I am thinking about setting up a family trust. How do I ensure that it achieves what I want for the beneficiaries?

Posted on By Joanna Pegum
man looks thoughtful

While a trust can be extremely useful, there are certain steps that can be taken to make the most of them. This includes managing beneficiaries’ expectations and educating them on how to be a good beneficiary.

It may be obvious that every creator of a family trust intends to enrich the lives of their beneficiaries, but this can be far from straightforward. Indeed, a recent publication on trusts in the US (see below) found as many as 80 per cent of beneficiaries found a trust more of a burden than a blessing. Too often there are misunderstandings. Trustees fail to understand beneficiaries, and beneficiaries in turn fail to understand the nature of the trust, or the roles and responsibilities of the trustees.

If you are setting up a trust for your family, you can take a number of steps to improve the relationship:

  1. Carefully consider what type of person or institution would make the best trustee for your family and, once appointed, conduct regular reviews to ensure that they are still the right choice.
  2. Educate your beneficiaries about their responsibilities, the nature of the trust, and the role of the trustees.
  3. Review your trust structure to ensure that it remains optimal for your family’s circumstances. 
  4. Hold open discussions with relevant family members, when appropriate, about the arrangements you have made for the trust, your motivations and values.

If in doubt, consult a professional advisor. While it’s best to seek advice at the outset, it’s never too late to discuss how you can improve the trust relationship.

  • Family Trusts – A guide for Beneficiaries, Trustees, Trust Protectors, and Trust Creators  by Hartley Goldstone, James E Hughes, and Keith Whitaker.

Miles Le Cornu TEP is Co-Founder at MK Consultants, Jersey

I am worried that a trustee has mismanaged my trust fund. What can I do?

Posted on By Joanna Pegum
concerned woman

Trustees are appointed to safeguard funds in a trust, and are duty-bound to act in the best interests of the beneficiaries. While most trustees will carry out their duties conscientiously; occasionally, there is mismanagement.

There are a number of ways in which a trustee can mismanage a trust fund. This can include:

  • Using trust funds to make investments that are not permitted by the trustee’s powers of investment, or which are outside the investment or risk profile for the trust, such as hazardous or speculative investments
  • Failing to exercise reasonable skill and care when making investments
  • Distributing trust assets to non-beneficiaries, or to a beneficiary who is not entitled to them under the terms of the trust document
  • Using trust funds for the trustee’s own personal advantage – even if he or she only ‘borrows’ the money
  • Reaping financial benefits from trust funds without permission
  • Making decisions based upon personal interests, instead of those of the beneficiaries.
  • Failing to take reasonable steps to protect the trust fund.

How can I find out if a trust fund is being mismanaged?

Trustees have a duty to account to beneficiaries for their administration of the trust.

Beneficiaries are entitled to demand financial information showing how the trust fund has been managed. If the trustee refuses to provide this, the beneficiary can apply to the court for an order compelling the trustee to produce it.

Once the beneficiary has the information, they should then be able to assess whether there has been any mismanagement.

If the affairs of the trust are complicated and/or it is unclear whether full information has been provided, it may be advisable to use a forensic accountant to discover whether there has been mismanagement, and whether complete information has been provided.

I’ve established that the trust fund has been mismanaged – what are my options?

There are a number of different types of remedy available, depending on the nature of the mismanagement:

  • If trust funds have been misappropriated, or wrongly distributed to non-beneficiaries, you can bring a court action for their recovery.
  • If the trustee has failed to exercise care and skill, or has made unauthorised investments, you can bring an action against him or her to make good the losses.
  • If the trustee has, without authorisation, profited from their position as trustee, you can bring an action against him or her.

As well as proceeding against the trustee, beneficiaries may also be able to proceed against third parties who dishonestly assisted the trustee in his or her breach of fiduciary duty – for example, anyone else who may have profited from their misconduct.

You can make an application to remove the trustee from office, if you do not have the power to do so under the trust deed, or if the trustee will not step down voluntarily.

Before bringing any such action, however, it’s best to take legal advice. If the legal action is unsuccessful, you may run the risk of having to pay the trustee’s costs. Your advisor may suggest alternatives to court action, such as direct negotiation or mediation, in the first instance.

Oliver Passmore is an Advocate and Managing Associate at Ogier, Jersey

What is a discretionary trust, and when would you use one?

Posted on By Joanna Pegum
woman looking thoughtful

A discretionary trust means trustees have the discretion to decide who benefits from the trust, from a list of potential beneficiaries.

They can also decide when payments are to be made, how much, and how often.

Discretionary trusts are very flexible and can have many uses. For example you might not know how much your beneficiaries might need in the future, so you can leave that responsibility to the trustees.

Personal injury trusts

Another good use for a discretionary trust is a personal injury trust, which can be set up by, or on behalf of, someone who has received compensation from a personal injury claim so that they don’t lose eligibility for their benefits.

Protecting other members of your family

Before 2007, when the law changed, it was common for spouses to make wills leaving the inheritance tax allowance (currently £325,000) to a nil-rate band discretionary trust, so the surviving spouse or civil partner could make use of their allowance after the first spouse died.

While this is no longer necessary, thanks to the transferable inheritance tax allowance between spouses or civil partners, it is useful to include such a trust in your will to provide for other members of the family. If there are assets which are likely to increase in value at a faster rate than the inheritance tax allowance, these could be included in the trust to mitigate inheritance tax on the estate of the surviving spouse/civil partner.

The main disadvantage of a discretionary trust is that any income which is produced from trust assets is taxed at a higher rate of income tax (currently 45%); however, beneficiaries who are basic rate tax payers can claim a tax rebate.

Taxes on trusts

If the value of the trust exceeds the inheritance tax allowance, there may be inheritance tax to pay when any assets are transferred to the beneficiaries (exit charge) and on each ten-year anniversary of the start of the trust (principal charge). The calculations for the exit charge and principal charge are complex, but the rate of tax is lower than the rate of inheritance tax and the maximum rate of tax payable is 6%. See Can I really use a trust to avoid inheritance tax? for more information.

Discretionary trusts are often set up by a will, but they can also be set up during someone’s lifetime. If the gift into trust is under £325,000 and no other gifts have been made, there will be no immediate lifetime inheritance tax charge.

It is worth noting that the inheritance tax residence nil-rate band, which came in to effect in April 2017, cannot be claimed if the deceased’s residence passes into a discretionary trust. This is because it must pass to direct descendants and cannot pass into trust (see What is the Residence Nil-Rate Band? for more information). However discretionary trusts are still useful tools to consider as part of estate and trust planning.

Tina Wong TEP is a Solicitor at Pothecary Witham Weld in London

How can I leave my pension to the person I choose?

Posted on By Joanna Pegum
father and son

It’s easy to think that everything you own will be distributed according to your will when you die. Your pension, though, is a different matter. Pensions are not considered part of your estate, and generally not subject to inheritance tax. Most importantly, you will need to specify who will benefit, via a particular form, known as a nomination form or Expression of Wish form.

What is a nomination form?

Most pensions, aside from the state pension, will require you to complete a nomination form. This will allow you to give details of the loved ones that you would like to benefit from your pension when you die, who are known as your beneficiaries. While nomination forms usually only apply to lump sum benefits from a pension on death, and not to the transfer of a drawdown pension (i.e pension income),  providers do vary. You will need to ask your provider(s) what they require.

Who can I nominate?

You can nominate anyone you like, including family, friends, charities, clubs or associations.

If I am married, will my spouse automatically get my pension?

Your pension provider may automatically nominate your spouse or civil partner to receive the lump sum in the absence of a nomination form, but you should check the details of your policy and make sure it complies with your wishes.

How many people can I nominate?

Each individual pension provider should specify their requirements on the form. Some providers state that you can nominate up to 25 beneficiaries.

What happens if I nominate my personal representatives?

If you nominate the ‘personal representatives’ or ‘executors’ of your will, or more simply your ‘estate,’ there is a good chance that your pension lump sum will form part of your estate and will become subject to inheritance tax.

Is it legally binding?

Most pension providers will state that your nominations will not be legally binding, and the distributions will be made at their discretion. In the majority of cases, they will comply with your instructions if they are clear and up to date. They may be more inclined to disregard your wishes if the information appears to be out of date or inappropriate, for example if someone has died or got divorced.

What happens if I don’t fill in the form?

Distributions are usually made at the provider’s discretion if you don’t submit a nomination form. Some pension providers have a policy that they will automatically pass the lump sum to your spouse or civil partner, but this is not guaranteed, and you should check your policy.

What information should I provide?

Each pension plan is different, but generally you will be asked to provide your pension account number or reference number, the full name of each beneficiary, their date of birth and address and their relationship to you. You will then be asked what percentage share of the lump sum you would like to leave them. You must ensure that the shares add up to 100%, otherwise your provider may be obliged to use their discretion. You can of course leave 100% to one person or organisation.

How can I update it?

The nomination form can be updated as frequently as necessary, and often online, so make sure you keep your beneficiary’s personal details current and correct. The forms can usually be revoked or amended at any time.