In very simple terms the job of the Trustees is to give effect to the terms of the Trust and or the wishes of the Settlor. This sounds quite simple and in the case of some trusts it is relatively simple. If the Trust clearly sets out its purpose, for example “To pay income to my wife during her lifetime and then to divide equally between my children”; that sounds fairly straightforward. Invest to support the wife and then divide between the children. But what do you do if the wife needs to move into a nursing home and runs out of money?
Things get even more complicated if you have a discretionary trust where there are lots of beneficiaries and a letter of wishes which says something like this. “I want you to look after my wife Jenny during her lifetime, but I also want you to do your best to help the kids, particularly Charlie who is struggling after his divorce. After jenny has died you need to look carefully at what the kids need and pay particular regards to the education needs of my grandchildren”. Something like this needs some careful thought by the trustees as to how they use their powers and the property held in the trust.
What this means is that what happens to a Trust fund can sometimes be quite straightforward but at other times may involve some complex decisions where it is necessary to balance up the wishes and needs of a family and to understand the family dynamics.
And this is only the starting point.
What else does a Trustee have to do?
1. A trustee is the legal owner of trust property.
This means that you have to look after that Trust property.
1.1 With investments this means you have to think about how to invest money you hold, just popping the money in a bank account is not an answer particularly at a time when interest rates are very low. So as a Trustee you have to decide on an investment policy, appoint someone to look after the investments, keep an eye on those investments, possibly make decisions over changes to investments or investment policy.
1.2 What if the trust property is land? Then you have to think about insurance, maintenance and all sorts of related matters. Sometimes some of this can be the pushed onto the beneficiary of the trust, but still as a Trustee you have duty to keep an eye on things.
1.3 Often there may be a need to think about balancing the needs of current beneficiaries, for example a wife who has a life interest, with the interests of the remaindermen who inherit when the wife dies. This can effect investment decisions and the management of any property owned by a trust.
2. Tax.
Trustees are responsible for the payment of tax on their trust. There are lots of taxes to consider, income tax, capital gains tax and last but not least inheritance tax. To look after these taxes, it is necessary to keep records and accounts. Depending on the trust it may be necessary to submit annual income tax returns. At various stages it will be necessary to submit inheritance tax returns and to pay the taxes. Trustees can always employ professional advisers to help with this but these services, as well as the tax, have to be paid for and the Trustees need to be able to access the necessary funds.
3. Liabilities.
While proper liabilities of a Trust are usually payable out of trust funds if there is a failure to make payment then the trustees are personally liable for taxes and expenses incurred when dealing with a trust. They can also be personally liable if things like investments go wrong or there is a failure to properly maintain property owned by a Trust. This means that Trustees have to take care to cover their backs, keep money that might be needed and possibly to consider insuring against certain risks. As a general rule the cost of these sorts of protections is an expense the trustees can claim back from a trust but there really is a need to be careful and to try to ensure that any liability or potential liability has been thought about. Most of the time beneficiaries of trusts are very happy about what they receive, but if things go wrong beneficiaries can very quickly turn and it really is essential that trustees think long and hard about how to protect their position….just in case.
4. Conflicts of interest and Trustee remuneration.
A trustee is not allowed to profit from the position. This means that in general a non-professional is not allowed to be paid for being a trustee. A professional trustee can only be paid if the Trust allows for that professional to be paid. This rule also means that trustees must be very careful not to find themselves in a position where there is a conflict of interest. For example if the trust owns a large number of shares in a private company and one of the trustees is a director of the company he or she may find that his duty as a director conflicts with his duty as a trustee, what should he do. Sometime in this sort of situation the Trustee may become a director because the Trust owns the majority of the shares in the company, is that Trustee entitles to Directors’ fees, often the answer is no unless the trust specifically says that he can.
5. Compliance with rules and regulations.
There are an increasing number of government rules, mainly but not exclusively relating to tax and investment. Care must be taken to comply with these.
This is only a brief summary to try and explain the principal responsibilities and duties of a trustee, for more detailed advice please contact a member of our Private Wealth Team on 01276 686222
If you are in the course of deciding who to appoint as an Executor or Trustee and are struggling to find someone suitable you might want to consider the Herrington Carmichael Trust Corporation. We also have some further information about Executor, Trustee and Attorney Services.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to your own particular matter before action is taken.
