Mavis is setting up a discretionary Gift Trust for IHT planning purposes with the aim that the trust fund will be used in the future to help her grandchildren (including those unborn) with university costs. She is automatically a trustee but intends to retire and has asked two of her children, Ivan and Jane, to be the ongoing trustees.

Ivan and Jane have limited experience of financial matters and no experience whatsoever of trusts. Both have a lot on their plates, juggling busy jobs with young families. They are honoured but apprehensive at the prospect of taking on the commitment of being trustees and have therefore asked for advice on their responsibilities.

Generally, trustee responsibilities can be split into these main categories

• Duties to be performed on appointment
   
• Investment duties
   
• Protecting the interests of beneficiaries
   
• Keeping accounts and records
   
• Distributing property to beneficiaries

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 Mavis (the settlor) has given to the trustees. These powers will be “dispositive” (how, and in what circumstances, 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 the potential beneficiaries. The trust should be administered, the trust fund invested, and funds distributed in accordance with the terms of the trust.

Ensure that trustee have 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. Any investments should be in the names of the trustees i.e. a trustee application will be required.

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 can 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 circumstances of the trust.

The trustees must, from time to time, review the investments and consider whether investments need to be varied.

Ivan and Jane should obtain and consider advice from an Independent Financial Adviser to ensure the standard investment criteria is met.

Protecting the interests of beneficiaries

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 trustee has a general duty not to make any profit from the fact that he or she acts as trustee. Professional trustees may however charge for their services in a number of circumstances:

• Where there is an express charging clause on the trust deed
   
• In certain circumstances 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 where appropriate, a record of trust income and expenses must be kept to complete the trust and estate tax return and pass information to beneficiaries.

The HMRC guidance details:

• 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.

Note also that the legal responsibility for registration with the Trust Registration Service lies with the trustees but Ivan and Jane can appoint an agent to complete the registration process if they so wish.

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.

Although the checklist of responsibilities is daunting at first sight, Ivan and Jane recognise that a number of these duties are simply common sense such as reading the trust deed, acting in the best interests of the beneficiaries, and not acting outside of their powers. They are less comfortable though with investment duties, keeping accounts and records, and dealing with trustee tax returns.

The concerns of Ivan and Jane are alleviated after they obtain advice from a financial adviser who draws their attention to a fund which is available in an Insurance Bond ‘wrapper’ which aims to protect the trustees against some of the ups and downs of the markets by using a smoothing process. The prospect of less volatile and more stable returns over the medium to long-term from diversified assets is appealing to Ivan and Jane who are looking for a “peace of mind” investment. This investment sits squarely with their responsibilities to take such care as an ordinary prudent person would take when investing for other people. The adviser explains to them that an added advantage of an Insurance Bond is that it is a non-income producing investment which reduces self-assessment filing obligations. The adviser explains to them how the ‘5% rule’ applies to trustees and the option, in the future, of gifting segments to grandchildren once they have reached 18 to access their personal tax position upon a subsequent encashment. At that time of course the grandchildren might be non-taxpayers with unused Personal Allowance, Personal Savings Allowance and 0% Savings Rate Band. With that in mind, the trustees choose to invest in an Offshore Bond.

In conclusion, Ivan and Jane are happy to act as trustees and in due course may well come to enjoy the responsibility of preserving and safeguarding the trust fund for the benefit of their mother’s grandchildren.