Are You A Newly Appointed Trustee
You’ve just been appointed trustee – what are your duties and responsibilities?
1. Read the Trust Deed
2. Check the interests of the beneficiaries
3. Ensure the trustee has been validly appointed
4. Ensure the trust fund is invested
5. Apply the income in accordance with the trust terms
6. Check for previous breaches of trust
7. Ensure you do not profit from the trust fund
8. Prepare Trust Accounts
9. Avoid conflicts of interest
10. Ensure all tax reporting requirements are met
Read the Trust Deed
It is important to find out why the trust was established. If there is anything in the trust deed that is unclear, legal advice at an appropriate level must be sought. The trust deed will set out the powers and duties bestowed on the trustee by the settlor. The powers will be about how and in what circumstances the trust income and/or the capital can be distributed and how the trust is to be run. It would be useful to review minutes of trustees’ meetings and any legal opinions sought by the trustees. It is also worth looking at the financial accounts prepared in respect of the trust.
Check the interests of the beneficiaries
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.
Accordingly, a beneficiary has a right to see the trust accounts – and the trust deed – and to obtain reasonable information about the investment and management of the trust fund.
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.
Beneficiaries have no rights to participate in the running of the trust but can make representations to the trustees.
Ensure the trustee has been validly appointed
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. For example, if the trustees own property, the land registry certificate should show the trustees as owner; if the trustees hold shares (or operate a Crest account), the share certificates – or the account – should show the trustees as legal owners.
If there is a doubt over the trustees’ legal ownership of assets, that doubt should be resolved as quickly as possible.
Ensure the trust fund is invested
Trustees have a fundamental duty to invest the trust fund so the beneficiaries’ interests are enhanced, whether in terms of income or capital appreciation. The duty of the trustees, in relation to investment, is to use their powers in the best interests of current and future beneficiaries.
‘In the case of a power of investment…the power must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question; and the prospects of yield of income and capital appreciation both have to be considered in judging the return from the investment.’ (Cowan v Scargill)
Trustees should obtain specialist investment advice unless the cost of such advice outweighs the perceived benefits.
Apply the income in accordance with the trust terms
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. Where the trust was established before 6 April 2010, the power to accumulate will be limited, generally to a period of 21 years. If the trust was established after that date, income can be accumulated for the ‘life’ of the trust: a maximum of 125 years.
In ‘interest in possession’ trusts, the beneficiary, or beneficiaries, who have the right to receive this income must receive it within a reasonable period of the trust’s accounting year end. The beneficiary will need to include this income in their self- assessment tax return so need to know the amount of income fairly promptly.
The trustees can only make income payments, or advances of capital, to beneficiaries so it is important for them to check the entitlement and identity of the proposed recipients.
Check for previous breaches of trust
The trustees can only act within the terms of the trust deed. If they act outside of 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.
Ensure you do not profit from the trust fund
It is ‘a principle founded on no technical rule of law, but on the highest principles of morality’ that a trustee may not make any profit from the fact that they act as trustee: ‘…equity…prohibits a trustee from making any profit by his management directly or indirectly.
For however innocent an act of this nature may be in itself, it is poisonous with regard to its consequences. If any opportunity be given for making profit in this manner, a trustee will lose sight of his duty, and soon learn to direct his management chiefly or solely for his own profit.’ Heady 19th century stuff but still good law.
The settlor, through the medium of the trust deed, can relax the full severity of this rule, for example, by allowing professional trustees to be remunerated.
Prepare Trust Accounts
Trustees must keep records of all transactions and prepare annual accounts. Beneficiaries have a right to inspect the records and receive copies of the annual accounts. There is no requirement for the accounts to be audited, unless the trust deed so specifies.
In a similar vein, trustees should record all of their decisions – usually in the form of minutes. The minutes need not record the reasoning behind the decisions and it is generally prudent not to do so. The minutes will be available to beneficiaries so should be confined to the recording of factual matters and decisions. It could be embarrassing if personal opinions expressed at trustees’ meetings find their way into the public domain.
Avoid conflicts of interest
A trustee must not place themselves in a position in which their duties as a trustee conflict with their private interests. The prohibition of not making a profit from the trust fund is one aspect of the avoidance of the conflicts of interest rule.
Can a trustee, acting as an individual, purchase assets from the trust fund? Potential problems can be avoided by full disclosure in advance of a purchase. However, as an additional protection for the beneficiaries, any purchase of trust assets by a trustee can be set aside at the request of a beneficiary within a reasonable time of discovering the circumstances. A beneficiary making such a request does not have to show any dishonesty on the part of the trustee.
Ensure all tax reporting requirements are met
Trustees will have to ‘self assess’ (complete an annual tax return) if they have income or capital gains. They will have a duty to deduct and account for income tax on making income payments to beneficiaries.
They will have to make inheritance tax returns when there is a tax charge, for example, on 10-yearly anniversaries and on capital distributions.
In some circumstances, trustees will have to report tax details to the settlor, such as where the trustees have invested in a life assurance bond and a chargeable event gain occurs.
Trustees will have to liaise with the settlor and beneficiaries where capital gains tax holdover relief is being claimed.
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