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Trusts

Trusts can be used as a way of protecting your assets until the beneficiary is old enough to look after the money themselves.

A trust means that you assign responsibility of the finances over to a trustee. This can be quite a demanding role and you should know what’s involved before agreeing to become a trustee.

Trustees have various duties and powers which are given to them either by the general law, the Trust deed (or Will) or a combination of both. It is essential that a Trustee understands the duties imposed on him and the powers available.
If there is more than one Trustee they must act unanimously. Loosely:-
"Duties" are obligations imposed on Trustees instructing them to do certain things. "Powers" are permissions, allowing the Trustees to do certain things.

It is essential to consult the Trust Deed (or Will) itself to see what the powers and duties of a particular trust will be.
Trustees manage Trust Funds on behalf of the Settlor (the person who sets up the Trust), for the benefit of the Beneficiaries. The Trustees must make sure that their actions are in the best interests of all the Beneficiaries. The Beneficiaries have the power to make sure the Trustees are doing so and they may take legal action against the Trustees if they act outside the terms of the Trust.

All Trustees must be over 18 and mentally capable. They should ideally also have a sound financial history. It is possible for a Beneficiary to also be a Trustee but this can give rise to a conflict of interest. There is no limit to the number of Trustees a particular Trust can have (with the exception of land, where there cannot be more than 4 trustees), but it is strongly advised that there be at least 2. It is possible for a Trustee to retire but the other Trustee(s) must agree to this. It is not possible for you to retire if you are the only Trustee unless someone else is appointed to act in your place. Trustees should also remember that even after retiring they can still be held responsible for their actions before retirement.

There are some circumstances in which a Trustee can be removed against their Will, for example if they are made bankrupt or remain outside the UK for more than 12 months or refuse to carry out their duties.

Duties

Duty to act impartially

The Trustees must invest the Trust Fund and generally administer the Trust in accordance with the Trust deed (or Will) and may take into account any letter of wishes. They must act fairly and impartially towards all the beneficiaries and must not benefit one beneficiary at the expense of another. They should treat all beneficiaries of the same class equally and of different classes fairly.

Duty to secure trust property

For example, this might mean that the Trustees would have to recover a debt owed to the Trust.

Duty to keep records

Trustees must keep records of what they do as they need these to prove that Trust has been properly managed. This includes keeping accounts, minutes of meetings and all other Trust documents. They must also allow inspection of these records by the Beneficiaries.

Duty not to benefit themselves

The Trustees must not make a profit out of the Trust for themselves – they must act as volunteers (although there is a power for professional Trustees to charge, as set out below). They must not profit either directly or indirectly, although this rule can be expressly excluded in the Trust deed (or Will).

Duty to enquire of Trust property

In other words, the Trustees must find out what assets are in the Trust, take control of them and ensure their preservation.

Duty to act with reasonable care and skill

Whenever the Trustees carry out certain functions (such as the power to invest, as set out below) there is a statutory duty on them to act with reasonable care and skill. The duty takes into account whether the Trustee is a professional and the level of knowledge and experience which he has or ought reasonably to have. Consequently, higher standards will be expected of investment professionals than of lay people.

Duty to keep investments under review

All the duties imposed on the Trustees require them to carefully consider the circumstances of the Trust, its Beneficiaries and investments on a regular basis. It is very important that every Trustee is actively involved in the administration of the Trust and in particular in the investment decisions. It is not sufficient for a Trustee to simply leave the decisions to his co-Trustees or for all the Trustees to simply leave the Trust investments in one place from year to year. They will need to hold a formal review and record the reasons for their decisions, at least once every year.

Powers

Power to delegate

The law allows Trustees to delegate to an agent (such as an accountant or solicitor) any of their functions including the powers of investment. There are, however, 4 areas which cannot be delegated:-

  1. Dispositive powers (i.e. those relating to the distribution of Trust property);
  2. Power to decide whether payments should be made out of income or capital;
  3. Power of appointing new Trustees;
  4. Power of delegation itself.

Where Trustees delegate to an agent providing asset management services, the law requires a written statement called a Policy Statement, providing guidance to the agent as to how the Trust assets are to be managed. The agent’s performance against this Policy Statement must be reviewed regularly.

Power to insure

Trustees may insure in full of the Trust property as if the property were their own. Insurance premiums can be paid out of income or capital of the Trust fund. It will not always be appropriate to insure Trust property, for example where the cost outweighs the benefit, but if the Trustees decide not to insure then they should set out their reasons for this decision, preferably in writing. They would then not be liable for any loss incurred.

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