Trusts School Lesson 1 Q&A

Q. Can I get the contact details of your technical advice team so I can call them to discuss a new investment case for IHT planning?

A. You should contact your account manager who will then arrange a call with the technical team. If you do not have an account manager, you can make a request via the “Ask an expert” button at the bottom of our Tech Matters home page Tech Matters | Tech Support | M&G for Advisers

Q. Will slides be available at some point (and if so from where)? Thanks.

A. The slides will be uploaded after each event to the Trust School home page under the relevant session Trusts School CPD Events | M&G for Advisers

Q. Is it possible to access recordings of the Bond school sessions please

A. Yes, they are available to watch via our Tech Matters site in the CPD and Events section  Events & CPD | Tech Matters | M&G for Advisers

Q. I can’t make the 9/7 session can I hear it retrospectively?

A. Yes. The recordings, slides and Q&A will be accessible on the Trust School home page. Trusts School CPD Events | M&G for Advisers

Q. I am new to using Trusts (previous employer didn't advise on Trusts - restricted) Will the course talk about the relationship between - creating the trusts - Involving a Solicitor and Accountant and who is responsible to register a Trust with TRS?

A. I will be highlighting the importance of working with other professionals and will be touching on the Trust Registration Service but more detail can found in our Tech Matters article here Trust Registration Service (TRS) | M&G for Advisers

Q. Please remind me, i don’t think a POA holder can establish a trust. Is that true?

A. Lasting or Enduring POAs in England and Wales do not provide the power for the attorney to make anything other than small gifts so they wouldn’t be able to set up a trust without applying to the Court of Protection for approval. The position is slightly different for Continuing POAs in Scotland as these can give the attorney the power to make gifts, carry out IHT planning, including by setting up trusts.

It should be noted that even when an attorney has the power (Scotland) or is granted the power later (rest of the UK), they may not be able to use a standard insurance company trust made available from UK investment bond providers. A bespoke trust may need to be drafted by a solicitor.

Q. Any nuances for Northern Ireland?

A. My understanding is that the position with trusts is broadly the same as that of England and Wales however there will be nuances. I’m not an expert on the differences so you should seek legal advice if advising on a trust written under Northern Ireland.

Q. What is the Settlor position with a settlement from a joint bank account into a trust.

A. HMRC will normally consider a gift from a joint bank account to be made on a 50/50 basis between the account holders unless there is evidence to the contrary.

Q. Regarding pensions and IHT, from April 2027, pension pots will be included in IHT. If pensions are under trust and the holder doesn't legally own the pot, how does the government tax it as IHT? Can IHT be mitigated by regular withdrawals, and does the 7-year rule apply?

A.  This isn’t a new feature of IHT, there are several things in peoples estate where the individual is not the legal owner like the right to occupy a house, or a gift with reservation of benefit.

IHT can be mitigated on a pension by extracting the pension funds (PCLS and/or pension income) then either  spending it, replacing it with something that qualifies for a relief or gifting it away. The tax implications on extraction also need to be factored in.  

Q. if a client has lived in Scotland for a number of years and has no plans on moving in the future, will there be any issues with a standard English loan trust being used for an investment bond

A. We’re not aware of any significant issue with the trust domicile when it comes to holding insurance bonds. It’s common for individuals in Scotland to use insurance company trusts that are governed by the law of England and Wales.

Q. What options are available if the existing trustee of a trust loses mental capacity and this isn't covered in the trust deed?

A. The remaining trustees should seek advice from a solicitor. In some cases the solicitor can draft a deed to have the incapacitated trustee removed. Where the incapacitated trustee is also a beneficiary of the trust it may require court involvement to have them removed. The best course of action is regularly review trustee positions, particularly elderly trustees and to retire a trustee prior to them losing capacity. For example, if a trustee has recently set up a Lasting POA for their personal affairs, this should be a nudge to consider whether they should consider retiring as trustee.

Q. When grandparents leave money to grandchildren in a will absolutely but delay access until age 25, what type of trust does this create?

A. It really depends on the specific wording used. It could create a bare trust but it could also create an age contingent trust which is not bare. You need to decide what conditions apply to the “gift”  - if all conditions are met and their interest has vested it will be bare, otherwise it won’t be bare. HMRC have a page in their Trust, Settlements, and Estates Manual with a few examples which is useful (I used two of the examples in the Trust School session). TSEM1563 - Introduction to trusts: types of trust: bare or simple trust - HMRC internal manual - GOV.UK. But, if in any doubt I would seek a legal opinion on it.

Q. Could regular gifting be classed as a Trust?

A. No. But regular gifts could be made into a trust.

Q. How does it work where you set up future beneficiaries i.e. grandchildren (and they are the only proposed beneficiaries) but then don't subsequently have grandchildren?

A. You would need to check the deed to see what happens There should be a “longstop beneficiary” and they would benefit. If it ends up there is no actual beneficiaries then the trust could revert to settlor.

Q. What happens if the witness is a spouse of the trustee?

A. Our understanding is that In principle if they are not a party to the trust then it’s possible but because they have an “interest” it should be avoided and have witnesses completely independent with no interest.

Q. Is there a minimum number of Witnesses to sign a trust

A. Technically no witnesses are needed for a trust to be established however in practice for a documented to be executed as a deed there needs to be at least 1 witness.

Q. Will you be covering 'Protectors' in any of the sessions?

A. We will be mentioning protectors but probably not in a great amount of detail as it’s not that common.

Q. Where an off the shelf trust is used, is it OK for the settlor to cross out any classes they DONT want to benefit and should they and all trustees initial any crossings out?

A. No. There are provisions that cover the removal of beneficiaries and these should be followed to ensure the amendments are valid. If the Settlor has bespoke beneficiary classes they could get a solicitor to prepare a suitable deed.

Q. In regards to protection - many provider trust deeds do not require wet signatures and use email verification links. are these subject to potential validity issues??

A.  Our understanding is there is no legal impediment to electronically executed trust deeds.

Q. Who can add additional beneficiaries after the death of the settlor?

A. It depends on the terms of the trust. The example I used in the session was taken from our discretionary trust deed. With our discretionary trusts beneficiaries can be added after the death of the settlor but only where two existing beneficiaries (who are over 18) agree to the addition. It’s a good idea to make sure the beneficiaries the settlor wants to benefit are added when the trust is set up or during their lifetime.

Q. Can the settlor's spouse be the beneficiary of a trust for IHT purposes?

A. Yes. The settlor’s spouse being a potential beneficiary doesn’t automatically trigger a gift with reservation although you do need to be a bit careful. You shouldn’t really distribute to the settlor’s spouse during the settlor’s lifetime as the settlor could inadvertently benefit from the trust fund causing a gift with reservation. A settlors spouse being a beneficiary would also make the trust settlor interested which complicates the income tax position (which you don’t need to concern yourself with if the trust holds a non-income producing bond)

Q. Do the Trustees always needs to open a Trust bank account to manage the flow of capital and income?

A. No. Ideally all trusts would have trust bank account but they’re not as easy to set up nowadays. You should at least make sure if a trustee is using a personal account that any trust money passing through the account is kept totally separate from their personal money. They may want to open a specific account for example for moving trust money.

Q. Does a default beneficiary need adding for all trusts?

A. No. If there are other beneficiaries then a trust would still be valid without a default beneficiary. 

Q. Does Grandchildren include Great Grandchildren in your example (in a will)

A. No. The settlor’s grandchildren are not the same as their great grandchildren. If you wanted both classes to be included then you should specifically mention both classes. Alternatively you could use the phrase “settlor’s remoter issue” which would cover all of the settlor’s descendants including grandchildren and great grandchildren.

Q. With Bare Trusts, can you stipulate the age?

A. With most insurance company trusts the age an absolute beneficiary can demand the trust property will be 18. If you want to stipulate an age, I would seek advice from a solicitor and ask them to draw up a bespoke deed.

Q. What is meant by antitrust legislation?

A. My understanding is that “antitrust” legislation has nothing to do with trusts in the financial planning sense. I believe it is more to do with monopolies of business interests.

Q. As investment bonds are non-income producing - if a trustee made a withdrawal of the 5% allowance and distributed to a beneficiary is it taxable?

A. Trustees can make use of the tax deferred allowance if they have invested in a bond. Withdrawals within the tax deferred allowance trigger no chargeable event so there is no gain. No gain means no income tax payable by the trustees. However, you may have to consider IHT exit charges when distributing capital to a beneficiary from certain types of trust.

Q. What are the issues with husband and wife beneficiaries if you were looking to give the option to bring trust assets back into the couple's control.

A. If you set up a trust with a husband and wife as settlors and potential beneficiaries it will not be effective for IHT planning.  If you mean intentionally setting up a trust each with the spouse as a potential beneficiary so that they could both have access to each other’s trust then this would likely be deemed to be a “reciprocal arrangement” and ineffective for IHT.

Q. If you have setup a bare trust leaving benefits to grandchildren but later want to remove them can that be changed?

A. If you set up a bare trust during your lifetime, the beneficiaries are fixed at outset and cannot be changed. This is why you need to be very sure who you want to benefit if you are using an absolute trust. If you mean someone has written a Will which includes an absolute trust then they can choose to write a new Will which would invalidate the previous one. Once the trust is in force though absolute beneficiaries can’t be changed.

Q. What happens to a trust if the settlor has died and no classes of beneficiaries are left?

A. It depends on the terms of the trust. The trustees may have the power to add beneficiaries but they may not. There might also be a default beneficiary e.g. a charity, to which the trustees can distribute. If there are no options you would need to seek legal advice to either get the trust rectified to have beneficiaries added or the trust may end falling back into the settlor’s estate. It really depends on the specifics of the case.

Q. Can lives assured be added after the bond is established?

A. I don’t know any provider that allows it in practice but it’s a bit of a moot point. Adding or removing lives assured is a classed as a “fundamental reconstruction” of the policy and causes a chargeable event so there is no benefit over surrendering the policy and reinvesting it on a different basis. For the avoidance of doubt, as this is a trust session, who the lives assured are on a bond held in trust, has no relevance to who benefits from the trust.

Q. Re an IIP Trust, is there a risk of favouring income over capital beneficiaries?

A. Yes. That was one of the concerns raised in Nestle v Natwest. The remaindermen felt that the trust fund was invested in a way which favoured the income beneficiaries which led to a much lower level of capital appreciation that would have occurred if they had invested differently.

Q. With income in possession trust does this impact RNRB?

A. It depends on the type of interest in possession trust you are referring to. Qualifying IIP trusts are included in the estate of the beneficiary who has the interest in possession (right to income/enjoyment of the trust property) The value of the trust property is included in the beneficiary’s estate for the purposes of IHT and calculating entitlement to the RNRB. More detail about the taxation of IIP trusts can be found in this article Interest in Possession (IIP) Trusts Taxation | M&G for Advisers

Q. Are provider trusts good enough to use vs solicitor version?

A. It depends on what the settlor is trying to achieve. “Off the shelf” trusts drafted by insurance companies are sufficient for a lot of clients’ circumstances. However, where a client has a particularly complex scenario and/or has very specific objectives it is sometimes worth asking a solicitor to draft a bespoke deed.

Q. Can trustees take remuneration from trust funds?

A. The trust deed will usually make provision for this.

Q. Does an Intestacy Trust for a minor need registering with TRS?

A. In England and Wales, where an individual dies intestate and money is left to their minor child, this is a “Trust for a bereaved minor” which is a statutory trust. There is an exemption in place for statutory trusts when it comes to the TRS however if the trust incurs a tax liability, it will become a taxable trust and the exemption is lost.

Q. Would you agree care fee avoidance schemes should be avoided?

A. Yes.

Q. Will trusts often have spouse as trustee and beneficiary - conflict issues?

A. There can potentially be a conflict of interest. Generally trustees need to ensure when they are making decisions as a trustee they are talking into account the interests of all the beneficiaries rather than just themselves. Where a trustee is also a beneficiary and is distributing trust property to themselves as a beneficiary, they should also have an independent trustee appointed. That said the trust deed (or Will) can include wording which states the trustee can act despite any conflicts so relaxes the general position.

Q. with a discretionary trust for future grandchildren what happens if new money added later?

A. The money added is subject to the trust provisions as drafted. So if future grandchildren are in the beneficiary class then they could have some of the additional money distributed to them.

Q. Should advisers act as trustees?

A. It is up to the adviser and they should consider on what basis they would act, are they doing it in a professional capacity, then are they insured etc etc or as a friend of the family etc etc. Trustees have a duty to avoid potential conflicts of interest. If an adviser is being paid by the trustees for investment advice this creates a potential conflict of interest so that would need to be managed appropriately and if not then we would say this should be avoided. Advisers should discuss this with their compliance officer and PI firm.

Q. If a life tenant doesn't want income, is a bond suitable?

A. The trustees have a duty to treat beneficiaries fairly but if the life tenant genuinely doesn’t need or want any income, then a non-income producing investment such as a bond may be an appropriate investment. You would also need to consider whether a bond would be an appropriate investment for the remaindermen who receive the capital on death of the life tenant.

The life tenant could also seek legal advice with a view to terminating their life interest.

Q. What are the issues with a husband and wife setting up 2 separate trusts to retain control?

A. If by control you mean access to funds then HMRC may well consider them reciprocal arrangements and there would be no IHT effectiveness.

Q. If a trustee loses capacity and no provisions exist how to remove them?

A. If there is nothing in the trust deed which automatically discharges a trustee when they lose capacity, a solicitor needs involved to remove them. Also, if the trustee is also a beneficiary of the trust, an application may need to be made to the court of protection to remove them. For these reasons it is worth considering whether a trustee should retire prior to losing capacity to simplify the ongoing administration of the trust.  

Q. Would an interest in possession trust protect against care fees?

A. Interest in possession trusts can result in capital being disregarded for the beneficiary’s financial assessment however they need to declare their entitlement under the trust i.e.  a right to income. This will be taken into account. That said, it also may depend on how the trust was created. For example, its common to see people set up interest in possession trusts during lifetime with themselves as the income beneficiary under the guise of simplifying the administration of their estate on death. Local authorities could look at these arrangements and challenge them under deliberate deprivation rules.

Q. Are personal accounts acceptable instead of trust accounts?

A. It is common practice to “wash money” through trustees personal accounts but trustees should not hold trust money personally.

Q. What happens if all trustees die?

A. Where a trustee dies they will automatically cease to be a trustee. If there are sufficient trustees remaining they will continue to administer the trust but it’s not uncommon to be left with no surviving trustees. Where the last trustee dies, their executor or the administrator of their estate will either take on the role of trustee themselves or appoint someone to act as trustee ensuring continuity for the trust. 

Q. Can trusts be wound up?

A. You can “wind up” a trust by distributing all the assets to the beneficiaries. Otherwise they can only be wound up by the court and only where there has been error, undue influence or fraud.

Q. Does trust deed override Trustee Act duties?

A. It depends on the duty you are referring to however, trust deeds may include wording to relax the duties outlined in the Trustee Act. For example, s4 of the Trustee Act 2000 covers “Standard Investment Criteria”. It says that trustees should consider diversification of investments however, some trusts deeds include wording so that trustees have no need to consider this.

Q. Can a letter of wishes control pension distribution age?

A.  No.

Q. Does death remove trustee responsibility?

A. Death of a trustee removes them as a trustee so they won’t be responsible for mismanaging the trust from that point onwards. I don’t believe this would absolve them for errors that occurred during their lifetime but if that is a potential issue legal advice should be sought.  

Q. Tax implications of assigning property into trust?

A. It depends on the property being placed into trust and the type of trust being used. Placing property in trust is a fairly specialist area where specialist advice should be sought.

Q. What happens if trustees move abroad?

A. They should seek specialist advice from someone who understands the implications of being a trustee in the country they are going to. There could be reporting requirements or tax implications of a trustee moving abroad but with so many countries each having their own tax and reporting regimes it’s impossible to say what these might be. However, as an example, France impose reporting requirements on trustees resident in France and failure to comply can result in significant penalties in excess of 20,000 euros.

Q. Explain difference between will wording creating or not creating a bare trust

A. The main thing to look for is what conditions are required for a beneficiary’s interest to vest. If the Will is very clear that the beneficiary only needs to be alive at the date of the testator’s death then that is likely to be a bare trust. If there are other conditions e.g. they must attain a specific age, this should be approached with caution as these often are not bare. It’s a subtle difference in wording and if in any doubt you should seek legal advice to establish the type of trust created. HMRC have a page in their Trust, Settlements, and Estates Manual with a few examples which is useful (I used two of the examples in the Trust School session). TSEM1563 - Introduction to trusts: types of trust: bare or simple trust - HMRC internal manual - GOV.UK

Q. If a trustee retires must they be replaced?

A. It depends on the terms of the trust. The trust provisions might say that a trustee can only retire if certain conditions are met e.g. there are at least two trustees remaining. Whether a replacement needs to be appoint will again depend on the terms of the trust.

Q. Are stepchildren treated the same as children?

A. Broadly, no.  But it depends on the wording of the trust and the context of what was intended. If not legally adopted it is best to include them by name or as a specific class on the deed to avoid ambiguity.

Q. Anything to stop lending to life tenant to fund ISA?

A.  Not if it’s suitable in the circumstances. But we’re finding it hard to think what the point of that would be!

Q. Does life interest trust impact mortgage ability?

A. We do not know whether a mortgage provider would accept income form an IIP trust when assessing affordability.

Q. Does a bond trust need TRS registration?

A. There is no exemption for trusts holding only investment bonds. It is the trust that dictates whether registration is required as opposed to the investments they hold.

Q. Can beneficiaries challenge trustees in court individually?

A. We believe so.

Q. Can trustees use a bond for income in life tenant scenario?

A. OEICs are often preferred for trustees of IIP trusts where one or more beneficiaries are entitled to income. This is due to the fact that investment bonds are non-income producing investments so will not produce income for the income beneficiary. However, if there is a clause in the trust deed giving the trustees power to pay capital to the life tenant at their discretion then an insurance bond could be a potential option. Also, if the trust fund is large enough, the trustees could diversify the trust fund, perhaps by investing in a mixture of OEICs to suit the income needs of one beneficiary, and insurance bonds to provide capital for the others.

If the trustees used a bond and had no right to advance capital then this would still be taxed as trust income and also have chargeable event taxation so is suboptimal.  It would also be a breach of trust.

Q. Joint account gifting source - HMRC treatment?

A. Our understanding is gifts from joint accounts are treated as being 50/50 between account holders unless there is evidence to the contrary.