Trustee Investment Guide: Trustee Investments, Responsibilities & Duties (2024)

What is a Trust?

A trust is a legal way to allow ownership of assets away from an individual or a company. A trust is simply another way to hold assets. Trusts may be used to control how assets are used, or to save tax.

There are various types of trust, and each operates differently.

Trusts can be set up during a person’s lifetime, or after they have died.

Trusts are set up for a number of reasons, and this can often lead to the need for trustee investment:

What are Trusts used for?

Control

Often trusts are created as a way to control how assets are used, even once the money has passed from the original owner. For example, many trusts are created in wills. This means that the assets passed from the will to a trust can be controlled to some degree by the deceased person. The trust is a way for the person who created the will to establish how those assets will be used after their death.

Trusts can be set up during a person’s lifetime. Broadly, that person will give up the ownership of the assets placed into the trust, but will use the trust as a way to control how those assets might be used.

Protect assets

Trusts can be a way to protect assets. This is related to control, as the trust might be a way for the person who set it up to ring-fence how that asset is treated in the future. This protection might apply to the lifetime of the individual, or continue after their death.

Saving tax

Trusts are often set up as a way to legally save tax, particularly inheritance tax. This is a complicated area, and can lead to additional tax in other areas.

Trusts used to be more effective for saving tax, but Governments have generally brought the taxation of trusts into line with personal assets, often at the worst tax rates available. This clearly removes one of the historical reasons for setting up of trusts to save tax.

Protecting vulnerable people

Trusts are a useful way to protect the interests of vulnerable people, either because of physical or mental disability.

Some trusts may be a way to manage the money of someone who is not capable of managing their own affairs.

Other trusts, such as personal injury trusts, are a way of separating the personal assets of an injured person away from a financial settlement received as a result of a personal injury. This is effective as a way to allow the injured person to continue to receive means-tested state benefits.

Passing assets during a person’s lifetime

Trusts can be used to pass ownership from a person to a separate legal entity during their lifetime. This may be for a variety of reasons, such as to keep control over those assets, to protect the interests of a person or group, or to possibly save tax.

Trust Definitions

Trusts are complicated legal entities, so you trustees need to be aware of some of the key definitions.

Settlor

The settlor is the person who puts assets into the trust, and is usually the person who set up the trust. Usually the settlor would decide how the assets placed into the trust should be treated. Settlors can also be trustees and beneficiaries under trusts.

The settlor might be someone looking to protect their family assets, to look after the interests of someone, or to save tax.

Settlors can potentially benefit from trust assets, although trusts are often set up for the benefit of others.

Trust deed

In most cases, trusts are formed using a trust deed (or will).

This is a legal document that sets out the rules of the trust, and what the trustees can and cannot do with trust money. The trust deed is very important to trustees, since it governs their rights and responsibilities.

Trustee

Trustees are the legal owners of the trust assets. Settlors and beneficiaries can also be trustees of trusts. The trustees are responsible for looking after the interests of those entitled to benefit from the trust (the beneficiaries).

Trustees deal with the assets held in the trust according to the wishes of the settlor, as contained in the trust deed or will.

Trustees manage the trust, and keep appropriate records of their decisions.

This might include making decisions around trustee investments, or paying appropriate tax for the trust.

Trustees can change, but the trust must always have at least one trustee.

Beneficiaries

The beneficiaries are those people entitled to benefit form trust assets. Settlors and trustees can also be beneficiaries of a trust.

Beneficiaries can be:

One person
A number of named people
A wider group of people (a class of beneficiaries)
A charity
A pet

What benefits are allowed for the beneficiaries is determined by the trust deed, and sometimes the discretion of trustees. Typically beneficiaries might receive:

Income from the trust
Capital from the trust
Both income and capital from the trust

Trust assets

Trust assets can be pretty much anything of value. Trust assets are known as trust property. When we refer to trustee investment we mean investing trust assets with the intention of generating capital growth or income for beneficiaries.

Trust assets can include:

Cash
Property
Investments (shares, bonds, funds etc)
Pension scheme death benefits
Life insurance proceeds
Other assets

Main types of trust

Bare trusts

Bare trusts are the simplest form of a trust. A bare trust names a specific beneficiary, who is absolutely entitled to receive all of the income or capital of a trust at any stage if they are aged 18 or over.

Bare trusts are often a simple way to pass money from one person to another, for example via a will.

Bare trusts are often used to hold assets destined for children. For example, money left to underage children might be preserved in a bare trust until they become old enough to manage the assets for themselves.

Other types of trust, such as a personal injury trust, can be a bare trust. This means that the trust can be wound up at any stage.

Bare trusts are treated as assets of the beneficiary if they die. This means that bare trusts are passed according to the will of a beneficiary if they die.

Example of a bare trust

John creates a will, which states that his bank account worth £100,000 should be left to his daughter Stephanie, who is aged 7. The will stipulates that Stephanie can take control of the money from age 18. When John dies soon after, the will creates a bare trust for the benefit of Stephanie. The trustees would manage this money until she decides to take control, at any stage after she reaches age 18.

Bare trust issues

Bare trusts are attractive due to their relative simplicity, and certainty. However, this leads to a lack of flexibility and discretion on the part of trustees. For example, in the above example Stephanie could take ownership of the trust assets on her 18th birthday and the trustees would probably be powerless to prevent this, even if they disapproved of her plans for the assets.

Bare trust considerations for trustees

Bare trusts are relatively straightforward to manage for trustees. Your role will be to manage the trust assets according to the wishes of the settlor, and to distribute the assets at the right time.

Interest-in-possession trusts (Life interest trusts)

Interest-in-possession trusts are also known as Life Interest trusts. Interest-in-possession trusts stipulate that the income of the trust should pass to beneficiaries as soon at it arises, for a specific period. In many cases, the Interest-in-possession trust will create a right for income for certain beneficiaries, and a right to capital for another class of beneficiaries.

If the Interest-in-possession trust grants a right to income from life for a certain beneficiary, this is known as a life interest trust. The beneficiary entitled to the income is known as the “life tenant” of the trust. The beneficiary entitled to receive the capital after the life tenant’s death is known as the “remainderman” of the trust.

Interest-in-possession trusts are often used to provide for one class of beneficiary, while preserving the interests of another.

Example of an Interest-in-possession trust

Sophie and Conrad are married, but Sophie has children from a previous relationship (Rebecca and Nathan). Sophie is concerned that if she dies Conrad might remarry and could disinherit Rebecca and Nathan. Therefore, Sophie writes a trust into her will leaving an Interest-in-possession trust. She names Conrad as the life tenant, and Rebecca and Nathan as remaindermen in equal shares. After Sophie’s death, Conrad is entitled to receive the income from assets of the trust until his death. After Conrad dies, Rebecca and Nathan will be entitled to receive the remaining capital.

Interest-in-possession trust issues

Interest-in-possession trusts are often favoured by settlors as a way to ensure that their ultimate wishes are followed. Interest-in-possession trusts are typically used to balance the needs of a partner, while ensuring that children end of getting the deceased’s estate. However, after the death of the settlor the beneficiaries of Interest-in-possession trusts are rarely content with the arrangements. The life tenant (often the surviving partner) can only receive an income from the trust. This will have little flexibility, and means that they probably cannot access capital in the way they might have previously done. The remaindermen, often children, might have to wait many years, or decades for their share of the capital.

Interest-in-possession trust considerations for trustees

The trustees of an Interest-in-possession trust will need to follow the wishes of the settlor, while balancing the needs of the life tenant and remaindermen. This is a difficult challenge, especially as Interest-in-possession trusts can cause conflict between different generations and classes of beneficiaries. In particular, trustees will need to carefully consider the needs of all current and potential beneficiaries. This can cause conflict, since your decisions will have an impact on the income or capital that different types of beneficiaries will be likely to receive.

Let’s return to our example (above). Imagine that Sophie has died, leaving behind Conrad, who is aged 45. Rebecca is 25, and Nathan is 20. Sophie’s assets will pass to the Interest-in-possession trust, and Conrad will be entitled to the income, but not the capital from the trust. This means that Conrad will have little flexibility to use the assets, and the investment decisions made by the trustees must balance Conrad’s income needs, with preserving and growing the capital assets for Rebecca and Nathan. Given that Conrad is aged 45, the trust could feasibly run for another 40 years, and possibly longer. Rebecca and Nathan will have an eye on the growth of their capital, but may be frustrated that they cannot access this capital without reducing Conrad’s income. Where all parties agree, some changes can be made to the terms of the life interest trust, and it may be possible to distribute capital to beneficiaries. However, this should only be done with careful legal advice.

Discretionary trusts

Discretionary trusts are the most flexible type of trust. Instead of appointing specific beneficiaries, who are absolutely entitled to receive capital and/or income, discretionary trusts appoint a class of beneficiaries, who could potentially receive benefits according to the discretion of the trustees. This means that beneficiaries of discretionary trusts do not have any absolute rights to assets of the trust, and can only receive income or capital if trustees make that decision. Settlors usually stipulate how much discretion trustees are allowed under the trust by writing a separate “letter of wishes”. This will set out some guidelines for the settlor’s expectations of how the trust assets should be used.

Discretionary trusts are subject to the rules set out in the trust deed. Typically, trustees have discretion over the following:

Which beneficiaries receive payments
How much, and when payments are made

Discretionary trusts often appoint a wide class of potential beneficiaries, such as the spouse, children, and grandchildren of the settlor. Discretionary trusts may set out default beneficiaries, who could be towards the front of the queue for consideration by trustees. However, the trustees of discretionary trusts should always take into account the wider needs of all potential beneficiaries when making their decisions.

Discretionary trusts are a way to keep assets available to wider groups of family, or to preserve the interests of potential beneficiaries who are not responsible or capable to manage money.

Example of a discretionary trust

Martin has calculated that he has a large value of assets, which he does not need, and wants to make a gift to benefit his family in the future. He gives away £300,000 to a discretionary trust (which incidentally is a Chargeable Lifetime Transfer for Inheritance Tax). He wants the following people to potentially benefit from the discretionary trust: his wife Simone, and his 2 children Sarah and Rasmus. Rasmus has a physical disability that means that he is unlikely to be able to manage his own financial affairs. The trust is set up with Martin and Simone as trustees, so they have control over the assets. After Martin’s death, other trustees could be appointed, perhaps Sarah. The discretionary trust is written to benefit Martin’s spouse, his children, and potential further heirs, such as grandchildren. Martin also writes a separate letter of wishes to the trustees to ask that they pay special attention to Rasmus’s physical needs, and this letter will have a bearing on the decisions of trustees when distributing assets in the future.

Discretionary trust issues

Discretionary trusts are attractive because of their flexibility. However, discretionary trusts have greater responsibility for trustees, given that they need to take into account the needs of all beneficiaries. Discretionary trusts have more complex and costly tax implications than other types of trust.

Discretionary trust considerations for trustees

Trustees of discretionary trusts will need to consider how and when to distribute assets or income from the trust, to whom, and when. This brings a greater level of responsibility, especially given competing needs and interests of different potential beneficiaries. As the tax implications of discretionary trusts are more complicated, these decisions should be taken with great care.

Other trusts

The 3 trusts outlined above are the most common types. However, other types of trust exist, although we have not considered these in depth for this article.

How to set up a trust

Trusts created in someone’s lifetime

Many trusts are created during a settlor’s lifetime. The settlor will arrange for a trust deed to be drafted. Once set up properly, this deed creates the legal mechanism for the trust to exist. The settlor would gift assets to the trust, which could have implications for Inheritance Tax. Once these assets have passed to the trust, they cease to be owned by the settlor. This means that the asset now placed in the trust are treated as legally separate from the assets of the settlor. If the settlor later wanted to use the assets, they could only do so within the terms of the trust deed. Therefore, transfers of assets to trusts should only be done with care. The trust should be effective if the settlor later became bankrupt (but probably not if the gift to the trust was intended to shelter money from bankruptcy).

Passing assets after death

Trusts can be created on the death of someone, usually through their will. These trusts are often known as “will trusts”.

Trusts created by statute

Some trusts are created by statute (by law). For example, a common type of trust is set up if someone dies without a will. For example, in certain situations trusts might be set up to protect the interests of non-adult children.

The Trustee Act 2000

The Trustee Act 2000 is the main legislation relating to trustee duties and powers, and it has particular relevance to trustee investments. There are other related pieces of legislation.

The Trustee Act 2000 imposes some importantduties and responsibilities on trustees. In general, these cannot be taken away by the provisions of the trust.

The Trustee Act 2000 is important to trusts since it provides the default rules for the trustee investment decisions. The Trustee Act 2000 also provides the rules for certain duties and responsibilities of trustees. If your solicitor drafts your trust correctly they will likely create additional powers beyond the provisions of the Trustee Act 2000.

The powers of the Trustee Act 2000 will only come into play if a trust is not drafted well. The rules surrounding the duties and responsibilities of trustees cannot be taken away.

Trustee Act 2000 – powers which cannot be delegated

Decisions over how to distribute trust assets to beneficiaries
Decisions surrounding fees or payments
Appointing trustees

Trustee Act 2000 investment powers

The Trustee Act 2000 gives much wider powers for trustee investment than were available in previous legislation. Now there is a power in place giving trustees the ability to invest as if they were the absolute owners themselves.

This is a much wider provision than was contained in previous legislation. Of course you may wish to restrict this power. If so, the trust deed could be set up with a much narrower range of trustee investment powers. This would override the Trustee Act 2000 provisions. So for example, a settlor could stipulate that you would only allow the trust to invest in land, or in regulated investments.

Action:

Review whether the trust extends or restricts the powers dealt with in the Trustee Act 2000

Duties and responsibilities imposed by the Trustee Act 2000

The Trustee Act 2000 imposes some importantduties and responsibilities on trustees. In general, these cannot be taken away by the provisions of the trust.

We consider some of the main duties of the Trustee Act 2000 in the sections below:

The Trustee Act 2000

The Trustee Act 2000 is the main legislation relating to trustee duties and powers, and it has particular relevance to trustee investments. There are other related pieces of legislation.

The Trustee Act 2000 imposes some importantduties and responsibilities on trustees. In general, these cannot be taken away by the provisions of the trust.

The powers of the Trustee Act 2000 will only come into play if a trust is not drafted well. The rules surrounding the duties and responsibilities of trustees cannot be taken away.

Trustee Act 2000 – powers which cannot be delegated

Decisions over how to distribute trust assets to beneficiaries
Decisions surrounding fees or payments
Appointing trustees

Trustee Act 2000 investment powers

Action:

Review whether the trust extends or restricts the powers dealt with in the Trustee Act 2000

Duties and responsibilities imposed by the Trustee Act 2000

The Trustee Act 2000 imposes some importantduties and responsibilities on trustees. In general, these cannot be taken away by the provisions of the trust.

We consider some of the main duties of the Trustee Act 2000 in the sections below:

The Trust Deed

The trust deed is usually the most important document for trustees. This is the legal document that forms the terms of the trust, and is designed to set out the key trustee responsibilities. The trust deed can extend the duties and responsibilities of trustees, and can also allow trustees to have wider powers than they might have otherwise had.

Duty to understand the trust deed

Trustees must obtain a copy of the trust deed, and have a duty to understand the terms, duties and responsibilities. If you are a non-professional trustee, it is likely that you will need to do some research and learning to ensure that the legal and tax terms are understood by all trustees. Of course, you can take professional advice to help trustees to understand the trust deed. In particular, the trust deed will set out the parameters for your trustee investments.

Action:

Read the trust deed carefully
Make notes of areas you do not understand, and seek advice from an appropriate professional adviser
Discuss queries with other trustees

Duty to follow the terms of the trust deed

The trust deed sets out the rules and powers of the trust, so trustees must comply with these duties and directions as set out in the document. If a trustee acts outside of the terms of the trust deed they are in breach of the trust. This could lead to legal action against the trustee.

Action:

Read the trust deed carefully
Make notes of areas you do not understand, and seek advice from an appropriate professional adviser
Discuss queries with other trustees

Duty to act unanimously

In general, trustees should act unanimously, unless the trust deed specifies that this is not required. When making decisions about trustee investments or distributions to beneficiaries you may find yourself in conflict with the views of other trustees. It can be difficult to come to unanimous decisions as trustees.

If trustees disagree, this can cause problems with the management of the trust. In severe cases, this can cause the trust not to function properly. Legal advice can help you to resolve disagreements between trustees. Ultimately, Courts can make decisions if trustees are unable to come to an agreement.

Action:

Create a process for making decisions with other trustees
Record these decisions using minutes of meetings signed by all trustees

Typical trust deed powers

Trust deed powers typically cover:

Administration
Powers and instructions relating to how the trust should operate. For example, the trust deed will probably set out how trustees can be appointed.
Distribution of trust assets
Powers and instructions relating to how the trust should distribute capital and income to beneficiaries.

Action:

Discuss trust powers with all trustees
Agree general understanding of proposed distributions of capital and income

Keeping trust records

Trustees have a general duty to keep up-to-date records of their decisions and the administration of the trust. Therefore, it makes sense to keep appropriate summaries of important discussions and decisions. This can be done with minutes of meetings, which are signed by all trustees. In the event of a future information request, or a conflict, these records will be consulted to prove that the trust deed was applied correctly.

Action:

Appoint a trustee with responsibility for keeping trust records
Create a filing system for trust records
Allow all trustees access to these records

Following the wishes of the settlor

The settlor’s main wishes will be established in the trust deed. However, they may also write a separate document called a “letter of wishes”, although this will not be binding on the trustees (in comparison to a trust deed, which would be binding).

A letter of wishes is often used by the settlor to set on record additional instructions to the trustees for how the trust assets should be used with regard to trustee investment, especially when exercising discretionary powers. Letters of wishes can include instructions on a number of subjects such as how to invest trust assets, or other administrative powers.

Trustees should regularly ask the settlor to update their letter of wishes.

Example

Jade set up a discretionary trust which is designed to look after the interests of her husband Ralph, plus her children Stanley (aged 25) and Linda (aged 16). The trust has wide powers to benefit a larger class of potential beneficiaries such as grandchildren and other family members.

Looking after the interests of beneficiaries

The most important role of a trustee is to look after the interests of all beneficiaries of the trust.

Duty to act impartially

Trustees must balance the interests of beneficiaries in an impartial manner. This is important, since the needs and interests of beneficiaries can often compete. Trustees should take care not to allow one beneficiary to benefit at the expense of another.

Example – Interest in possession trust

John set up a trust to benefit his spouse Sarah, and their children Simon and Mark. John wanted Sarah to receive income from his assets for life, and then for Simon and Mark to receive the capital equally after Sarah dies.

In this example, Sarah is entitled to receive income from the trust assets for life (she is the Life Tenant). Naturally, Sarah would want her income to be as high as possible, and to increase over time. Simon and Mark are not entitled to income, but would want to preserve the capital value, and for this to rise over time. This could lead to a conflict between the interests of Sarah and her children. If the trustees wanted to, they could set up investments with a greater income; however, this might be at the expense of capital growth over time.

This is a delicate balancing act, and financial advice can often help trustees to balance the needs of beneficiaries. This can help trustees to demonstrate that they have considered both sets of beneficiaries equally.

Example – discretionary trust

A discretionary trust tends to have a wider class of beneficiaries, such as the settlor’s spouse, children, and grandchildren.

Trustees have a wide discretion to make distributions to any potential beneficiaries. However, when doing do, they should not ignore the interests of the other beneficiaries. For example, Victoria set up a discretionary trust for the benefit of her wider family. However, she has one daughter, Sheila, who has a disability that requires additional financial support. The trustees might be justified to distribute money to Sheila in greater proportions than other beneficiaries; however, they should take care not to support Sheila without considering the needs of the other beneficiaries.

Action:

Discuss all beneficiaries with the other trustees
Consider the rights of each beneficiary and their wider needs where you have discretion

Duty to provide information to beneficiaries

Trustees must keep clear and accurate records of their decisions, and appropriate tax records. Trustees have a duty to provide relevant information to the beneficiaries if they request this data.

Trustees should inform all beneficiaries of their interest in the trust, once the beneficiary reaches age 18.

Action:

Allow access to date to beneficiaries if requested

Conflicts of interest

A trustee should not make a profit from their role. Trustees are able to receive payment for expenses incurred in their duties, and professional trustees can charge for their services. However, a conflict of interest could happen in the event that a trustee makes a decision that ultimately benefits them over beneficiaries. This is a difficult balance if you are both a trustee and a beneficiary.

Trustee conflicts of interest are taken into account in the STEP provisions.

Action:

Create a mechanism for recording and paying expenses for trustees.

Trustee statutory duty of care

The Trustee Act 2000 imposes a duty on trustees to act in the best interests of the beneficiaries of the trust. Trustees should not profit from their office (although beneficiaries can be trustees, and expenses can be paid). Trustees should act impartially between different classes of beneficiaries. This is particularly important where certain beneficiaries are entitled to income from the trust, and others are entitled to the capital. Professional trustees have a higher degree of standard to meet under the Trustee Act 2000.

Under this duty of care trustees must exercise skill and care as is reasonable given the circ*mstances and the knowledge and experience of the trustee. Therefore, under the Trustee Act 2000, a family member trustee would have a lower standard to meet than a professional trustee, unless they have special skills.

This statutory duty of care can be excluded from trusts created after 2001, but a general duty of care would still exist.

Action:

Consider how this duty of care applies to your role as a trustee.

Trustee duty to obtain and consider advice

The Trustee Act 2000 stipulates that trusts should obtain and consider proper advice. This means taking advice from an appropriate expert. In the case of the set-up of the trust, this would be a solicitor. The tax treatment might go to an accountant or tax adviser. In the case of trustee investment decisions, a properly authorised financial adviser should be consulted. This is particularly relevant when considering the need to diversify investments and to review them.

If trustees plan to advise the trust within their role, they should be suitably qualified and authorised to do so. Trustees or advisers providing investment advice should be authorised and regulated by the Financial Conduct Authority.

There may be cases where it is reasonable for trustees to ignore this. This might be the case if the costs of advice outweigh the benefits.

The STEP provisions provide some limitation of the liability for trustees when taking legal advice.

Action:

Consider whether you will need advice in the following areas:
- Legal (for example trust powers and rules)
- Accountancy and tax
- Financial advice – investments held within the trust
Record your decision, and the basis of this decision.

Power to invest

Trustees are required to act prudently to preserve and grow trust capital, and to look after the needs of all beneficiaries.

The trust deed may confer particular investment powers, but without this trustees can invest in investments as if they were absolutely entitled to the assets of the fund.

The starting point for trustees is that you should invest trust assets, to balance the short-term and long-term needs of the beneficiaries. Bank accounts alone will rarely be suitable trustee investments.

The STEP provisions give trustees wide discretion over how they can invest.

Action:

Consider whether you will need to invest assets as part of your role. Other duties set out in this section will be relevant if you decide to set up trustee investments with cash on behalf of beneficiaries.

Power to delegate

Trustees have the power to delegate some of their responsibilities, although this does not apply to key decisions such as the distribution of assets to beneficiaries.

One example is that you can delegate the management of trustee investments, such as through the services of a financial adviser. This delegation can only be done with a proper written agreement giving guidance to the agent. It is common for trustee investments to be delegated to regulated financial advisers.

Trustees can also delegate most functions, perhaps if a trustee becomes unavailable for a period.

The STEP provisions give trustees permission to delegate their functions in writing.

Action:

Consider whether you intend to delegate some responsibilities, particularly trustee investments
Create a document setting out the parameters for trustee investments managed by a professional adviser.

Duty to diversify trustee investments

Under the Trustee Act 2000 all trusts should pay attention to the diversification of their investments. This typically means that you should ensure a good spread of trustee investments. It would be rare that proper diversification would take place in a trust investing in just one asset class such as bank savings.

The STEP provisions reinforce the requirement to diversify trustee investments.

Read more aboutinvestment diversification.

Action:

Consider whether you have properly diversified trustee investments. Take account wider factors such as the goals of the trust, investment powers, the needs of the beneficiaries etc.
Consider whether trustees are qualified to act in this area, or whether you should engage a qualified investment adviser
Record and review your decisions.

Duty to ensure trustee investments are suitable

Under the Trustee Act 2000 all trusts should ensure that the investments made are suitable. This means paying close attention to the provisions of the trust and the appropriate balance between the various needs of the different beneficiaries entitled to capital or income. Particular attention should be paid to the amount of money to be invested and therisks to be taken with investments.

Action:

Consider your trustee investment decisions and the suitability in relation to the goals of the trust. Examine your trustee investment powers, the need for capital or income, the needs of the beneficiaries etc.
Consider whether the trustees would benefit from investment advice from a qualified adviser
Record and review your decisions.

Duty to review trustee investments

Trustees are required to review their investments under the Trustee Act 2000. This means that you cannot simply set up a trustee investment and walk away. Those trustee investments are likely to change and therefore need to be reviewed in light of the provisions of the trust and the needs of the beneficiaries.

Action:

Review trustee investments at least annually
Record your review process in case this needs to be checked in future.

Complying with tax obligations

Trustees have a general duty to prepare tax records on time, and to pay the tax bills of the trust. This of course is likely to apply to trustee investments made by the trust.

The STEP provisions give an expectation that the trustees will pay tax liabilities.

Tax records trustees must keep

Bank statements
Interest paid into bank accounts
National savings bonds or certificates
Certificates issued by life assurance companies
Dividend vouchers from companies and unit trusts
Details of expenses paid by the trustees
Details of all taxes paid by the trust
Records of income payments to beneficiaries

You should also keep up-to-date records for all settlors, trustees and beneficiaries.

You can find out more on thetax records trustees must keep.

Action:

Appoint a trustee to be responsible for keeping tax records
Set up a system for this data to be retained and submitted on time.

STEP provisions

Many trusts refer to the Provisions of the Society of Trusts and Estate Practitioners. These are standard provisions or terms to be used to interpret typical clauses within a trust deed. These provisions usually apply if you see a clause which expressly states that they apply.

These provisions are useful shorthand when drafting trusts, so that the trust deed does not require unnecessary clauses for interpretation of optional rules.

Example STEP provisions:

Additional trustee powers
The provisions give additional powers of investment, administrative control, distribution of capital and income, plus other practical arrangements;
Liability of trustees
The provisions allow the trust to limit the liability of trustees, so that the trustee is only liable for losses caused by fraud or negligence.
Discretion of trustees
The provisions allow a wide discretion for trustees, so that they are not necessarily under a duty to consult with beneficiaries.

Registering trusts with HMRC

TheTrusts Registration Serviceis a recent initiative from HMRC, which requires attention from all trustees. These changes mean that up to 2 million UK trusts will be required to register. Recent changes to the Trust Registration Service mean that trusts will need to be registered by 1st September 2022.

What is the Trusts Registration Service?

If you run a trust, you may need to register with HMRC. Now, the Trusts Registration Service operates online.

This service will have:

A central register of the beneficial interests of tax-paying trusts for compliance with Money Laundering regulations
Notification to HMRC of trust tax liabilities

Your trust will receive a unique tax reference, and trust tax returns will be issued to you as appropriate.

Who is responsible for registering the trust?

The trustees are responsible for registering the trust. This can be delegated to a professional adviser, such as an accountant. However, the ultimate responsibility lies with the trustees.

Which types of trust must register using the Trusts Registration Service?

Your trust is likely to have to register if it was expressly created by the settlor (via a deed or a will), and fits any of the following categories:

Interest in possession trusts
Discretionary trusts
Loan trusts
Employee ownership trusts

Under the new rules, the value of the trust is not relevant.

Trusts out of scope of the rules

The UK Government recently issued aconsultation on the Trusts Registration Service, which listed certain trusts which are likely to be deemed to be outside of the scope of the proposed rules:

Statutory trusts
Jointly owned assets
For example a joint bank account, or property
Personal Injury Trusts
Vulnerable beneficiary trusts (disabled trusts)
Bereaved minor trusts and 18-25 trusts
Trusts for life assurance or retirement policies
- However, some trusts in this category may still need to be registered, for example if the life policy has a cash-in value that that is more than “incidental” to the insurance provided (such as some whole of life policies).
- Trusts containing investment bonds should be registered.
Registered pension schemes
Will trusts created on death that only receive assets from the estate
- Trusts would need to be registered if assets are not fully distributed within 2 years of the death.
Trusts holding assets valued at less than £100 unless further assets are added
Charitable trusts

Deadlines for trustees to use theTrusts Registration Service?

New trusts set up before 1st September 2022
All new trusts formed before 1st September 2022 will be required to register within 90 days, or by 1st September 2022, whichever is the later. If your trust was set up before this date then you have missed the deadline.
Trusts set up after 1st September 2022
These trusts will be required to register within 90 days.

Trustees must already use the Trusts Registration Service if the trust has incurred a tax liability to HMRC, or if the trust is registered for self-assessment.

Trustees should also update their existing registration within 90 days of any changes to the details of the trust, for example if trustees change.

Penalties for late registration of trusts

The current rules levy penalties between £100 and £300 for late registration, or 5% of the tax owed (whichever is the greater). The new proposals states that there will be no penalty for the trust for an initial failure to register. A letter will be sent to the trust requiring registration, with penalties of £100 per offence after that.

Should your trust register as taxable?

There are 2 types of trust registrations – taxable and non-taxable. You should register as a non-taxable trust if you know that your trust will not be expected to declare tax. This might apply to your trust if the income is very low, or is pad via your investment.

As soon as tax becomes payable you should register your trust as taxable. Take care as your trust might have to pay different types of tax: income tax, capital gains tax, or inheritance tax.

How to register your trust

Click here to complete your trust’s registration online.

What information will required to register a trust?

Name of the trust
Type of trust
Date the trust was created
The tax reference of the trust
Trustees’ contact details including National Insurance numbers and dates of birth, and passport details for non-UK trustees
Details of the beneficiaries, including potential beneficiaries
Details of the assets held by the trust

Action:

Review this section to determine whether your trust is required to register with HMRC
Register your trust by the appropriate deadline
Inform your professional advisers.

Legal Entity Identifiers (LEI)

Some trusts need to obtain a Legal Entity Identifier (LEI) in addition to registering with HMRC. Bare trusts do not need to obtain a Legal Identity Identifier.

A Legal Entity Identifier is a way for investment companies and regulators to identify trusts, especially where they operate across jurisdictions. This number should then be used when trading investments. If will need to be renewed annually.

You will require a Legal Entity Identifier if your trust plans to invest in overseas assets, such as exchange traded funds, or offshore funds. You do not need a Legal Entity Identifier if you only wish to invest in UK-domiciled unit trusts and OEICs.

Your investment provider will require you to notify them of your Legal Identity Identifier if your trust is an Interest in Possession or Discretionary trust, and trustees want to trade in any of the following asset types:

Shares
Investment trusts
Exchange Traded Funds (ETFs)
Complex investments such as derivatives, options, futures, warrants etc.

How to obtain a Legal Identity Identifier (LEI)

You need to obtain an identifying number from a regulated source in the UK, which will verify your trust. For example, you can obtain a Legal Identity Identifier from the London Stock Exchange.

Trustee bank accounts

Trustee bank accounts are a useful way for trust records to be kept. Trusts will have to pay for a variety of expenses, such as:

Administration
Tax
Advice fees (legal, accountancy, financial)
Trustee expenses

It is not a requirement for a trust to hold a bank account, but it can be sensible for trustees to hold easily-accessible cash to pay for expenses. The bank account will also allow trustees to keep appropriate records of transactions.

Setting up a trustee bank account

Trustee bank accounts are just like any other bank account held by individuals. The difference is that the trustee bank account is set up in the name of the trust. The trustee bank account can have a number of signatories.

Not all banks offer trustee accounts, as this is a specialist area. It can be difficult to find a bank willing to take on a trustee account. Those banks that do offer trustee accounts often require a minimum balance to be retained in the account.

Do trustees need a bank account?

Trusteesdo nothave to set up a separate account in the name of the trust. Trustees can instead hold trust cash in a separate account in the name of the trustee. This is easier to set up, but runs some risk of confusion with the trustee’s own assets. If you take up this option you should keep scrupulous records.

Action:

Decide whether the trust requires a trustee bank account
Review available bank accounts
Decide who should be a signatory to the account
Maintain appropriate records.

Do you need a professional trustee?

The duties and responsibilities of trustees are significant. You may prefer to appoint a professional trustee to help with advice and decisions. A professional trustee is someone who has relevant knowledge to bring to the trust. Professional trustees can charge for their services, and are held to a higher standard of knowledge than a non-professional trustee.

Considerations when selecting a trustee

Trust

A settlor should only appoint someone who you know they can trust, since the trustee will be in a position of considerable influence. This is especially true wherever the trust has discretionary powers. You should ensure that you appoint someone who is trustworthy, and who will also follow the spirit of your instructions. A settlor can do this by writing a letter expressing their wishes.A friend or family member can easily satisfy your need for someone who is trustworthy. Of course, a professional trustee should be bound be the rules and regulations surrounding their profession. Of course, this does not mean that you should not investigate a proposed trustee thoroughly.

Ability and expertise

The trustee will be required to act in the best interests of the beneficiaries. This means acting within the ability and expertise appropriate to their experience. An amateur trustee will be held to a lower standard than a professional trustee for obvious reasons. A professional trustee would be deemed to be more of an expert and therefore should be judged by their professional ability. Usually, amateur trustees are expected to be appropriately competent rather than having particular skills.Of course, the duties of trustees require that you meet certain standards, particularly around the completion of tax returns and investing money. This applies regardless of the trustee’s expertise.

Overall, if you want a trustee to be technically expert, then a professional trustee would be more appropriate. However, it is often the case that an amateur trustee can apply themselves to the technical aspects with the help of a professional adviser, who can assist with difficult areas as required.

Sometimes it can be helpful to have a professional trustee on board to act as an independent voice in complex family affairs.

Time

The management of a trust can take up significant time in meetings and administration. Therefore, you need to be sure that the trustee will be able to devote the required time and attention to what can be an ongoing project. Obviously, a professional trustee can devote more time to their duties but this does come at a cost. Sometimes the right family member cannot become a trustee because they are just too busy.

Cost

This is the major barrier to appointing a professional trustee. Any professional will expect to be paid for their services. These costs can be significant, and you may need to consider the costs of appointing a professional to do tasks versus a volunteer amateur who would be more likely to give their time for free, or for basic expenses.

Age

Trusts often run for many years, and across generations. You should think about the age of any trustee and consider whether they are likely to be able to continue to operate in their role in the future. This also applies to you if you are a settlor and want to appoint yourself as a trustee. A professional trustee might have colleagues who can step in if theyare unable to continue their duties. You should consider how difficult it would be to appoint a new trustee if the trust operates for many years, or across generations. You should apply this principle to any professional trustee since they might not have the appropriate resources to allow for succession in the event of retirement or death.

Do you need a professional trustee?

The short answer is no. Most trusts work perfectly well with only trusted family or friends acting as trustees. Usually, professional trustees work on trusts with larger funds, or complex objectives. The main reason for this is that the fees charged by professional trustees can be significant. Of course, many trusts also work with a combination of amateur and professional trustees. The choice is up to you, but this is usually driven by cost.

Please note, that we do not offer a professional trustee service for our clients, as this would likely to be a conflict of interest. For example, if we were to be a trustee of a trust, which received investment advice from our firm, then it would be likely to be a conflict of interest for the trustee (our firm) to take investment advice from the same firm. There are many independent professional trustee services, operated by banks, solicitors, and financial institutions. If you do a simple internet search, you should be able to locate a suitable professional trustee service.

Action:

Review whether the trust’s size and complexity means that you need a professional trustee
Be careful that if you appoint a professional trustee that the other trustees do not allow this person to take over their decision-making roles.

Power to insure

Trustees have the power to insure trust assets as if they were the standard owner of that property.

Action:

Consider whether you need to set up insurance for any trust assets – for example property.

Power to charge

Professional trustees have the power to charge for their time if this option is contained within the trust deed. The Trustee Act 2000 also permits charging for work done by professional trustees on behalf of the trust.

Action:

Consider and agree your trust’s policy for payment of any charges by trustees.

What happens if trustees do not comply with their duties?

If a trustee does not comply with their duties and responsibilities then beneficiaries can apply to Court to have the trustee removed from their post. Courts have wide powers to direct how trustees should manage the trust assets, and can remove trustees who do not live up to their responsibilities.

If a beneficiary disagrees with the decisions of a trust they can also take legal advice in an attempt to represent their interests.

Action:

This will only need attention in rare situations.

Resigning as a trustee

Trustees can of course resign from their post, and replacement trustees can be appointed. This process usually takes place via a deed of resignation and appointment. However, a trust cannot be left without any trustees, or it would cease to function. In rare cases, if a sole trustee dies then Courts can appoint a new trustee.

This can be more complex in certain cases. Resigning as a trustee is relatively simple if you have another trustee to replace you. However, if the trustee becomes incapacitated due to illness or injury you may need to obtain permission from the Court of Protection. A trustee cannot usually be automatically excluded from their role by the trust deed.

Action:

If a trustee wants to resign consider and interview suitable candidates.
Take legal advice if a trustee dies or becomes unable to perform their duties.

Trustee indemnity

Trustees are personally liable for decisions made with trust property. This liability is not limited to the trust assets alone.

A trustee is entitled to be indemnified against any liabilities they take on as a result of the role. This would come from trust assets.