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Trustees – Managing trust money correctly.

One of a trustees main roles is to manage a trust fund correctly for the beneficiaries. This will often involve making decisions and investing money held by the trust correctly. Whilst this sounds easy, this is often one area that trustees find themselves in error, especially when family or friends are acting as trustees and can lead to personal liability for not achieving a reasonably return, failing to take advice and the potential for family disputes. Where a professional is appointed as a trustee they are expected to exercise an even higher standard of care and skill.

Investment Choice

The general financial principles are contained in the Trustee Act 2000 (s3) and may also feature in the trust instrument itself, to give the trustees power to put trust assets into any investment which they would be able to invest in if they owned the funds themselves. This is obviously a wide ranging power however, there is further guidance as to how the trustees exercise this function.

– Trustees must consider the suitability of proposed investments for the trust.

– The investment strategy should be diversified if appropriate to spread risk.

– Where trustees do not feel they are suitably experienced to take qualified financial advice to ensure the trustees are complying with their obligations.

 

Dependent on the nature of the trust other factors may need to be considered in the appropriateness of any investment, for example an Income in Possession trust (IIP) to produce income for a beneficiary for life before being distributed to remaining beneficiaries must way the balance between producing the income for those currently entitled against preserving or increasing the capital for those ultimately interested following the termination of the life interest.

Often something as simple as this can be overlooked and recently the writer has been involved in assisting a trust where a capital sum of approximately £10,000 was placed onto a trust in the 1980’s for the benefit of a surviving widow were only consideration was given to generating income for that surviving widow and not any subsequent capital growth.  In the 1980’s £10,000 had a significantly greater value then £10,000 in 2018 and had the fund been invested to both generate income and increase the capital then the trust fund wild have been substantially more, all beneficiaries would have been happy and more importantly the trustees would have acted correctly.

Beneficiaries age or tax position may also be relevant to investment choice of trustees and should be considered. If only £1,000 is held for a child until they reach 18 and they are currently 16 then a low risk choice would be sensible but if £25,000 is held for a 2 year old so there are 16 years to manage the fund, a longer term approach to grow capital would be more sensible. Income tax and reporting requirements to HMRC will be covered in a speedster blog but as a note of caution where trust funds are to be held for minor beneficiaries then trustees may consider a investment strategy to mitigate the need for income tax accountable to HM Revenue & Customs.

Investment Review

Following initial investment choices by trustees regular reviews should be undertaken and if necessary amendments made to ensure that trustees continue to discharge their professional duties and responsibilities.  Where financial advisors are utilised by trustees in relation to investments, this obligation is often met by the financial advisors submitting regular investment reports to the trustees.

With the uncertainty over Brexit and market reaction it is perhaps an ideal time for trustees to consider the investment strategy of their trust funds and as always document any decisions made to confirm that trustees have considered the investment.

Failure to Manage Correctly

Where trustees do not manage a trust fund correctly they can be held to have breached their position and be held accountable for loss. Where a loss has been incurred but the trustees have acted in accordance with their duties, for example if the stock market fell, trustees will not normally be liable if they have acted appropriately.

Often it is inaction of trustees rather than a incorrect informed choice that can lead to a question of negligence and in the pre-trustee act case of Nestle v National Westminster Bank PLC (1994) the beneficiaries argued that the trustees had exercised their investment powers too restrictively and that if the trust had been properly invested, it would have been worth a significantly greater value (over £1 million) Whilst the Court accepted the beneficiaries’ arguments they dismissed the claim because the trustees could not be held as following a investment strategy which no reasonably confident trustee would have done in the same circumstances.

Had they not taken any action at all in considering investments the outcome would have been significantly different with the trustees facing liability for the loss.

How We Can Help?

Our private client solicitors include members of the Society of Trusts and Estates Practitioners, the internationally recognised body of leading professionals in the areas of estate planning and trusts, and are available to provide advice on trust establishment, administration and winding up a trust to ensure trustees are complying with their obligations and reporting matters to HMRC correctly.

We can assist with ad hoc advice to trustees or undertaken a full administration service. We can also act as a trustee should you require a professional trustee to be involved in the trust administration.

Should you consider that you may need advice in relation to your role as trustee then contact our trust team at our Darlington office on 01325 281111 or visit www.clarkwillis.com or call into your nearest office.

Life Interest Will Trusts – Protecting Property & Assets by Alex Spurr, Solicitor

Life Interest Trusts In Wills – Why You Might Need One To Protect Your Property & Assets

What is a Life Interest Trust?

Life Interest Trusts, sometimes called Asset Protection Trusts, are the familiar term given to a legal arrangement called an Interest In Possession Trust. They are termed Life Interest Trusts because they give a particular person (the life tenant) the legal right to benefit from the assets being held under the trust. If this is a residential property, this would include a right to reside in the property, or if it is liquid assets, such as cash or investments, the right to receive the income.  This right normally lasts throughout the beneficiary’s lifetime, hence the name life tenant, although sometimes the right might end earlier, for example if the beneficiary required full time residential care or on remarriage.

A Life Interest Trust can hold money, but the arrangement is most often used over a residential property by spouses, civil partners or cohabiting partners.

The Will would specify what happens to the trust property when the life tenant dies (or stops having a benefit if an earlier event occurs) for example passing down to children or other nominated persons.

Normally, the trust allows the assets of the trust to be altered so that if the life tenant wished to move for example, the trust could dispose of property A and acquire, or part acquire, property B to enable the trust to adapt to life events and circumstances.

If the trust held other financial assets, a property sold and the trust held funds not used entirely in the purchase of a new property, then the life tenant would normally be entitled to the income generated by these funds although the trust could be drafted to enable the trustees to pay out capital sums to the life tenant or ultimate benefactors.

Why Might I Want One in My Will?

The main reason is to preserve whatever is in the trust, such as a share in the family home or financial assets. As the life tenant does not physically own the trust assets they cannot be included in their own financial affairs. This can be important post retirement for safeguarding assets from long term residential care costs and throughout life to safeguard assets for the bloodline, to ensure your children inherit. If you consider multiple marriages are now common place and an ageing population means care costs are a increased risk, you may appreciate that building in levels of security for your financial affairs can have long term benefit.

Example One – Care Fees

Alan and Rita are retired and live in a 3 bedroom detached property valued at £250,000 and have £20,000 each in the bank. Alan dies and leaves his property share and money in the bank to Rita. Rita later requires care and all of the property and cash in the bank can be used to fund that care. Rita is self-funding and when she passes away, is left with the bottom threshold of £14,250 which passes between their 2 children.

If Alan and Rita had included a Life Interest Trust in their respective Wills over the property only, in the above scenario, after Alan died, Rita would own her half of the house outright and have the benefit of Alan’s whilst she was alive, meaning she had security, but Alan’s Will specifies that ultimately his 50% of the property passes to the children after Rita’s death. When Rita went into care this time, only her 50% of the property and the savings could be used to fund her care, meaning the children would inherit the £14,250 from Rita’s assets on her death and 50% of the home that was subject to the Life Interest Trust, being an extra £125,000.

Example 2 – Young Family

Neil and Sue are in their 30s with three children under 10. Sue has a fatal accident and Neil inherits her estate. After a few years of being a single parent, Neil meets Helen, another single parent with one child, and several years later they cohabit and ultimately marry. Neil then dies at 76 leaving Helen as his surviving widow. Helen inherits everything and then makes a Will leaving her entire estate to her child and nothing to Neil’s three children. Neil’s original three children are disinherited.

If Neil and Sue had included a Life Interest Trust in their respective Wills over the property, in the above scenario, after Sue’s death, half of the matrimonial home would always have been protected for her three children rather than them being disinherited.

Who are the Trustees?

The executors, or possibly alternative specified trustees by you in the Will, have the job of safeguarding the trust assets and must always act in the best interests of all the beneficiaries.  Care must be taken when choosing who should act in this role.  The surviving partner can be a trustee, but should not be the only one, and perhaps a adult child or sibling should act together with them.  Unless the Will provides otherwise, the trustees will have to act unanimously, so that a surviving partner cannot override the terms of the trust or act in their own best interest.

If there is a property share involved, the trustees would usually go on the title deeds together with the surviving partner and a restriction placed on the title deeds to make reference to the trust.

Inheritance Tax (IHT) Issues?

The life tenant is treated as if he or she owned the trust property for the purposes of Inheritance Tax (IHT) and so will attract the usual spouse exemption if established under a spouses Will. On the death of the surviving spouse they may also have the ability to use the unused element of the predeceasing spouses tax free level, and unused extra residential property allowance, which will not have been decreased by establishing the trust.

If cohabiting partners include Life Interest Trusts then no similar spouse exemption is available although the level of IHT, if payable, will be no different by including this arrangement. There can be circumstances, if each cohabiting partner has their own children that the arrangement can cause the full or partial loss of the additional residential property allowance dependant on circumstances.

The primary position is Inheritance tax (IHT) is payable at 40% on a person’s assets over £325,000 on death and certain gifts made during their lifetime. There are also additional residential property allowances, transferable allowances between spouses and a range of exemptions and reliefs before IHT becomes payable.

On the life tenant’s death, subject to any exemptions or reliefs which then apply, IHT will be payable on the combined value of the trust assets and the life tenant’s own estate.  The trustees will be responsible for paying the proportion of the IHT payable in relation to the trust assets and the executors of the life tenants other estate, on the estate other than the trust.

Other Taxation Issues?

The trust may also be liable for Income tax and Capital Gains tax.

If the trust only includes a share in a residential property then no income tax is likely to arise or capital gains tax issues if the equivalent of an individuals main residence relief is available. For most Life Interest Trust this is the outcome.

Where the trust holds other assets then the taxation position may change. If the trust holds income producing assets, trustees will be liable for tax at the normal rates for income or dividend income.  Where any income is mandated to the life tenant, for example interest credited straight to their bank account so the trustees do not touch the income, then the life tenant would simply reflect this on their own tax returns as their own income.

If the assets held on trust increased above the trustee annual exemption for Capital Gains tax (currently half of an individual’s allowance) then the trustees may be liable for paying CGT if no reliefs are available.

Summary

In modern society, second often third marriages are common place and healthcare advances coupled with lifestyle changes mean that life expectancy has increased causing greater demand on residential care in later stages of life. These two factors alone mean that taking simple steps like including a Life Interest Trust arrangement in a Will for a spouse, civil partner or cohabiting partner can ensure protection for your descendants but without compromising the survivor’s ability to benefit during their lifetime. Where the residential home is included in such arrangements, the taxation side of things is often a non issue.

Whatever stage of life you are at, when owning a property jointly and making a Will, or where one person owns the property in their sole name but cohabits, then we will always discuss with you protection opportunities, including Life Interest Trusts, so that you can make an informed decision on planning your affairs.

As with all legal advice, your own particular circumstances may impact on the suitability of such an arrangement and so we would recommend you contact our specialist Wills team at your local office to discuss your affairs. Call us today on 01325 281111 or 01748 830000 to arrange your no obligation, complimentary discussion.