Trusts & Family Offices Flashcards
What is a trust?
A trust is a legal arrangement where one party (the settlor) transfers assets to another party (the trustee) to manage for the benefit of a third party (the beneficiaries).
Who is the settlor?
The person who creates the trust / trust deed
What two things does the trust deed set out?
1) Who the trustees are & their duties
2) Who the beneficaries are
What is a trustee?
1) has legal ownership over trust property
2) acts in best interests of beneficaries
Who are the beneficaries
The individuals who will benefit from the trust property
Who is the trust protector?
Appointed to ensure trustees act in line with settlors wishes
Who are the 4 main parties in a trust?
1) Settlor
2) Trustees
3) Beneficaries
4) Trust Protector
What are the three certainties which must be in place for a trust to be legal?
1) Certainty of intention
2) Certainty of Subject Matter
3) Certainty of Objects
What is certainty of intention?
It must be clear that the settlor intended / intends to set up a trust
What is certainty of subject matter?
It must be clear what property is to be included in the trust
What is certainty of objects?
It must be clear who the beneficaries are
What is the cy pres doctrine and what does it apply to?
Charitable trusts
a court can alter the terms of a trust to ensure the original purpose can be achieved when the originla objective is no longer possible
e.g. was set up to support a hospital that no longer exists
What are the 5 main types of trust
1) Bare
2) Discretionary
3) Interest in Possession
4) Charitable
5) 18 to 25 trusts
What is a bare trust?
Beneficaries have immediate access to income and capital (sometimes known as simple trusts)
What are the pros of bare trusts?
1) Simple
2) Cheap
3) Tax Transparent
How is tax treated on bare trusts?
IHT on settlor (PET - no IHT if 7+ years)
Beneficiary liable for income and CGT
What is a common use of a bare trust?
Gifting to minors so they can access on their 18th birthdays
What is an interest in possesion trust
A trust in which income and capital are seperated
life tenant gets income (and may have access to things like property)
on death, remaindermen receive the capital
How are IIP trusts taxed?
Income tax on life tenant @ marginal rate
Trustees pay CGT
Trust property is part of life tenants estate for IHT
Periodic charges every 10 years
What is a use of an IIP trust?
1) Provide for surviving spouse whilst preserving assets for children.
2) Managing Wealth across generations
3) Ensuring someone has benefits without giving them control of the assets
What are the disadvantages of an IIP?
1) Cost / complicated administration (trustees, accountanct etc)
2) Lack of flexibility (life tenant cannot access capital)
3) Heavily taxed (income, cgt & iht) & 10 year charge.
Give examples of what might be put in an IIP trust and why
1) Investments - spouse can take income whilst the capital is left to children
2) Property - spouse can continue to use but children receive on death (ensures wishes of settlor are followed)
What are trustees duties and how have they developed?
Developed through case law, now under common law expected to:
1) Due diligence when investing
2) Professional Expertise
3) Act impartially
4) Administer assets in best interests
5) Make trust productive
6) Obtain advice if lacking competency
trustee powers are granted by the trust deed
What is the difference between a fixed trust and discretionary trust?
Fixed trust names beneficiaries and when they get benefit
Discretionary trust names beneficaries but trustees have discretion as to when they get benefit
fixed trust can fix a payout date as well as the level of benefits
What is the main benefit of using a discretionary trust?
Why is this the main benefit?
The flexibility
1) can add and remove beneficaries
2) Can choose when and how to distribute
3) Can choose how much to distribute
What are some of the potential reasons / circumstances to set up a discretionary trust?
1) More complex estate planning (e.g. 2nd marriages etc)
2) Multiple beneficiaries (at different stages of life)
3) Need the flexibility (can add and remove, can choose when to disburse)
4) Guard against spendthrift beneficiaries
How is IHT applied on a discretionary trust?
1) Early charge - if transfer exceeds NRB 20% lifetime rate charged to excess
2) 10 year charge - up to 6% of value of assets above NRB
3) Exit Charge
4) PET - if settlor dies within 7yrs IHT due
How is income tax applied on a discretionary trust?
and dividends
Trustees pay 45% above £500
Beneficaries receive income with 45% deducted - this can be reclaimed
dividends at 39.35%
How is CGT applied on a discretionary trust?
24% with a £1,500 annual exemption
What is a charitable trust?
a trust set up for a cause or purpose that will benefit a large group of people / society in general.
not set up to benefit specific people
What does a charitable trust have to be for to qualify?
The advancement of:
1) Education
2) Religion
3) Health
4) Amateur Sport
5) The Arts / Science
this has been expanded (things like ESG, Animal welfare, armed forces)
What do charitable trusts benefit from?
Tax exemptions
What tax exemptions do charitable trusts get?
1) Income Tax Exemption
2) CGT Exemption
3) IHT Exemption (can also reduce the IHT rate from 40% to 36%)
What is an 18-25 Trust?
A trust set up for the child of one or more deceased parents
How does an 18-25 trust work?
Assets set aside for a child until at latest their 25th birthday
goes beyond a bereaved minor’s trust which pays out at 18
What was the purpose of the Trustee Act 2000?
To widen the powers both in terms of administration and investment as well as powers of delegation for trustees.
What were the 5 main areas of focus under the trustee act 2000?
1) Investment Powers
2) Power to Delegate
3) Duty of Care
4) Renumeration
5) Power to insure
also expanded the power to aquire land for any purpose
How were investment powers expanded under the trustee act?
Gives trustees a wider range of investment options to allow for better diversification
Trustees can invest assets as is they were absolutely entitled to the assets
How was the power to delegate expanded under the trustee act?
Trustees can now delegate a variety of functions to others - but must reguarly review their performance
How was duty of care expanded under the trustee act?
trustees must exercise reasonable care and skill and these standards are even higher for professional trustees
How has renumeration changed under the trustee act?
Trustees can now be paid for their work - either where the trust deed allows it or they are professionals
How has the power to insure expanded under the trustee act?
can now insure 100% of trust property as opposed to 75%
How was the power to acquire land expanded under the trustee act?
trustees can now acquire land for any purpose (e.g. occupation of beneficiary or for investment)
What investment duties do trustees have?
1) Must review reguarly
2) Must obtain and consider proper advice
3) Must be aware of need for diversification
What is a family office?
An organisation dedicated to holding and managing the wealth of a family
Each office is bespoke and can provide services broader than just wealth management (e.g. tax, concierge etc)
What is the benefit of a family office?
The service is bespoke and more efficient that a large firm
family offices are starting to include more ESG considerations according to UBS
What is the difference between single-family office and multi-family office?
SFO serve one family (fully customied & confidential)
MFO - wealth managers that manage a group of families
