Contents
1.Duties to be performed on appointment
2.Investment duties
3.Protecting the interests of beneficiaries
4.Keeping accounts and records
5.Distributing property to beneficiaries
6.Further reading
Duties to be performed on appointment
- Obtain a copy of the trust deed and read it.
The trust deed will set out the powers and duties the settlor has given to the trustees. These powers will be “dispositive” (how, and in what circ*mstances, the trustees are to distribute trust income and/or capital) and “administrative” (how the trust is to be “run”.) - Check and understand the interests of beneficiaries.
The trustees must act solely in the interest of beneficiaries. The beneficiary has a right to have the trust administered, the trust fund invested and income distributed in accordance with the terms of the trust.
For example, if one beneficiary is entitled to income and another entitled to capital, then the trustees should consider diversifying the trust fund, perhaps by investing in a mixture of authorised investment funds to suit the income needs of one beneficiary and insurance bonds to provide capital for the others.
A beneficiary who is of “full age” (generally 18 in England, Wales and Northern Ireland and 16 in Scotland) should be told of his or her interest in the trust. - Ensure that the trustee has been validly appointed and that the trustees are legal owners of all the trust assets.
The trust deed will set out a mechanism for the appointment of trustees. This mechanism must be followed – if it stipulates that the appointment must be by way of deed then a duly executed deed is essential.
The investments comprising the trust fund should be in the name of the trustees. - Manage where appropriate
Certain parts of the trust fund might require management. For example, in the case of a property which is let out then the trustees need to ensure that rent continues to be received, the property is adequately maintained and so on. - Ensure that the trust fund is invested.
It is a fundamental duty of trustees to invest the trust fund so that the beneficiaries’ interests (whether in terms of income or capital appreciation) are enhanced. The duty of the trustees in relation to investment is to use their powers in the best interests of current and future beneficiaries.
Trustees should also consider whether they are under any duty to sell any part of the trust property.
Investment duties
Trustees have wide investment powers through the Trustee Act 2000 (E&W), Charities and Trustee Investment (Scotland) Act 2005 and Trustee Act (Northern Ireland) 2001. This means that unless the trust deed restricts the type of investment, they are able to invest in any type of asset.
When choosing appropriate assets to invest in, the trustees must consider the purpose of the trust and the needs of the beneficiaries and apply the standard investment criteria accordingly, these are:
- the suitability to the trust of the investments (both in relation to the suitability of the kind of investment, and the suitability of the particular investment); and
- the need for diversification of investments of the trust, in so far as is appropriate to the circ*mstances of the trust.
A trustee must from time to time review the investments and consider whether having regard to the standard investment criteria, investments need to be varied.
Protecting the interests of beneficiaries
Trustees must act impartially between the beneficiaries and ensure that one beneficiary does not benefit at the expense of another. Consider for example an interest in possession trust where one beneficiary is entitled to income with others entitled to capital on the death of that person. Those ‘competing’ beneficiaries should be treated fairly unless perhaps the settlor had made it clear that one class of beneficiary was to be preferred over another.
For example, if the trust states that income is to be provided for a beneficiary, then trustees should consider income producing assets such as OEICs or unit trusts. Investment bonds arenot income producing assets and withdrawals from bonds are a return of capital not ‘income’. Where a beneficiary is only entitled to income, then the trustees should bear in mind that an insurance bond may not be appropriate:
- Regular withdrawals from a bond may erode the capital for the remaindermen, leaving no money for those beneficiaries on the death of the income beneficiary.
- The withdrawals could be taxed as income by HMRC.
- The trustees may not be fulfilling their duties to all of the beneficiaries appropriately, and could leave themselves open to legal action.
It may be that the trust gives the trustees power to pay capital to that income beneficiary. In this case, a bond might be appropriate but the trustees still need to consider the impact of eroding the capital for the remaindermen.
A trustee must not place himself or herself in a position in which his or her duties as a trustee conflicts with his or her private 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 breach of trust will cause some detriment to the beneficiaries. As trustees can only act in the interests of their beneficiaries a newly appointed trustee is obliged to check that there have been no previous breaches of trust. If there have been such breaches the situation must be remedied. The beneficiaries may absolve the trustees from responsibility for the consequences of the breach. Otherwise the trustees have to make good any loss to the trust fund from their own resources.
A trustee has a general duty not make any profit from the fact that he or she acts as trustee. Professional trustees may charge for their services in a number of circ*mstances:
- Where there is an express charging clause on the trust deed
- In certain circ*mstances with the written agreement of the other trustees
- Where appropriate with the prior agreement of all the beneficiaries
Keeping accounts and records
HMRC make it clear that a record of trust income and expenses must be kept to complete the trust and estate tax return and pass information to beneficiaries.
TheHMRC guidancedetails:
- Records that must be kept
- Records of income payments to beneficiaries
- How long to keep records
- What happens if records are lost or destroyed
Clearly a non-income producing insurance bond will simplify the accounting and record keeping requirements.
The legal responsibility for registration, where appropriate, with theTrust Registration Service(TRS) lies with the trustees. In addition, TRS details must be kept up to date. Note also that EU issues can arise. If, for example the underlying investment is a bond issued in Ireland, then UK trustees also need to register on Ireland’s Central Register of Beneficial Ownership of Trusts (CRBOT). At the time of writing, the mechanics of this are still being finalised.
Distributing property to beneficiaries
In a discretionary trust the trustees will have a power to accumulate income. Accumulation is the process whereby, under the terms of a trust, the trustees are authorised or required to accumulate income, thereby converting it into capital.
In “interest in possession” trusts the beneficiary (or beneficiaries) having the right to income must receive that income – within a reasonable period of the trust’s accounting year end. The beneficiary will need to include this income in his or her self-assessment tax return so needs to know the quantum of income fairly promptly.
Further reading
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