Upcoming inheritance tax (IHT) changes are having a big impact on estate planning and trusts are becoming increasingly popular, and with that comes a potentially tricky question: who should you choose as your trustees?
Any adult with the capacity to act can be a trustee, but this is really the bare minimum criteria.
The real question is, who should be a trustee? To answer that question, we need to dive into a trustee’s responsibilities and duties.
The fact is, becoming a trustee is a long-term commitment. It involves certain responsibilities and a regular cycle of activity.
Trustees must understand any specific powers, duties or limitations unique to the trust, and how these may need to be reviewed and amended over time.
Depending on the structure of the trust and the investments it holds, the trustees may need to submit annual returns to HM Revenue & Customs (HMRC) for income and capital gains.
Some trusts may also have ongoing IHT charges to arrange, known as the 10 yearly periodic and exit charges.
All UK resident trusts must be registered with HMRC’s trust registration service within 90 days of declaration. Any changes, like the appointment or retirement of trustees, must also be updated within 90 days.
Failure to do so can result in a £5,000 fine for the trust.
When the time comes, the trustees are responsible for distributing the trust fund in accordance with its terms.
For a discretionary trust, this may mean balancing the needs of many potential beneficiaries to decide how best to use the trust fund.
The trustees must also act with reasonable skill and care.
Trustees who have relevant experience or skills are expected to apply those to the role, meaning the bar for judging care is higher for professionals
This is the opening theme of the Trustee Act 2000, it applies to all trusts created under the law of England and Wales – trusts in Scotland or Northern Ireland have separate legislation, though the aims and outcomes are broadly the same.
The Act outlines the duty of care trustees agree to and explains that the trustee must act in the way that any reasonably prudent person would.
Trustees who have relevant experience or skills are expected to apply those to the role, meaning the bar for judging care is higher for professionals.
However, this does not diminish the responsibility for a non-professional, as all trustees are expected to seek advice to fill any knowledge gaps.
The Trustee Act 2000 and its counterparts also outline the trustee’s powers of investment, which are deeply linked to the duty of care.
Trustees are expected to diversify the trust’s investments where possible to help reduce unnecessary risk and protect the beneficiaries
Trustees may invest in the same assets as they could as individuals, including land and property.
Trustees should also consult qualified professionals before making investments, evaluating the advice against the best interests and needs of the beneficiaries, and disregarding their personal preferences.
Trustees are expected to diversify the trust’s investments where possible to help reduce unnecessary risk and protect the beneficiaries.
Under the Act, trustees can delegate these responsibilities to help them meet their duty of care obligations, which opens the door to using discretionary fund management services.
So, who should be a trustee?
The ideal trustee is an adult which can be relied upon to act in a prudent manner – when assessing this consider any particular skills and experience the individual has which will help them fulfil their duty.
While you can appoint almost anyone over 18 as a trustee, including the settlor, it’s recommended that; there are at least two trustees and there is at least one independent trustee.
Appointing two or more trustees helps to ensure a balanced view is applied to the management of the trust and appointing additional, younger trustees supports long-term continuity in the trust’s management.
An independent trustee does not have a personal stake in the trust and provides an unbiased perspective to help navigate decisions and disagreements in the best interests of all beneficiaries.
Being a trustee doesn’t need to be daunting
While we shouldn’t play down the importance of acting prudently and applying a duty of care, the right advice, support and investment products can play a large part in making the role manageable.
For example, using a single premium life assurance policy can simplify the trustee’s tax and reporting duties as no direct tax liability will arise on the underlying assets.
Instead, income tax may apply on the occurrence of a ‘chargeable event’, and a 5% tax-deferred allowance enables payments to beneficiaries without an immediate tax liability.
As an adviser, you can also help by partnering with a product provider that offers comprehensive technical support materials and guidance – enabling you to keep your knowledge and your advice sharp.
