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AF1 2020/21 > Trusts > Flashcards

Flashcards in Trusts Deck (24)
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1

Characteristics of a trust - key points:

  • Assets are a separate fund i.e. not art of a trustee's own estate
  • Trustees (or their representatives) have title to trust assets
  • Trustees must deal with trust property (manage it, sell it) in line with trust deed and trust law

2

Overview of a Trust - The settlor - key points:

  • Original owner(s) of trust property
  • Transfers legal ownership to trustees
    • Usually via 'deed of trust' or 'deed of settlement'
  • May also be a trustee, giving them some control over trust property
    • This must be to the advantage of the beneficiary not to themselves
  • Can be a beneficiary, but this may have tax disadvantages (becomes gift with reservation) which might defeat purpose of trust
  • Offshore trusts may also have a 'protector'
    • Role to ensure trustees follow settlor's intentions
    • Can veto trustee decisions/ remove trustees

3

Overview of a Trust - The trustee(s) - key points:

  • Legal owners of trust property
    • Can therefore, say, make a claim on a life policy
  • Must use it for benefit of beneficaries
    • Cannot use it as their own property
  • Can usually be any number of trustees
    • Exception when trust property is land: minimum is 2 (1 if trust corporation) maximum 4
  • Only legal criteria for trustee: must be over 18 and of sound mind
  • Could use a trust corporation instead of an individual
    • Trust corporation cannot die, has expertise but may have high charges
  • 2 types of trustees - professional and lay
    • Professional trustees have professional knowledge/ experience to manage trust, may work for professional trustee firm, will not be beneficiary of trust. 
    • Lay trustees are individuals with no specialist knowledge; e.g. relatives
    • Lay trustees cannot charge, professional ones can.
    •  

4

Overview of a Trust - The beneficiary(ies) - key points:

  • Equitable/ beneficial owner(s) of trust property.
    • Cannot, therefore, make a claim on a life policy under trust, but can claim against trustees if terms of trust gives them entitlement to proceeds. 

5

Main types of beneficiary:

  • Absolute interest
    • Full equitable ownership to both income and capital. 
    • Cannot be taken away.
  • Life interest
    • Entitles to income from trust but not capital.
    • Life tenant.
  • Remainderman
    • Entitled to capital after death of life tenenat
    • Until then have reversionary interest only. 
  • Contingent beneficary
    • Interest depends on particular event that may or may not occur. 

6

Beneficiary(ies) - powers:

  • Beneficaries can be named (John Smith) or decribed (my grandchildren)
  • Cannot control trustees
    • Can demand they act in line with trust deed and trust accounts be audited
  • Under Saunders v Vautier (1841) beneficiaries can bring a trust to an end providing:
    • all beneficiaries are ascertained
    • no possibility of further beneficiaries
    • all of full age and mental capacity
    • all agree

7

Trust property - what can (and can't) be trust property?

Most property can be placed under trust (not ISAs though). Assets divided into:

  • Realty - freehold interest in land
  • Personalty - other assets categorised as 
    • Chattels real - leasehold interest in land
    • Chattels personal
      • Choses in action - intangible assets (life asurance, debt, shares)
      • Choses in possession - tangible objects (jewellery, art, antiques)

8

Main types of trust investments - key points and features:

Collectives/ Shares

  • Selected for income and/ or growth depending on needs of beneficiary
  • Under discretionary trust taxed at 38.1% (dividend income), 45% (all other income) in excess of standard rate band. 
  • CGT at 20% in excess of up to 1/2 usual annual exempt amount. 

Investment bonds

  • No incometherefore no need to self-assess until a chargeable gain occurs
  • Benefit from 5 tax-deferred withdrawals
  • Can assign to beneficiary prior to chargeable event so can be taxed at their rates
  • Onshore bond (20% tax at source)
  • Offshore bonds: benefit from gross roll up

9

Trust and contract - main differences:

Trust

  • No need for offer, acceptance or consideration
  • Beneficiaries may not be aware of the trust
  • Beneficiaries can be minors
  • Trustees are legal owners

Contracts

  • Offer, acceptance and consideration required
  • All parties must be aware of the agreement
  • Contract with a minor may or may not be enforceable
  • Only parties to contract have legal/ equitable rights

10

General duties and responsibilities of trustees:

  • Protect trust property by holding title documents
  • Ensure they are registered as legal owners for any trust property
  • Avoid conflicts of interest including making personal profit as such a transaction can be declared void at request of beneficiary.

11

Appointment of trustees ( at outset) - three scenarios:

  • Names (appointed by) in trust deed
  • Named in will (usually the executors
  • Administrators (intestacy)

12

Replacement/ retirement of trustees - key points:

  • The trust deed usually names appointer (who can be the settlor) with power to appoint new trustees (including themselves):
    • If no provision either surviving trustees or legal personal representatives last surviving trustee will appoint new trustees
    • Exception for corporate trustees who are expected to remain constant
    • In extreme cases where no other option exists, court can appoint trustees

13

Appointment of new trustees to replace another - Trustee Act 1925, s.36 - key points:

Under the Trustee Act 1925, s.36 a new trustee can be appointed to replace one who:

  • Has died
  • has been outside the UK for more than a year
  • Wants to be discharged
  • Refuses to act
  • Is unfit or incapable of acting
  • Is a minor

 

14

Trustees powers to delegate - key points:

  • Generally trustees functions cannot be delegated
  • under TA 2000 trustees can appoint agents and delegate to them any of their powers except:
    • power over trust asset distribution
    • fee handling
    • appointment of new trustees/ nominees/ custodians
    • delegation of trustees' powers
  • Trustees can appoint nominees to hold property in their name and custodians to undertake safe custody of trust assets/ documents unless deed says they cannot
  • Trustees can delegate exercise of any powers under a general power of attorney (Trustee Delegation Act 1999) providing:
    • it is for less than a year
    • it gives written notice of power and reason for it to appointer and all other trustees within 7 days of it being ptut into effect
    • donor remains liable

15

Types and uses of Trusts - there are a number of ways in which a trust can come about:

  • Express
  • Implied
  • Presumptive
  • Purpose
  • Successive
  • Constructive
  • Resulting

  • Express
    • Trust expressly created either in writing/ orally
  • Implied
    • Trust not expressly created
    • implied by the actions or intentions of parties
  • Presumptive
    • Similar to an implied trust
    • Where one person buys property in the name of another and holds it for them
  • Purpose
    • Exists not to benefit an individual but a purpose
  • Successive
    • Property held for a succession of interests e.g. spouse then children
  • Constructive
    • Trust imposed by law
  • Resulting
    • Trust that arises where there is a failure of the trust on which the property is held

16

Types of trust - bare and discretionary:

  • Bare Trust
    • Assets transferred by settlor to legal ownership of trustee.
    • Benefit of beneficaries absolutely. 
  • Discretionary
    • Type of relevant property trust
    • No beneficiary has the right to income or capital
    • Trustees have power to accumulate or distribute income/ capital at their discretion
    • May be subject to IHT lifetime, periodic and exit charges

17

Relevant property trust - key features:

  • Trusts created on/after 22 March 2006 that create flexible/ successive/ contingent interests are relevant property trusts (i.e. discretionary)
    • Therefore potentially subjct to IHT, periodic and exit charges
  • Exceptions are where property:
    • is in an IiP trust set up before 22 March 2006,
    • subject to transitional serial interest made before 5 October 2008
    • IPDI applied (trust created by will/ intestacy)
    • or trust for disabled person/ breaved minor/ 18-25 trust

18

Life interest and IIP trusts - key points:

 

IIPDI trusts - key points:

IIP

  • IIP = right to income of the trust or the right to use trust assets 
  • Beneficiaries are life tenant(s) and remainderman(men)

 

IPDI

  • Trust where person has an IIP and settlement was affected by will/ intestacy or beneficiary became benficially entitled to IIP on death of testator/ intestate
  • IPDI trusts are not treated as relevant property trusts

19

Power of appointment (flexible) trusts - key points:

  • Trustees have power to alter beneficial interest within class of potential beneficiaries
  • Flexibly advantageous
  • Default beneficiary has right to income/ possibly capital if no other appointment is made
  • Avoid including settlor as potential beneficiary to avoid reservation of benefit for IHT

20

Accumulation and maintenance trusts - key points:

  • Used to enjoy beneficial IHT treatment
  • One or more benficiary becomes legally entitled to capital/ income prior to 25
  • Prior to that income held by trustees but can be applied for mainentnance / education/ benefit of beneficiary
  • Could last no longer than 25 years unless set up for benefit of grandchildren of a common grandparent

21

Trst rules - three certainties:

  • Words
    • must unmistakably show that a trust is intended
  • Subject matter
    • must be certain with property clearly identifieid
  • Object must be certain - i.e. beneficiaries
    • they can be named 
    • described as a class
      • wording should be precise capable of legal definition e.g. wife, civil partner
      • children includes illegitimate children but not step-children
    • does not apply to charitable trusts

22

Overseas trusts - key points:

  • Trust created overseas subject to laws of that country
  • May be tax advantageous if not UK domociled/ deemed domiciled
  • Not all countries recognise trusts
  • Creation of trust with foreign residence trustees is usually a transfer of value for IHT
    • Chargeable unless
      • IHT exemption arises
      • property is 'excluded property' (property overseas and non-dom
      • HMRC must be told when trust created

 

23

Excluded property trust - key points:

  • Offshore discretionary trust for UK tax resident but not UK dom/deemed dom
  • Rin-fence non-UK assets and protect them from UK tax on their death
  • Remain excluded even if settlor is a beneficiary and later becomes dom/deemed dom providing
    • trust created when non-dom
    • further property added when non-dom
    • no further assets added once UK dom
    • residence status irrelevant

24

Excluded property trust - taxation treatment:

  • If EPT criteria is met then:
    • Transfers into EPT are not transfers of value for IHT
    • Trust not subject to periodic/ exit charges
    • Beneficiaries can include settlor, spouse, civil partner, children and will not be a gift with reservation
    • On settlor's death EPT outside the estate (unless returning UK dom on/ after 6 April 2017)