UK Contract and Trust Legislation (2/80)

Question 1

What is the capacity to contract?

Answer 1

This is a legal term which means that someone has the power in law to enter into a contract; if they do not have capacity to contract, the contract may be either Void or Voidable

Question 2

What role do IFAs play in any transactions for their clients?

Answer 2

They act as “Agents” of the client. In some cases, wher ethe IFA is tied to a provide,r they may act as Agent of the provider.

Question 3

What is Limited Liability?

Answer 3

Its owners cannot – except in very few circumstances – be found liable for the company’s debts; their liability is limited to what they paid for their shares, hence most companies have the term limited in their title.

Question 4

What is the difference btween a Partnership and a LLC?

Answer 4

A partnership is not a separate legal entity like a company, and, with some kinds of partnership, the partners remain fully liable for the partnership debts.

Question 5

What is the diofference between dying Testate or Intestate?

Answer 5

Testate means with a will which manages the assets. Intestate means administrators will divide the assets.

Question 6

What are the two types of property?

Answer 6

• real property, and

* personal property.

Question 7

What are the types of joint ownership?

Answer 7

• a joint tenancy, or

* tenants in common.

Question 8

What is the difference bteween joint tenancy and tenants in common?

Answer 8

Joint Tenants each have an identicle interest. If one dies, the other owns it all. Tenants in common each own a seperate share and this can be passed to others.

Question 9

What are the cirumstances where an individual cannot be bankrupt?

Answer 9

• Upon death
• Infancy
• Mental incapability

Question 10

What are the ways a bankruptcy order can be made?

Answer 10

• Debtor’s petition – the debtor may apply voluntarily to the courts for a bankruptcy order. They
may do this because, while the process is unpleasant, it gives them the opportunity to put their debt
problems behind them and begin again.
• Creditor’s petition – one or more of the individual’s creditors can petition the courts for an
enforcement order.

Question 11

What is the difference between Bankruptcy and insolvency?

Answer 11

Companies become Insolvent, Individuals become Bankrupt

Question 12

How might a company address Insolvency?

Answer 12

• Liquidation
• Informal Arrangements
• Company Voluntary Arrangement
• Administration

Question 13

Why might you use a Trust?

Answer 13

• To ensure that the financial needs of the settlor’s family will be provided for after they die.
• To minimise the tax burden on the settlor’s estate on their death, perhaps by taking a gift out of the
settlor’s estate now while retaining the ability to decide exactly who will get what at a later stage.
• To make gifts for the benefit of people who may not be old enough, or sensible enough, to handle
them at the outset.
• To make a gift of income to one individual, while reserving the capital for the benefit of someone
else, after the income beneficiary’s death.

Question 14

What must a Trust Deed include?

Answer 14

The deed will specify the:
• trust property
• names of the trustees
• names of the beneficiaries
• name of the protector (if there is one)
• powers of the trustees
• rights of the beneficiaries.

Question 15

What is a Will Trust?

Answer 15

A trust can be expressly stated in a will or arise because of a gift to a minor. Even if the will does not
include provisions to set up a trust, the executors are effectively holding the entire estate on trust for
the beneficiaries until they can fully distribute it.

Question 16

What are the 3 Certainties required for a Valid Trust?

Answer 16

Certainty of intention (what do you intend)
Certainty of object (who is it for)
Certainty of subject matter (what is in it)

Question 17

What is the Settlor of a Trust?

Answer 17

The settlor is the person who sets up the trust by transferring money or other property to trustees to
hold upon the terms of the trust they are seeking to establish.

Question 18

Who are the Trustees of a Trust?

Answer 18

The trustees are the legal owners of the trust property and on appointment the property will be vested
in them by the settlor. This process is known as constituting the trust.

Question 19

What are the duties of Trustees?

Answer 19

• To comply with the terms of the trust – the trustee must be familiar with the terms of the trust and
comply with the duties and powers contained in the trust instrument.
• To take control of the trust property – the trustee must ascertain the assets of the trust and ensure
these are vested in the names of the trustees.
• To act impartially between the beneficiaries – trustees must act in the best interests of the
beneficiaries but, importantly, must also act impartially between all the beneficiaries.
• Duty to keep accounts – a trustee must keep clear and accurate accounts of the trust, and provide
them to beneficiaries on request.
• Duty to provide information – a trustee must produce information and documents on request of
the beneficiaries.
• Duty of care – in addition to the above general duties, there has always existed an overarching duty
of care which covers all the actions of a trustee.

Question 20

Can trustees delegate their powers?

Answer 20

Yes, to an Agent

Question 21

Who are the Beneficiaries of a Trust?

Answer 21

The beneficiaries are the persons or objects for whose benefit the trust is created.

Question 22

What are the types of Beneficiary for a Trust?

Answer 22

• Absolute vested interest – the beneficiary has a full equitable ownership, which cannot be taken
away.
• Life interest – a beneficiary (called the life tenant) is entitled to the income on the trust property
but not the capital.
• Remaindermen – these beneficiaries will receive the capital of the trust fund on the death of the
life tenant

Question 23

What is a Protector a trust?

Answer 23

They make decisions and other powers given to them in the Trust Document, however they do not legally hold the Trust assets, unlike the Trustee

Question 24

What is a Bare Trust?

Answer 24

A bare trust is when the trustee holds the trust property for a single beneficiary who is of full age and
mental capacity.

Question 25

How is income treated on a Bare Trust?

Answer 25

The income on a bare trust is deemed to be that of the beneficiary, who will be able to utilise any unused
personal allowance to mitigate, or avoid completely, any income tax on the income arising within the
trust fund. For parents, this type of trust is not so attractive, since any income over £100 is deemed to be
that of the parents, for income tax purposes. For grandparents, however, this rule does not apply.

Question 26

What is an Interest in Possession Trust?

Answer 26

An interest in possession is the right to receive an income from the trust fund, or use of the trust assets.

Question 27

Why would you use a Interest in Possession Trust?

Answer 27

Typically, the settlor will leave assets to be held in trust for their widow(er) to enjoy the income or use
of property for the rest of their lifetime, and on their death the assets in the trust will be distributed
between the children or grandchildren.

Question 28

What is a Charitable Trust?

Answer 28

A charitable trust is a type of purpose trust in that it promotes a purpose and does not primarily benefit
specific individuals.

Question 29

What are the 13 purposes for which a Trust can be considered Charitable?

Answer 29

1. The prevention or relief of poverty.
2. The advancement of education.
3. The advancement of religion.
4. The advancement of health or the saving of lives.
5. The advancement of citizenship or community development.
6. The advancement of the arts, culture, heritage or science.
7. The advancement of amateur sport.
8. The advancement of human rights, conflict resolution or reconciliation or the promotion of religious
   or racial harmony or equality and diversity.
9. The advancement of environmental protection or improvement.
10. The relief of those in need, by reason of youth, age, ill-health, disability, financial hardship or other
    disadvantage.
11. The advancement of animal welfare.
12. The promotion of the efficiency of the armed forces of the Crown; or the efficiency of the police, fire
    and rescue services or ambulance services.
13. Any other purposes charitable in law.

Question 30

What are the advantages of a Charitable Trust?

Answer 30

• Investment income is exempt from income tax, providing that it is applied for charitable purposes.
• No CGT is payable on disposals by the trust.
• Stamp duty is not payable by charities, if an asset is bought for charitable purposes.
• No CGT is payable on gifts by individuals to charity (this is an exempt disposal).
• No IHT is payable on outright gifts by individuals to a charity.
• Charities benefit from a mandatory 80% business rate relief for the premises that they occupy.
The further 20% is discretionary and may be awarded by the local authority to whom the rates are
payable.
• Gifts to charitable trusts may qualify for income tax relief under gift aid or a payroll-giving scheme.