Being appointed as a trustee can seem a daunting and time consuming task to be asked to undertake but it is not as onerous as it first appears once you look through all of the jargon.
Trustees have a legal duty to act in the best interests of the beneficiaries and in good faith. A failure to carry out these basic principles may result in a breach of trust for which the trustees could be personally liable.
In order to understand Trusts it is necessary to understand some of the legal terminology.
- The Settlor – the person who creates the trust
- The Trustees – the persons who own the trust property and ‘look after’ it for the benefit of the beneficiaries
- The Beneficiary(ies) – the person or persons for whose benefit the trust assets are held
- Discretionary Trust – a trust under which no one person has the right to receive the trust income
- Life Interest - a beneficiary who has the right to the income from trust assets for the rest of their life
- Settlement – a trust created during the lifetime of a Settlor (in tax rules a settlement can be created on death)
Powers Of Trustees
Within the settlement, the settlor may include powers that they wish to give the trustees to enable them to have flexibility to carry out their role. If powers are included then the trustees have a duty to consider periodically whether or not they should exercise those powers. If these are not exercised properly then the Court may intervene in the management of the Trust.
It is commonly at the trustees’ discretion as to whether or not they choose to exercise their powers and, if they choose to do so, to what extent these powers are exercised. Some powers must be exercised and it is just the trustees’ decision as to when and how to exercise them.
Within most trusts there is a power of appointment. The use of this power depends upon the wording of the power itself. Most commonly this power allows the trustees to give a beneficiary a life interest or to remove one. These powers must be exercised in the correct way and require a legal document to be signed to ensure the trustees’ actions are legally binding.
Another common power is a power of advancement. This allows the trustees to advance money to a beneficiary or for their benefit, for example to pay school fees. There are limitations on this power and every time the trustees consider whether or not to exercise this careful consideration must be taken.
The trustees may also have administrative powers which are of a managerial nature. These may allow the trustees, for example to run a business, lend money and borrow money. These duties will be clearly laid down in the settlement.
The trustees have a duty to protect the assets of the trust and therefore to ensure that the trust assets are properly invested. The power to invest will usually be contained in the settlement and usually allows the trustees to deal with the assets as if they are the legal owner of them. The trustees have the opportunity to (subject to some notable exceptions) invest in any asset as they feel appropriate but do have to exercise diligence and skill. The Trustee Act 2000 provides clear guidance as to how the trustees have to deal with investments and the need to diversify.
The trustees have a legal duty to obtain proper advice as to where to invest and keep such investments under regular review as part of the compliance with the legislation. The type of investment will sometimes be limited by the type of trust being dealt with i.e. a life interest trust requires income generating assets as the beneficiary is entitled to the income for their life.
The legislation also requires that the trustees have a policy statement where they provide their attitude to investment and risk to a professional advisor. This statement must be kept under regular review – especially in a changing market.
It is especially important to keep full accounts for the trust, not only to ease the completion of any annual tax return, but also to be able to produce to the beneficiaries upon request.
As the trustees need to act in the best interests of the beneficiaries it is important to ensure that trustees’ interests do not conflict with the interests of the beneficiaries. For example, a trustee must not make a profit during the course of their appointment. However, trustees are allowed to be paid for their services. Trustees are entitled to recover their out of pocket expenses, including fees paid by them to professional advisers.
Trustees are personally chosen to act and therefore must act in this capacity and are prohibited from delegating someone else to carry out their duties for them. Some administrative powers can be delegated to another person but it is important to take advice as to which powers can be authorised to a third party.
Retirement, Removal & Appointment Of Trustees
In any settlement there is no minimum amount of trustees that can be appointed but, for administration purposes of some assets, there must be a minimum of two appointed.
Under statute, there is the power to appoint a trustee if this is not included in the settlement itself. This power can be exercised to replace a trustee in some circumstances, for example where a trustee dies or wishes to be removed. It can also be used to appoint more trustees so long as this does not exceed four. Legal documentation is required to make any appointment valid.
It is common for the settlor in any lifetime settlement to reserve the power to appoint new trustees but if the settlement is silent then the power can be exercised by the existing trustees. In some circumstances the Court can make an order to appoint a trustee.
If all beneficiaries of a trust are adults and are entitled under the trust then they have the power to direct that a trustee should retire and appoint an alternative to act. Once again, such power must be exercised in writing.
Taxation Of Trusts
There are specific taxation rules which apply to trusts which are lengthy and complex. Income tax, inheritance tax and capital gains tax are all appropriate to consider. Trusts are like people – they have their own unique rules. Trustees generally have to complete an annual tax return unless there are non income producing assets in the trust and no disposals have been made for Capital Gains Tax purposes.
Trusts pay income tax at various different rates which depend upon the type of trust. Some trusts pay income tax at basic rate (currently 20%) whilst others pay at 50%, which is known as the rate applicable to trusts.
Expert, Professional Advice
The Inheritance tax and capital gains tax rules relating to trusts are complex and specialist advice is recommended to understand the issues. Our expert Wills, Trusts and Wealth Management lawyers are able to assist if requested.