Trusts

A trust is a method transferring ownership of property for the benefit of others without giving them full control over it. By placing property in trust, the original holder of that property relinquishes absolute ownership to other parties. Ownership becomes split so that legal title passes to the trustee, who will hold the property for the benefit of another individual, known as a beneficiary.

The beneficiary becomes the equitable (beneficial) owner of that property. 

As equitable owners of the trust property, beneficiaries cannot, for example, claim against a life company for proceeds of a life policy that is held within the trust, but they can claim against the trustees in accordance with the terms of the trust who, in turn, can claim against the life company as legal owners of the policy.

There can be more than one trustee and more than one beneficiary. Furthermore, it is permitted for the se...

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...t 1999

Trustee Act 2000 (which applies to England and Wales)

The Trustee Act (Northern Ireland) 2001 (applies to NI)

The Charities and Trustee Investment (Scotland) Act 2005 (Scotland)

Perpetuities and Accumulations Acts 1964 and 2009

Inheritance and Trustees’ Powers Act 2014

Trusts can be distinguished from contracts in that:

Unlike in contract law, no agreement exists between the creator of the trust and its beneficiaries, therefore, no consideration is required

Beneficiaries may be completely unaware of the trust if, for instance, they are minor children

Trust law arises from the principle of equity as opposed to common law. For many years, trusts were not even recognised under common law whereas contracts were

Trust law has developed over the centuries on equitable principles, and much of the English and Welsh law is now contained in the Trustee Acts of 1925 and 2000

The settlor is the person who originally places assets into trust. This is normally achieved by executing a deed of trust often referred to as a “settlement&rdqu...

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...ling with certain offshore trusts, for example. They are also useful where corporate trustees are used - the protector can remove the corporate trustee and replace it.

The only restrictions as to who can be a trustee are that they must be at least age 18 and sane. It is possible, therefore, for an un-disch...

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...rporation is that it is likely to charge for its services which may be impractical, especially where smaller, simpler trusts are concerned.

The primary role of the trustee(s) is to hold trust property, administer it in accordance with the provisions of the trust, and to ensure that their actions are for the benefit of the beneficiaries.

Trustees should hold all title documents to trust property and ensure they are registered as the legal owners of that property.

With effect from 1 February 2001, the Trustee Act 2000 brought in a new statutory duty of care for trustees when carrying out their duties under t...

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...n of the trust and its beneficiaries (Hurlingham Estates v Wilde & Partners (1997))

To keep proper accounts of all trust property, to which the beneficiaries should be given access on demand, as well as all other reasonable information relating to trust administration. Trustees are personally liable to the beneficiaries for any losses caused by their default or bad management

To avoid conflicts of interest, which is difficult if the trustee is also a beneficiary

The trust deed usually provides trustees with specific powers in terms of how they are to deal with the trust property. For example, with a portfolio of shares, trustees are given the power to buy and sell those shares as they see fit in accordance with the objectives of the trust.

All trustees have to agree on the exercise of a particular power unless the trust terms say something to the contrary. Trusts operating under Scottish law have a majority decision-making principle.

In addition to any powers specifically expressed in the trust wording, the following powers can be exercised as provided under the Trustee Act 1925:

Section 31 gives trustees power to apply trust income for any infant beneficiary ...

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... trustees are not permitted to charge for their services. Professional trustees can usually charge for their services and there is usually an express clause in the trust to facilitate this. Where there is no such clause, the Trustee Act 2000 provides an express professional charging clause that is applicable to all non-charitable trusts.

Trustees are entitled to reimbursement of expenses incurred in the running of the trust, and such expenses are funded out of the trust property.

If the trust owns shares, it is not uncommon for one of the trustees to be appointed a director of that company, but any director’s fees earned in this capacity must be paid to the trust fund, not to the trustee personally.

Initial appointment

Trustees can be appointed in a number of ways:

Under a trust created by a deed - the initial trustees are appointed by the deed itself

Where a trust is created by a will, it should name the trustees (normally executors of the will)

Under a trust established via statute e.g. as a result of intestacy, the administrators of the estate will be the trustees

Replacing trustees

The trust deed will usually name the person(s) called the appointor(s) - those entitled to appoint new trustees. If no provision is included in the trust deed, power to appoint new trustees rests with the surviving trustees or the legal personal representatives of the l...

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...f trustees are governed by s18 of the Trustee Act 1925.

If one of two or more trustees dies, their powers can be exercised by the surviving trustees. The only exception to this is that a sole trustee cannot give a good receipt for the proceeds of a sale of land, unless that sole trustee is a trust corporation.

If a sole (or last surviving) trustee dies, his or her legal representatives can act as trustees until an appointment is made by the appointor.

If no appointment was specified in the trust deed or if the appointor is now dead, the legal personal representatives can continue to act as trustees or can appoint replacement trustees under s36 of the Trustee Act 1925.

Generally speaking, trustees’ functions cannot be delegated to others.

However, under the terms of the Trustee Act 2000, trustees can appoint agents and delegate to an agent any of their powers, other than :

The power to distribute trust assets

Powers in relation to how fees are dealt with

The power to appoint new trustees, nominees or custodians; and

The power to delegate trustees’ powers

Trustees can (unless the trust deed states expressly to the contrary) appoint nominees to hold trust property on behalf of the trust and custodians to keep assets or tr...

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...is usually an express clause in the trust to facilitate this. Where there is no such clause, the Trustee Act 2000 provides an express professional charging clause that is applicable to all non-charitable trusts.

Trustees are entitled to reimbursement of expenses incurred in the running of the trust, and such expenses are funded out of the trust property.

If the trust owns shares, it is not uncommon for one of the trustees to be appointed a director of that company, but any director’s fees earned in this capacity must be paid to the trust fund, not to the trustee personally.

If a trustee acts outside of their powers or fails to carry out a function required of him or her by the trust, this is considered to be a breach of trust.

If a beneficiary believes that a trustee has committed or is about to commit a breach of trust, legal a...

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...ested that professional trustees should not be allowed to rely on clauses that exclude their liability for breach of trust arising from negligence, and that trustees be given the power to purchase indemnity insurance to cover their liability for breach of trust.

Beneficiaries of a trust are the equitable (beneficial) owners of the trust property. All actions arising from the trust must be for their benefit. There are several types of beneficiary:

Absolute beneficiaries have full equitable ownership of the trust property, which cannot be appointed away.

A beneficiary with a life interest is entitled to receive the income from the trust property for life but cannot access the capital. Such be...

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...subject to any express provisions contained in the trust. 

In some cases, beneficiaries can end a trust. Under the rule relating to Saunders v Vautier , they can direct the trustees to hand the trust property over to them and end the trust if:

All beneficiaries are ascertained

There is no possibility of further beneficiaries

They are of full age and capacity; and

There is a unanimous agreement of all the beneficiaries.

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There are several different trust types:

Express trusts

This is a trust expressly created, often by some written method for instance in a deed or a will. The terms are “expressly” laid out (hence the name). Trusts of personal property can be given by express oral declaration.

Implied trusts

This is a trust that is created by implication from the actions or circumstance of the parties involved.

For instance, a business partnership could purchase a property and arrange for the conveyance to be on only one of the partners. The partner effectively holds the property in trust for all partners even where no formal written agreement is in place detailing such a trust arrangement.

Presumptive trusts

A presumptive trust occurs where a person purchases property in the name of another. An example of this would be where A purchases a property in the name of B. The presumption is that B is holding the property as trustee for A.

Purpose trusts

A purpose trust exists not to benefit individuals, but for a specific purpose, such as to maintain a building or garden.

Constructive trusts

A constructive trust is one imposed by law irrespective of the intentions of those involved. An example may be where a trustee profited from the trust in a way he was not allowed to do by the trust wording. Such profit will be held on constructive trust for the beneficiaries.

Successive trusts

Successive trusts, sometimes referred to as settlements, hold property in trust for a succession of beneficiaries. The interests of each beneficiary take effect one after the other.

As an example, a settlement on marriage may provide for property to be held on trust for the wife for her life, thereafter for her husband for life, and then on death for their children in equal shares. If ...

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...h as grandchildren and great grandchildren. Prior to March 2006, they enjoyed favourable IHT treatment (the lifetime transfer of benefits into this type of trust was treated as a potentially exempt transfer). Following the Finance Act 2006, any new accumulation and maintenance trusts no longer benefit from favourable IHT treatment.

The rules governing accumulation and maintenance trusts (primarily to ensure that they could benefit from previously favourable tax treatment) are:

One or more beneficiaries becomes legally entitled to the trust’s capital or income on attaining a certain age no later than 25

Prior to that, the income must be held by the trustees to apply it for the maintenance, education or benefit of the beneficiaries

As an alternative, the income can be accumulated until one or more beneficiary becomes entitled to the income; and

Unless all beneficiaries have a grandparent in common, the trust must not last for more than 25 years

Statutory trusts

These are trusts created as a result of law, such as those created under the laws of intestacy or under the Married Women’s Property Act 1982. This Act originally gave married women the right to own property and sue in their own right, but the main practical effect of the Act was in relation to life policies. Where a husband took out a life policy for the benefit of his wife, the Married Women’s Property Act enabled her to claim on her husband’s death even though she was not party to the contract between the husband and the life company.

Where a statutory trust is created for a minor beneficiary, there will be no physical trust deed because the trust is created under the laws of intestacy. An investment made on behalf of a beneficiary of such a trust would complete a ‘trustee application form’ and provide prove of their entitlement under the laws of intestacy.

There are various ways in which trusts can be useful.

 

Reduction of tax

Trusts are often used to reduce tax. For example, a higher or additional rate taxpayer could pass assets into trust which would otherwise attract income subject to higher or additional rate tax. However, anti-avoidance rules exist to stop individuals passing assets into trust for the benefit of children purely for the sake of reducing income tax.

Another instance arises where an individual transfers assets into trust during their lifetime in order to reduce inheritance tax. By surviving seven years from the date of the transfer, the assets fall entirely out of the settlor’s estate, potentially saving large amounts of inheritance tax. The sooner an individual begin making transfers and utilising the nil rate band, the more nil rate bands they can utilised during their lifetime.

In intestacy

The distribution of an estate on intestacy often involves a trust, ...

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... method.

Joint tenants – where property is owned under a joint tenancy, all joint owners have an identical and equal interest in the property. When one ‘tenant’ (owner) dies, the property passes automatically to the surviving tenants (owners) under the ‘right of survivorship’. This means that interest in property owned in this way cannot be left in a will – they do not form part of the deceased’s estate. This also means that the deceased’s interest passes to the surviving owners free of IHT. Joint tenancy is severed in the event of the bankruptcy of one of the joint tenants.

Tenants in common – where the property is held as tenants in common, on the death of one ‘tenant’ (owner), their share of the property becomes part of their estate, and is distributed according to their will, or under the law of intestacy if there is no will. This is a transfer of value for IHT purposes.