The scenario
Gita is establishing a discretionary Gift Trust with the goal of using it for tax planning, specifically to assist her grandchildren, including those yet to be born, with their college expenses in the future. While she is initially a trustee, she plans to step down and has requested that her two children, Krishna and Dolly, take over as the trustees moving forward.
Krishna and Dolly are relatively new to handling financial issues and have no background in trusts at all. They're both very busy, managing demanding careers along with raising young children. They feel both grateful and nervous about the idea of becoming trustees and have sought guidance on what their duties will entail.
The responsibilities and duties
Generally, trustee responsibilities can be split into these main categories
- Duties to be performed on appointment
- Investment duties
- Protecting the interests of beneficiaries
- Keeping accounts and records
- Distributing property to beneficiaries
- Trust Registration
Duties to be performed on appointment
Obtain a copy of the trust deed and read it.
The trust agreement will detail the authority and responsibilities entrusted to the trustees by Gita (the person who established the trust). These authorities will include "dispositive powers," which define the conditions and methods for the distribution of trust earnings and/or principal, and "administrative powers," which outline the management of the trust.
Assess and comprehend the preferences of the beneficiaries
The trustees are required to act exclusively for the benefit of the possible beneficiaries. The trust must be managed, the assets of the trust should be invested, and the money should be allocated following the guidelines of the trust.
Make sure that the trustees were properly appointed and that they are the rightful owners of all the assets in the trust.
The trust agreement will establish a process for selecting trustees. This process must be adhered to – if it requires the selection to be made through a formal document, then a properly signed document is necessary. All investments should be held by the trustees, meaning a trustee application will be necessary.
Manage where appropriate
Some sections of the trust fund might need oversight. For instance, if a property is rented out, then the trustees must make sure that the rent is paid, the property is properly looked after, and so forth.
Ensure that the trust fund is invested
Trustees have a crucial responsibility to allocate the trust assets in a way that benefits the beneficiaries, either by increasing their income or the value of their investments. Their role in managing investments is to exercise their authority for the benefit of both present and future beneficiaries.
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Trustees ought to also think about if they have any obligation to part with any portion of the trust assets.
Investment duties
Trustees possess broad investment authority under the Trustee Act 2000 (England & Wales), Charities and Trustee Investment (Scotland) Act 2005, and Trustee Act (Northern Ireland) 2001. Consequently, they are able to invest in any kind of asset, provided the trust deed does not limit the investment options.
When selecting suitable investments for the trust, the trustees need to think about the trust's goal and the requirements of the beneficiaries, and then apply the usual investment standards as needed.
- The appropriateness of the investments for the trust (considering both the appropriateness of the investment type and the appropriateness of the specific investment); and
- The requirement to spread out the investments of the trust, as suitable for the trust's situation.
The trustees are required to periodically assess the investments and determine if there is a need to diversify them.
Krishna and Dolly need to seek and evaluate guidance from a unbiased Financial Adviser to make sure the required investment standards are achieved.
Safeguarding the rights of beneficiaries
A trustee cannot position himself or herself in a way that puts their responsibilities as a trustee at odds with their personal interests.
The trustees can only act within the terms of the trust deed. If they act outside those powers they are said to be in breach of trust.
A trustee is generally required to avoid any earnings from their role as trustee. However, in certain situations, professional trustees might be allowed to charge for their services.
- If there's a specific charging clause outlined in the trust deed.
- In some situations as long as the agreeing trustee also signs off on it.
- If deemed suitable with the consent of all the beneficiaries
Keeping accounts and records
The HRMC has made it very clear that when necessary, a record of trust earnings and expenditures should be maintained to finalize the trust and estate tax form and transmit details to the beneficiaries.
The HMRC guidance details:
- Records that must be kept
- Records of income payments to beneficiaries
- How long to keep records
- What happens if records are lost or destroyed
Unmistakably a type of Insurance Bond that does not generate income will make the task of managing accounts and maintaining records easier.
Distributing property to beneficiaries
In a trust designed for discretion, the trustees possess the ability to gather income. This process, called accumulation, involves the condition under which, according to the trust's rules, the trustees are given the power or are obligated to gather income, transforming it into assets.
Trust Registration
In terms of Trust Registration Service (TRS) guidelines, it's the trustees' duty to ensure registration and make necessary updates. However, the trustees are free to designate an agent if they choose to do so. It's also important to mention that a common bond in a direct trust setup may have trustees from the UK, but the bond itself could be issued in Ireland. In this case, the trustees are required to submit information to Ireland's Central Register of Beneficial Ownership of Trusts (CRBOT), even though the trust might not owe any UK obligations unless the bond qalifies for one of the UK's exemptions. In any case, the trustees must also register their details on the TRS if the trust is liable under UK law.
The outcome
At first glance, the list of tasks seems overwhelming, but Krishna and Dolly understand that many of these duties are just basic common sense tasks like studying the trust document, ensuring the beneficiaries' best interests are always a priority, and staying within their authority. However, they do feel uneasy about managing investments, maintaining financial records, and addressing the financial matters of the trustees
Krishna and Dolly find relief from their worries following guidance from FOL Wealth, who highlight a fund offered within an Insurance Bond 'wrapper' designed to shield the trustees from market fluctuations through a smoothing mechanism. The possibility of steady and more predictable returns over an extended period, thanks to a diversified portfolio, attracts Krishna and Dolly who seek an "investment with peace of mind." This investment aligns perfectly with their obligations to behave as a responsible and cautious investor would when handling other people's money.
FOL WEALTH Investment Bond Advice London informs them that one benefit of an Insurance Bond is its status as a non-dividend-yielding investment that lessens the need for self-assessment tax filings.
FOL Wealth Investment Bond Advice London then further clarifies to them the '5% rule' as it pertains to trustees, detailing the possibility of gifting portions to grandchildren upon their 18th birthday, at which point they could be in a favourable tax position due to their personal income status, including any unused Personal Allowance, Personal Savings Allowance, and 0% Savings Rate Band. Considering this, the trustees decide to allocate their funds into an Offshore Bond.
To sum up, Krishna and Dolly are pleased to serve as trustees and could potentially find joy in the duties of protecting and managing the trust fund for the advantage of their mother's grandchildren in the future.
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