How flexible is a Trust?
Trusts are very common and play a key role in many aspects of everyday life. Many people, often without realising it; will come into contact with a trust in one form or another at some point during their lives. Yet trusts are widely misunderstood and often seen as something just the wealthy need to be concerned with.
But trusts are particularly useful when planning how money and assets should pass from one generation to another, especially when family structures are complicated by divorces and second marriages. This; coupled with the growing frequency of marriage breakdowns, an ageing population and rising prosperity; makes trusts an excellent tool for long-term planning to ensure a family’s financial stability and security.
But how flexible is a Trust?
One of the great advantages of Trusts is the flexibility they can provide. None of us know what the future may hold and so the Trust Deed is usually drafted to provide as much flexibility as possible by giving Trustees wide powers.
Trustees have to make a number of decisions when administering a Trust, there are two types of decisions:
Dispositive Decisions; and
A dispositive power effectively means a power to make distributions of Trust assets to beneficiaries. Most Trust Deeds have two separate dispositive powers: (1) a power to appoint income and capital and (2) a power to apply income and capital for the advancement or benefit of beneficiaries. These powers are very often discretionary.
The decision on whether to make a disposition (distribution) of trust property to a beneficiary is that of the Trustees alone and which may frustrate some beneficiaries, who perhaps feel they are entitled to benefit. Generally, the court will not interfere with the exercise of discretionary dispositive powers as long as the Trustee has acted within the terms of the Trust Instrument and he has acted honestly.
It is important that the Trustee does not blindly follow the wishes of a beneficiary or even the Settlor, if laid out in a Letter of Wishes; who do not have the right to dictate how the Trustee should use his discretionary power.
In Re Hay's Settlement Trusts , the court emphasised that, in order to avoid a complaint by a beneficiary, a trustee's decision-making process should follow a simple formula:
A Trustee should periodically consider whether or not to exercise his dispositive powers.
A Trustee should review the range of beneficiaries and the methods of disposition available
A Trustee should consider the appropriateness of each disposition on an individual, case-by-case, basis.
Dispositive Powers include such things as the Power of Maintenance and Power of Advancement, which we included in our blog entitled 'The Trustee Powers'. They may also include what is known as Powers of Appointment, sometimes referred to as overriding powers. These powers enable the original trusts of the settlement to be modified. Trustees are likely to use this power when they want to keep property within the trust but want to vary the terms on which it is held, for example changing an age contingency. A typical use of a power of appointment is to give a beneficiary a right to receive income. This is beneficial from an income tax point of view as it means that the income is no longer liable to the trust rate of income tax but will be taxed at the beneficiary’s rates.
Most modern Trust Deeds deliberately identify a relatively narrow class of beneficiaries such as children and remoter issue of the Settlor; but then give the trustees a power to add further persons (including charities) as well as a power to exclude beneficiaries. The power to add or exclude is normally given to the trustees, although sometimes it is reserved to the Settlor during his lifetime. Spouses and civil partners of children are generally not included in the class on the basis that they can be added if there is a reason to do so.
The decisions a Trustee makes in relation to the management of the Trust assets or in relation to the Trust in general are known as Administrative Decisions. Again, in making any of these decision, the Trustee must act honestly and within the Powers given to him by the Trust Instrument and by legislation. In making their decisions, the Trustee must consider his fiduciary duties and the statutory duty of care he owes to the beneficiaries.
The trustees have wide administrative powers, granted to them under the general law, statutory provisions and under the terms of the trust instrument. These will include things such as:
Power of sale
Trustees are given wide powers as to how a sale should be conducted, provided they obtain the best possible price.
Power to insure
Trustees are given the power to insure all trust property for the full value of the assets; against risk of loss or damage arising from any event. The premiums are deductible from the either the capital or income of the Trust fund.
Power to receipt
Where a third party pays monies to the Trustee, the receipt they receive form the trustees will be a sufficient discharge of any liability. This power cannot be excluded from the Trust Deed.
A sensible addition to the administrative provisions is for a clause to be included within the Trust Deed which allows the trustees to give themselves further powers. Otherwise, it may be necessary to apply to the court under s.57 Trustee Act 1925, which allows the court to grant additional powers of administration and management if it is expedient to do so.
Please note that this is a list of the more common Trustee powers and is not a detailed or an exhaustive list.