Trustees need to act in the best interests of the beneficiaries and 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 entitled to recover their out of pocket expenses, including fees paid by them to professional advisers. A professional or corporate trustee is entitled to reasonable remuneration.
An outline of the duties
- As Trustees are personally chosen to act and therefore must act in this capacity, they are prohibited from delegating someone else to carry out their duties for them.
- Trustees must act unanimously unless the Trust Deed provides otherwise.
- The trustees have a duty to protect the assets of the trust and to ensure that the trust assets are properly invested.
- 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.
- The legislation also requires that the trustees have a regularly reviewed policy statement where they provide their attitude to investment and risk to a professional advisor
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.
Trustees are obliged to register a trust upon HMRC’s Trusts Registration Service by 31 January after the end of the tax year when tax falls due.
Trusts 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 the 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.
Within some trusts, there is a power of appointment. This is an express power and its use 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 which may be statutory or express. This allows the trustees to apply money or assets to a beneficiary or for their advancement or benefit, for example to help establish a beneficiary in life such as by funding the cost of education. 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.
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 and the type of income. The taxation of trusts is complicated and professional advice is recommended.
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 provide practical and effective advice.