Last week I met some clients to discuss a family trust. They are trustees of the trust and were concerned about their responsibility as trustees. Many people find the trustee role very onerous, with all the paperwork involved, tax issues and legal responsibilities. I talked them through their concerns and thought it might be useful to share some of the information with you all. Please contact me at Janine.email@example.com if you would like to discuss any of this further.
What is a Trust?
Trusts are not a new concept. They have been with us in one form or another since the Middle Ages when used by the Crusaders to protect their property while fighting in the Holy Land. It is therefore surprising that the law has yet to come up with a satisfactory definition.
Trusts are simply an agreement, usually in writing, which defines the relationship between individuals and assets. For example, a property is often held in trust for the benefit of specific individuals, known as beneficiaries.
The person who provides the assets is called the settlor and he/she expresses his/her wishes in the trust document. Trustees are usually appointed (in addition to the settlor) and administer the trust in accordance with those wishes and relevant trust law. Generally, the assets transferred into the trust, and any benefits arising from it, will have to be applied for the benefit of the beneficiaries. Most types of assets can be placed in trust and these include life assurance.
Why place a life assurance plan in Trust?
Although life assurance is taken out for a variety of reasons, it is primarily designed to provide the right money at the right time. Writing the life assurance plan in trust provides the means by which this may be achieved. The right money, at the right time, in the right hands. There are a number of reasons why a life assurance plan should be written in trust and these include, but are not limited to, the following:
To avoid delays
Under normal circumstances if the life assured dies and the plan is not held under a trust, it will not be possible to make payment of the sum assured until a Grant of Representation is obtained.
Unfortunately, long delays can occur in obtaining a Grant. Delays of over a year may arise and delays of six months are common (see the table overleaf). During this time the life assured’s dependants will be unable to receive any monies from the deceased’s estate and may not only suffer undue financial hardship, but the personal representatives may need to borrow to pay any Inheritance Tax (IHT) liabilities.
To avoid or mitigate Inheritance Tax
If the life assured owns the plan when it pays out, the sum assured will fall into their estate and will be taxable for the purposes of IHT. However, if the plan is placed in trust, the proceeds should be outside the deceased’s estate for IHT purposes and, therefore, will not be taxable. By placing a plan in trust in this way, proceeds are ‘outside the estate’ and can be used to pay any tax due on the estate itself.
Making a gift of a plan
A life plan written in trust may provide a suitable method of making gifts. For example, if cash is gifted to a child the donor has no control over how the money is spent and it may be frittered away. As an alternative to an outright gift, the donor could arrange for a life assurance plan to be placed under an appropriate trust such as a Variable Discretionary Trust. In this way, they not only retain some control, but also the flexibility to add or change beneficiaries.
Trustees are individuals who legally own the assets of the trust, but are not permitted to benefit themselves (unless they are also beneficiaries) from the assets. They are there to manage and look after the assets for other people; beneficiaries. For the most part, selecting your trustees will be a matter of practicality:
- no more than four, including the settlor(s)
- someone you trust and has knowledge of your family circumstances and intentions
- perhaps someone who is a professional, but certainly capable of working with other trustees • should ideally live reasonably close to the other trustees.
The role and responsibilities of a Trustee
The role and responsibilities of a trustee should not be undertaken lightly. If you have been chosen as a trustee, the settlor feels you can be trusted to act in accordance with their intentions and in the best interests of the beneficiaries, and are suited to dealing with this important element of their affairs.
- The trustees must ensure the trust assets are registered in their ownership and deal with any aspect of these assets as directed by the terms of the trust
- Trustees must exercise such care and skill in making investments as is reasonable in the circumstances
- Trustees should not put themselves in a position where there is a conflict between their own personal interests and the interests of the trust and its beneficiaries
- Plan proceeds may become available before distribution is desirable. Under such circumstances, trustees should invest the monies in a suitable investment, other than land, as if they were absolutely entitled to the assets of the trust.
For the majority of trustees concerned with life plan their duties will simply involve the collection and distribution of the plan proceeds.
Every effort has been made to ensure that the information in this document is correct. However, there are some differences between English, Scottish and Northern Irish trust law and the information is, therefore, in summary form. In addition, law and practice in this area may change from time to time.
Trustees general duties, established largely through case law, are:
- to exercise their powers in the best interests of the beneficiaries
- to invest the trust funds without profiting from their office and without causing loss to the trust, and
- to act impartially and treat all classes of beneficiaries fairly.
The Trustee Act 2000 introduced a statutory duty of care whereby trustees must exercise such care and skill as is reasonable in the circumstances, having regard to any special knowledge or experience they have or hold themselves out to have.
Please note that Trusts and some areas of Inheritance Tax Planning are not regulated by the Financial Services Authority.