in good health that have assets that can’t be gifted such as a house
What basis can a back to back trust be written on
Single and joint
What type of trust is used for back to backs
Discretionary
When might a trust review be triggered
Death of a trustee or beneficiary
Serious illness of a trustee or beneficiary
Bankruptcy of a settlor trustee or beneficiary
Beneficiary’s marriage separation or divorce
Changes in income or wealth
Disputes between settlor trustee and beneficiary
