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

Child trust funds: do you need to act now?

Posted on By Joanna Pegum
backpacker

Thousands of child trust funds came into the control of 18-year-olds from September 2020 as the oldest accounts matured, giving children control and access to over potentially tens of thousands of pounds.

Every child born between 1 September 2002 and 2 January 2011 was eligible for a child trust fund, introduced by Labour to encourage regular and long-term savings in a tax-free account that the child could control at 16, but not withdraw funds until 18. Payments made into the account had an original upper limit of £1,200 per annum and have since risen to £9,000 in the 2021/22 tax year – meaning that by the time children turn 18, some funds could be worth at least £70,000.

While the scheme was replaced with junior ISAs in 2011, the holders of the earliest child trust funds turned 16 from the beginning of September 2018 and the first child trust funds matured in September 2020 giving the child full access to the account.  On maturity the child trust fund can either be cashed in or the proceeds passed to an Adult ISA.  However, if the child does not contact the provider then the money will be held in a protected account.

Some of the larger funds could make a huge difference to a young adult’s life by providing the means for a house deposit, money to start their own business or to be put towards higher education. However, many parents will worry that their child will fritter away the fund at their first taste of freedom.

Parents should talk to their children to discuss what they might want to do with their fund and how they might want to invest it. One option is for the child to put the trust fund into a tax-free junior ISA so that it turns into an adult ISA when he/she turns 18, but proper advice should always be sought on the best decision.

These early conversations will arm children with the best knowledge available to them, and could ward off unwise decisions when they turn 18 and gain unfettered control of the assets. While there is very little parents can do if their child still fritters away a child trust fund, they may decide that future assets they are planning to leave the child are best put in trust, rather than bequeathed outright.

In some instances the child may reach 18 but lack the mental capacity to provide instructions to the provider.  In these circumstances and in the absence of a registered Financial Lasting Power of Attorney, the parent will need to apply to the Court of Protection to be appointed as their child’s deputy, giving them the necessary authority to deal with account on their child’s behalf.

Sarah Phillips TEP is a Tax Partner at Irwin Mitchell Private Wealth, Newbury, Berks

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 should I look for when choosing a trustee?

Posted on By Louise Polcaro
choosing a trustee

If you’re thinking about setting up a trust, either to take effect in your lifetime or after your death, you need to take care when choosing a trustee.

In setting up a trust, you are giving up ownership of the assets, and signing them over to the trustee. The trustee will then take responsibility for managing the money or assets that you have set aside in the trust for the benefit of someone else (the beneficiaries). The trustee must use the money or assets in the trust only for the beneficiary’s benefit and everything the trustee does must be done in the beneficiary’s best interests.

Clearly, with such an important responsibility, it is essential to choose the right person to act as trustee.

Who can be a trustee?

As a general rule, anyone over the age of 18 can be a trustee. But you will want to be very careful about who you give the power and responsibility of trusteeship to.

Many people appoint a trusted family member or friend for trusts that take effect after their death. For trusts that take effect in your lifetime, you can appoint yourself and your spouse/civil partner/partner as trustee(s) if you wish, so that you retain some control over the assets and the decision-making power, though you must exercise this for the benefit of the beneficiaries.

How many trustees should there be?

Two or three are preferred. Four is the maximum (unless it is a charity), and only one trust corporation is needed.

Must I appoint a professional trustee?

You do not need to appoint a professional trustee, but this can be helpful if the others are unfamiliar with the obligations of the role. Alternatively, you can appoint family or friends and they can take advice from a professional trustee as and when necessary.

What do I need to think about when choosing a professional trustee?

If you decide to use a professional trustee, make sure you do some research before you sign up with them.

  • How long has the company been trading?
  • Are they regulated by any body/bodies?
  • Have they signed up to any professional codes?
  • Do they have a good reputation?
  • Are their charges reasonable?
  • Do they have professional indemnity cover, or other protection in place?
  • Who are the directors? Check their credentials and background

You should take your time and shop around to ensure you are completely comfortable with the company before you make a decision.

Final thoughts

Ultimately the clue is in the name: ‘trust’. You must make sure you trust the person or people you appoint as trustee(s). This is an important decision and must not be taken lightly.

Related articles

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 make sure my disabled child is provided for when I die?

Posted on By admin
young person on motorized wheelchair

Providing for our loved ones when we die is one of the most compelling reasons to make a will. If you have a disabled child this is even more important, as they will have specific and often costly needs that need special consideration.

The term ‘disabled’ can encompass a number of different disabilities. These could be physical and/or learning disabilities. People can be vulnerable for all sorts of reasons and careful thought should be given to the provisions that should be included to benefit them in a will.

What are the key considerations?

  • Where will they live?
  • What financial benefits are they already receiving?
  • What help are other family members providing?
  • What care plans are in place?
  • While it may be difficult, it is also important to think about your child’s life expectancy and medical prognosis.

When all the above factors have been thought about carefully, a will can be drawn up and a number of options can be looked at to ensure that appropriate financial provision is included.

Option 1: Making an ‘absolute gift’

The will can include what is known as an ‘absolute gift’. This means that your child will receive a financial benefit that is unrestricted and that will belong to them to do with as they wish.

Provisions are usually made for trustees to look after that money on behalf of your child until they reach the legal age of majority (18), but after that the money will belong to your child without any restriction. Before choosing this option you should think about whether your child is likely to have sufficient capacity when they reach adulthood to make decisions about how they use that money.

The gift would, in time, form part of your child’s estate, so you also need to think about whether your child is likely to have sufficient capacity at the appropriate time to make a will.

If your child is receiving means-tested benefits, you should bear in mind that by giving an absolute gift, this would be taken into consideration in calculating benefits, which may then be lost. This therefore needs careful consideration to ensure that your child isn’t disadvantaged by your decision.

Option 2: Using a life interest trust

Another possible option is to use a ‘life interest trust’. This would mean that trustees appointed in your will would look after the money you have set aside for your child during your child’s lifetime. The trustees would usually invest this money and the income produced on the investments would be available for your child for the remainder of their life. When your child passes away, the remaining money would be passed onto other individuals, who you name in your will.

Bear in mind that the income your child receives will be taken into consideration when they are assessed for any means tested benefits (the capital will not be taken into consideration).

In certain circumstances, and depending on the wording of your will, the trustees can sometimes make a ‘one-off payment’ of capital to your child, for example to pay for a holiday, or buy some equipment. The amount of capital that can be used for these purposes can be restricted by the wording used in setting up the trust.

Option 3: Using a discretionary trust

Another option to consider is a ‘discretionary trust’. The trustees would look after the assets (property, money, etc) within the trust and they are given absolute discretion to use both the income and the capital for your child’s benefit. There can also be other beneficiaries (perhaps other children and grandchildren) who will be able to benefit from the trust.

If you set up this kind of trust in your will, you would be asked to provide a letter of wishes addressed to the trustees that you have chosen, which sets out how you would wish them to make decisions about the assets in the trust.

On the death of your disabled child, any assets remaining in the trust can be distributed to the other beneficiaries.

Tax consequences

When setting up any sort of trust in a will, you should take advice on the tax consequences of the various options to ensure that you understand the advantages and disadvantages of any choice that you make.

There is a particular sort of trust that can be advantageous to use, which is called a ‘Vulnerable Beneficiary Trust’. This trust is recognised by HMRC and gets special tax treatment.

The definition of a ‘vulnerable beneficiary’ and the various tax consequences are clearly set out on the GOV.UK website.

In these trusts the vulnerable beneficiary (the disabled child) is entitled to receive the benefits from the trust during the remainder of their lifetime. Only a small amount of assets in the trust can be used for the benefit of someone else while the disabled person remains alive. The other beneficiaries would be entitled to what remains in the trust after the death of the disabled child.

When the disabled child dies it should be noted that the assets in the trust will be treated as part of their estate for inheritance tax purposes before they are distributed to the remaining beneficiaries of the trust.

Relying on your other children

You may be considering relying on your other children to look after their disabled brother or sister after you have died, so you don’t plan to leave anything to your disabled child in your will. This is a dangerous option and not one that is to be recommended.

You may feel that your disabled child already receives means-tested benefits and so doesn’t require anything else. The state may take a different view, however, and it leaves your estate open to a claim being made under the Inheritance (Provision for Family and Dependants) Act 1975 for reasonable financial provision to be made from the estate for your disabled child. This would be costly and not in the best interests of anyone. It is always best to make some provision for a disabled child, rather than to leave them out of the will altogether.

Some other considerations

When giving instructions for your will, you should give special thought to the choice of trustees and guardians for your child, as they will have onerous duties and responsibilities after you have died.

You should also think about where the child will live and what practical arrangements will need to be in place. If they are to remain at home, your other children may have to wait a long time for their inheritance until after your disabled child has died and the property has been sold.

Finally, it should be noted that you can set up a trust to benefit your disabled child in your lifetime, as well as by will. This enables grandparents and other close relatives to benefit your child either during their lifetime or by leaving gifts in their wills that can be added to the trust for your child.

This is a complicated area of law, and if financial provision needs to be considered for your disabled child then it would be strongly recommended to take specialist advice from a qualified practitioner who will be able to discuss the family circumstances to ensure the right option is chosen.

Patricia Wass TEP

Can I really use a trust to avoid inheritance tax?

Posted on By admin
Mature couple talking to financial planner at home

Trusts are occasionally seen as devices to avoid paying tax. In reality, you would never set up a trust just to gain tax advantages.

When you set up a trust you are giving up ownership of the assets it holds. This is a dramatic move, and will normally only make sense if you have clear objectives about what you want to achieve with your assets. Tax should really be a secondary issue.

In most cases any tax advantages or exemptions given to trusts are tightly targeted at those that are seen as doing social good – such as charitable trusts, trusts for disabled or vulnerable people, etc.

In many cases the trust may avoid one type of tax, but will be caught by another.

A lot of people think that if you put your money in a trust it will be exempt from inheritance tax. However, trusts are subject to three separate inheritance taxes: an entry charge; an exit charge; and a ten-year charge.

Let’s look at these in detail.

Entry charge for a trust

The entry charge is paid when you transfer assets into a trust. These may include buildings, land or money and can be either:

  • a gift made during a person’s lifetime, or
  • a transfer that reduces the value of the person’s estate (for example an asset is sold to trustees at less than its market value). The loss to the person’s estate is considered a gift or transfer.

Exit charge for a trust

The exit charge is similar, but it takes place when a trustee pays out of the trust to another person, called a beneficiary. The charge is based on a percentage of the value of the assets being transferred. Where payments of income are distributed to beneficiaries, no inheritance tax is payable because the beneficiaries will be liable for income tax instead.

Ten-year charge

The ten-year charge, also known as the periodic charge, is payable where the trust contains relevant property, where the value is over the £325,000 inheritance tax threshold known as the nil-rate band. It is charged on the ‘net value’ of relevant property in the trust on the day before each ten-year anniversary. The net value is the value after deducting any debts and reliefs, such as Business Property Relief or Agricultural Property Relief. However, neither of these are applied if the assets have been held for less than two years. If all of the assets are transferred to one or more of the beneficiaries before the ten-year anniversary, no charge will occur, but, of course, an exit charge will apply.

Charges

Both exit charges and ten-year charges are incurred at 6%, but there are many complicating factors and exemptions regarding ‘excluded property’, which get quite technical.

These charges are time consuming and complex to calculate, and trustees generally need to consult a professional advisor to arrive at the correct figure. This can be expensive, but it is worthwhile, as delayed or incorrect payments to HMRC will result in interest charges and/or financial penalties.

Speak to an advisor

As you can see, the rules around inheritance tax and trusts are very complicated, and each person’s individual circumstances will dictate their tax position. If you are considering setting up a trust you should speak to an advisor to discuss your specific situation and find a solution that works for you.

What is a disabled person’s trust?

Posted on By admin

Some trusts for disabled people are able to get special tax treatment from HMRC. They are more usually referred to as ‘vulnerable beneficiary trusts’.

For the trust to qualify as a vulnerable beneficiary trust, various conditions will apply.

Vulnerable beneficiary trusts for children are often set up in a parent’s will, but they are able to set up in lifetime as well.

Who qualifies for a vulnerable beneficiary trust?

The beneficiary of such a trust must be a disabled person. For this purpose a disabled person is one who:

  • by reason of ‘mental disorder’, within the meaning of the Mental Health Act 1983, is incapable of administering their property or managing their affairs, or
  • qualifies under a ‘benefits’ test, i.e.
    • is in receipt of an increased allowance, or
    • is in receipt of attendance allowance, or
    • is in receipt of the care component of disability living allowance at the highest or middle rate, or the mobility component of disability living allowance at the higher rate, or
    • is in receipt of the personal independence payment, or
    • is in receipt of an armed forced independent payment.

What classes as a ‘mental disorder’?

It should be noted that ‘mental disorder’ referred to above also has conditions attached to it. It is understood that HMRC will accept certain conditions as a ‘mental disorder’ that enable a person to qualify, and as a result of the condition they are incapable of managing their affairs. The accepted conditions are as follows:

  • Alzheimer’s or other forms of dementia;
  • bipolar disorder, schizophrenia, depression, or other mental illness;
  • Autistic Spectrum Disorder (sometimes described as a persuasive developmental disorder);
  • a learning disability, such as Down’s Syndrome.

Some brain injuries are not seen as a mental disorder if they only have physical consequences. However, if the brain injury has caused a psychological, cognitive or behavioural disorder, then these will generally be accepted as a ‘mental disorder’.

What about other beneficiaries?

If there are beneficiaries in the trust who are not vulnerable then the assets and income for the vulnerable beneficiary must be identified and kept separate. They must only be used for that person. It is only that part of the trust that would be entitled to special tax treatment.

How does the special tax treatment work?

If the trustees of the vulnerable beneficiary trust wish to claim the special tax treatment for income tax and capital gains tax purposes, they will have to complete the ‘Vulnerable Person Election Form VPE1’. A separate form will be required for each vulnerable beneficiary. The trustees and the beneficiary must both sign the form.

The election for special tax treatment is made for a tax year or part of a tax year (for example if the beneficiary has just become a vulnerable person). It has to be made within 12 months of the normal filing date for the trust tax return. It will come to an end if the beneficiary ceases to be vulnerable; the trust is terminated; or the beneficiary dies. The trustees would be required to report these circumstances to HMRC.

Income tax

For income tax purposes, the trustees are entitled to a deduction. They need to work out what tax they would be paying on the income of the trust if there was no vulnerable person. They then work out what tax the vulnerable person would have paid if the trust income had been paid directly to them as an individual. The difference between the two figures can then be claimed as a deduction from the income tax liability of the trust. There are variations on computing the relief from income tax and from capital gains tax depending on whether the beneficiary is UK resident or non-resident. Competent professional advice from a qualified advisor should be sought to assist in carrying out the various computations.

Capital gains tax

There are also special rules for capital gains tax. This is usually paid when assets are sold, given away, exchanged or transferred in some other way and their value has increased since they were put into the trust. There is an annual exempt amount allowed for the trustees to set against capital gains in the trust. As with the income tax calculations for these trusts, there is a similar calculation done for claiming a deduction in capital gains tax. The trustees work out what they would pay without any deduction. They then work out what the vulnerable person would pay if the gains had come directly to him. They are allowed to claim the difference as a reduction on what the trustees would have to pay by filling in a form.

Inheritance tax

For inheritance tax purposes there are also some special tax treatments. There is no charge if the person who sets up the trust survives for seven years from the date they set it up and there is no charge on transfers made out of a trust to the vulnerable beneficiary. It should also be noted that trusts usually have a ten-yearly inheritance tax charge, but trusts with vulnerable beneficiaries are exempt.

For inheritance tax purposes only, a ‘disabled person’ also includes a person who settles their own property into a trust for themselves at a time when they have a condition that it is reasonable to expect will lead to them becoming incapable of administering their property or managing their affairs (this can often happen for someone who may have an acquired brain injury as a result of an accident).

Get advice

If a vulnerable beneficiary trust is to be contemplated, then it is recommended that an advisor who is skilled in the law of taxation and trusts, such as a TEP, is engaged as the tax treatment, in particular, is fraught with technical difficulty.

Patricia Wass TEP

Planning for your baby’s future

Posted on By admin

Congratulations on the arrival of your little bundle of joy! Having a baby is an amazing experience, but it can also be a bit bewildering. It takes time to adjust to your new role as Mum or Dad: suddenly you are responsible for a tiny human being, and the overwhelming feeling is the need to protect and provide for them.

Getting some key documents in place can give you real peace of mind.

Make a will

Making a will is an important first step to ensure that your family will be looked after, whatever happens. Within your will you can appoint a legal guardian for your child in case you should pass away before they grow up, and you can also ensure the financial security of your child and leave instructions as to any possessions you wish to pass on. A will can also take future babies into account, although you’ll need to update it. If you die without a will, your estate will be distributed according to legal rules known as the rules of intestacy. This may not be what you want for your child or partner.

Appoint a guardian

If your child is under 18 when you die, the surviving parent will most likely be the guardian, as long as they have parental responsibility. However, if there is no one with parental responsibility, the court will decide on a guardian, and may appoint a complete stranger. This is why it is so important that you nominate a guardian for your child, either in a will or in a separate document. The guardian would usually be someone that you trust implicitly with your child’s wellbeing.

See ‘Who should I appoint as my child’s guardian in my will?’ for further information.

Set up a trust fund

You may have some money set aside for your child in your will, but you wouldn’t want them to inherit this money before they are mature enough to handle it. If so, you can set up a trust, which will look after the money until they reach a specific age. Many parents choose the age 21, but you can choose any age you like. When your child reaches that age, the trust will come to an end, and they will receive the money.

Make a power of attorney

If you lose mental capacity because of illness, an accident or for any other reason, having a lasting or enduring power of attorney in place can protect both you and your family. This document gives an individual(s) of your choice the legal authority to look after your wellbeing and/or finances if you are unable to look after yourself. You can nominate a trusted family member or friend, and feel safe in the knowledge that your best interests and your child’s will be taken care of if you are unable to make decisions. This kind of power of attorney must be made while you have full mental capacity. It does not have to be used until it is needed.

Take out life insurance

Life insurance is definitely worth considering. This can give you peace of mind that if you/your partner were to die, the surviving partner or your child would receive a lump sum that could go towards supporting their needs during what is bound to be a very difficult time. You can never be too financially prepared.

What next?

The above gives just an overview of some important areas to consider. For help deciding what is best for you and your family, speak to a qualified advisor.