For many clients a trust can be the right fit to meet their objectives. They can offer control, asset protection and flexibility. There are a number of considerations when advising clients about trusts as well as considering the impact of taxation and compliance when establishing and administering trusts.
1. The trust deed
The trust deed will confirm who the settlor is, what type of trust it is and who the trustees and beneficiaries are. It should provide specific powers to the trustees. A side letter of wishes can offer guidance on how the trust fund should be distributed.
The trust deed may place conditions on how the beneficiary is to receive any income or capital from the trust fund. It is important that these provisions are followed and that the trustees are advised of these provisions and of their powers. The risk is that the trustees could distribute trust funds incorrectly or they could act beyond their powers.
2. Duties and responsibilities of trustees
Trustees must ensure that they act according to their fiduciary duties and must be advised of these duties accordingly. It is important to ensure that the trustees have a full understanding of their role and that the beneficiaries may have a right of action against them – with potential personal liability - should they breach any of these duties. Some examples of these duties include not profiting from the trust, to act without a conflict of interest, and to act in the interest of the beneficiaries of the trust. Investment can be delegated, and trustees should seek advice on that.
3. Trust compliance
The trustees have a duty to comply with various trust compliance requirements.
This may include the requirement for trust tax returns for income and capital gains. There may also be inheritance tax returns on the ten-year anniversaries or on exits of capital. The tax treatment and who returns the tax is dictated by the type of trust, whether bare, liferent, or discretionary.
The trustees should also consider whether annual accounts should be prepared which are required in order to fulfil the trustee duty to account to the beneficiaries.
Additional compliance includes HMRC's Trust Registration Service (TRS) which is a register of trusts; and the Automatic Exchange of Information (AEOI) which is a separate requirement to report any non-UK connections associated with the trust. In addition, if the trust holds any heritable property, the trustees may be required to report to the Register of Persons Holding a Controlled Interest in Land (RCI).
4. Conflicts of interest
It is all too easy for a conflict of interest to arise where the beneficiaries are in regular communication with the lawyers who are acting for the trustees. It is important to remember who your client is and who you are acting for. The rights and entitlements of beneficiaries will be dictated by the type of trust and the terms of the trust.
At Brodies we deal with a variety of both straightforward and complex trusts. Our team have a significant amount of experience with establishing trusts, administering trusts, advising on tax implications and compliance, and also winding up trusts. For more information please get in touch, we would be delighted to assist with any trust query you may have.
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