Trusts

The beneficiary becomes the equitable (beneficial) owner of that property. 

As equitable owners of the trust property, beneficiaries cannot, for example, claim against a life company for proceeds of a life policy that is held within the trust, but they can claim against the trustees in accordance with the terms of the trust who, in turn, can claim against the life company as legal owners of the policy.

There can be more than one trustee and more than one beneficiary. Furthermore, it is permitted for the set...

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Trustee Act 2000 (which applies to England and Wales)

The Trustee Act (Northern Ireland) 2001 (applies to NI)

The Charities and Trustee Investment (Scotland) Act 2005 (Scotland)

Perpetuities and Accumulations Acts 1964 and 2009

Inheritance and Trustees’ Powers Act 2014

Trusts can be distinguished from contracts in that:

No agreement exists between the creator of the trust and its beneficiaries. Unlike contract law, therefore, no consideration is required

Beneficiaries may be completely unaware of the trust if, for instance, they are minor children

Trust law arises from the principle of equity as opposed to common law. For many years, trusts were not even recognised under common law whereas contracts were

Trust law has developed over the centuries on equitable principles, although much of the English and Welsh law is now contained in the Trustee Acts of 1925 and 2000

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Trustees should hold all title documents to trust property and ensure they are registered as the legal owners of that property.

With effect from 1 February 2001, the Trustee Act 2000 brought in a new statutory duty of care for trustees when carrying out their duties under the trust deed or under the Trus...

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To avoid conflicts of interest, which is difficult if the trustee is also a beneficiary

Professional trustees can charge for their services, usually under an express professional charging clause. Where no clause exists, they can charge for services carried out since 1 February 2001 under s.29 of the Trustee Act 2000.

All trustees have to agree on the exercise of a particular ...

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As previously mentioned, trustees now have wide investment powers under the terms of the Trustee Act 2000. These can, however, be varied by any specific wording in the trust deed.

Trustees can be appointed in a number of ways:

Under a trust created by a deed - the initial trustees are appointed by the deed itself

Where a trust is created by a will, it should name the trustees (normally executors of the will)

Under a trust established via statute e.g. as a result of intestacy, the administrators of the estate will be the trustees

Replacing trustees

The trust deed will usually name the person(s) called the appointor(s) - those entitled to appoint new trustees. If no provision is included in the trust deed, power to appoint new trustees rests with the surviving trustees or the legal personal representatives of the l...

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If one of two or more trustees dies, their powers can be exercised by the surviving trustees. The only exception to this is that a sole trustee cannot give a good receipt for the proceeds of a sale of land, unless that sole trustee is a trust corporation.

If a sole (or last surviving) trustee dies, his or her legal representatives can act as trustees until an appointment is made by the appointor.

If no appointment was specified in the trust deed or if the appointor is now dead, the legal personal representatives can continue to act as trustees or can appoint replacement trustees under s36 of the Trustee Act 1925.

However, under the terms of the Trustee Act 2000, trustees can appoint agents and delegate to an agent any of their powers, other than :

The power to distribute trust assets

Powers in relation to how fees are dealt with

The power to appoint new trustees, nominees or custodians; and

The power to delegate trustees’ powers

Trustees can (unless the trust deed states expressly to the contrary) appoint nominees to hold trust property on behalf of the trust and custodians to keep assets or tr...

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Trustees are entitled to reimbursement of expenses incurred in the running of the trust, and such expenses are funded out of the trust property.

If the trust owns shares, it is not uncommon for one of the trustees to be appointed a director of that company, but any director’s fees earned in this capacity must be paid to the trust fund, not to the trustee personally.

If a beneficiary believes that a trustee has committed or is about to commit a breach of trust, legal a...

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Absolute beneficiaries have full equitable ownership of the trust property, which cannot be appointed away.

A beneficiary with a life interest is entitled to receive the income from the trust property for life but cannot access the capital. Such beneficiaries are known as life tenants.

Benef...

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In some cases, beneficiaries can end a trust. Under the rule relating to Saunders v Vautier , they can direct the trustees to hand the trust property over to them and end the trust if:

All beneficiaries are ascertained

There is no possibility of further beneficiaries

They are of full age and capacity; and

There is a unanimous agreement of all the beneficiaries.

There are several different trust types:

Express trusts

This is a trust expressly created, often by some written method for instance in a deed or a will. The terms are “expressly” laid out (hence the name). Trusts of personal property can be given by express oral declaration.

Implied trusts

This is a trust that is created by implication from the actions or circumstance of the parties involved.

For instance, a business partnership could purchase a property and arrange for the conveyance to be on only one of the partners. The partner effectively holds the property in trust for all partners even where no formal written agreement is in place detailing such a trust arrangement.

Presumptive trusts

A presumptive trust occurs where a person purchases property in the name of another. An example of this would be where A purchases a property in the name of B. The presumption is that B is holding the property as trustee for A.

Purpose trusts

A purpose trust exists not to benefit individuals, but for a specific purpose, such as to maintain a building or garden.

Constructive trusts

A constructive trust is one imposed by law irrespective of the intentions of those involved. An example may be where a trustee profited from the trust in a way he was not allowed to do by the trust wording. Such profit will be held on constructive trust for the beneficiaries.

Successive trusts

Successive trusts, sometimes referred to as settlements, hold property in trust for a succession of beneficiaries. The interests of each beneficiary take effect one after the other.

As an example, a settlement on marriage may provide for property to be held on trust for the wife for her life, thereafter for her husband for life, and then on death for their children in equal shares. If ...

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The rules governing accumulation and maintenance trusts (primarily to ensure that they could benefit from previously favourable tax treatment) are:

One or more beneficiaries becomes legally entitled to the trust’s capital or income on attaining a certain age no later than 25

Prior to that, the income must be held by the trustees to apply it for the maintenance, education or benefit of the beneficiaries

As an alternative, the income can be accumulated until one or more beneficiary becomes entitled to the income; and

Unless all beneficiaries have a grandparent in common, the trust must not last for more than 25 years

Statutory trusts

These are trusts created as a result of law, such as those created under the laws of intestacy or under the Married Women’s Property Act 1982. This Act originally gave married women the right to own property and sue in their own right, but the main practical effect of the Act was in relation to life policies. Where a husband took out a life policy for the benefit of his wife, the Married Women’s Property Act enabled her to claim on her husband’s death even though she was not party to the contract between the husband and the life company.

Where a statutory trust is created for a minor beneficiary, there will be no physical trust deed because the trust is created under the laws of intestacy. An investment made on behalf of a beneficiary of such a trust would complete a ‘trustee application form’ and provide prove of their entitlement under the laws of intestacy.

Reduction of tax

Trusts are often used to reduce tax. For example, a higher or additional rate taxpayer could pass assets into trust which would otherwise attract income subject to higher or additional rate tax. However, anti-avoidance rules exist to stop individuals passing assets into trust for the benefit of children purely for the sake of reducing income tax.

Another instance arises where an individual transfers assets into trust during their lifetime in order to reduce inheritance tax. By surviving seven years from the date of the transfer, the assets fall entirely out of the settlor’s estate, potentially saving large amounts of inheritance tax. The sooner an individual begin making transfers and utilising the nil rate band, the more nil rate bands they can utilised during their lifetime.

In intestacy

The distribution of an estate on intestacy often involves a trust, ...

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Joint tenants – where property is owned under a joint tenancy, all joint owners have an identical and equal interest in the property. When one ‘tenant’ (owner) dies, the property passes automatically to the surviving tenants (owners) under the ‘right of survivorship’. This means that interest in property owned in this way cannot be left in a will – they do not form part of the deceased’s estate. This also means that the deceased’s interest passes to the surviving owners free of IHT. Joint tenancy is severed in the event of the bankruptcy of one of the joint tenants.

Tenants in common – where the property is held as tenants in common, on the death of one ‘tenant’ (owner), their share of the property becomes part of their estate, and is distributed according to their will, or under the law of intestacy if there is no will. This is a transfer of value for IHT purposes.