Why should your client consider engaging a professional trustee?
One of the key tools that might be recommended as a financial or legal adviser in achieving a client's estate planning goals is the establishment of a trust.
Most people don't come across a trust in the ordinary course of life. They may have heard something about them but they tend to be a bit of a mystery.
In short, it was a method of wealth protection established many centuries ago in England when wealthy individuals went to war or an exploration of the world to ensure their families were taken care of while they were away or in case they didn't return. Individuals who the owner respected and considered responsible were given instructions concerning what to do with the owner's assets to protect their value and what to do with any income generated.
In effect, the owner put their 'trust' in these individuals to honour the instructions.
The same basic principles remain today even though many variations have developed over the centuries and have been refined in the courts and by legislation. This has given rise to a whole profession specialising in understanding and advising on the application of trusts, known as Trust and Estate Practitioners. Members must satisfy the qualification levels and ethical code of conduct of the Society of Trust and Estate Practitioners to be qualified to advise on trusts.
So what does a trustee do?
According to HMRC trustees should:-
Notify them about the creation of the trust
Declare and pay tax on income received by a discretionary trust
Keep the following records
• Bank statements for current and deposit accounts
• Confirmation of interest paid on bank or building society accounts
• National savings bonds or certificates
• Chargeable event certificates issued by life assurance companies
• Dividend vouchers from companies, OEICs and unit trusts
• Stockbroker reports and record of dividends
• Details of expenses paid
• Details of all taxes paid by the trust
• The trustees of a discretionary trust should record income payments to beneficiaries
If the trust sells or buys assets during the year, the trustees will need:
• Completion statements for property transactions
• Contract notes for stocks or shares
• Receipts for sale or purchase expenses, including estate agents' and solicitors' fees on the sale of property and details of any stamp duty land tax paid
If the trust has received additional assets, the trustees will need to record:
• The amount or value of the asset received, i.e. the market value on the date of transfer into the trust
• The date when the additional money or asset was received
• Details of who made the payment or who put the asset into trust
The trustees should also keep records that show any important decisions, such as:
• Minutes of meetings
• Deeds of appointment
• Any decisions that affect the distribution of capital or income
The trustees need to keep records of any income payments made at their discretion to beneficiaries. This information is required as part of the Trust and Estate Tax Return for discretionary trusts.
Beneficiaries who receive income may ask the trustees to provide a statement showing how much income they've received and how much tax the trustees have deducted. The trustees may use form R185 (Trust Income) to do this. The beneficiary can then use the information on this form to prepare his or her own self-assessment tax return or claim a repayment of tax.
If the beneficiary is also the settlor and he/she - or his/her spouse or civil partner - has retained an interest in the trust, form R185 (Settlor) can be used instead.
Trustees may find it helpful to keep copies of all the forms R185 (Trust Income) that they give to beneficiaries.
For how long should records be kept?
If the self-assessment tax return is submitted on or before 31 January, HMRC states that records should be retained for one more year from 31 January. For example, for a 2014-15 self-assessment tax return filed on or before 31 January 2016, records must be kept until 31 January 2017.
However, the retention period suggested by HMRC seems a little short. It relates to tax requirements only.
It seems sensible that trustees retain documentation for as long as possible (ideally for the entire trust period), so that evidence is available in the event of any dispute with beneficiaries.
The above information will also assist in the preparation of the trustee accounts.
Trusts in civil law countries?
Trusts are recognised in many countries around the world but some of the concepts have not developed in the same way in civil law jurisdictions common in Europe. If a client sets up a trust while resident in a civil law country or beneficiaries are resident in a civil law country extra care needs to be taken to ensure their wishes can be satisfied in the same way or if extra steps need to be taken to take account of civil law implications.
So could your clients take on the role of a trustee?
A lot of the work of a trustee is applying common sense and following the terms set out in the trust documents. There will be many occasions where the terms of a trust and circumstances surrounding it are simple and the responsibilities light. A client may feel able to undertake such a role.
However, it is a responsible position which requires time, dedication and thoroughness, plus an ability to respond to circumstances at times which may not be convenient. If a client is prepared to commit to it they don't need to be on their own as advice is on hand when needed from a professional trust and estate practitioner or lawyer.
If it is your clients' own trust, there is the added complication that if many of the terms of the trust only apply on their death, they will not be around to take care of its provisions.
Appointing Professional Trustees
For a qualified person to operate a business of providing trusts and trustee services, that business will also need to satisfy the requirements of the local regulator, whose role it is to protect clients from inappropriate and unsuitable advice and advisers.
Having a professional whose every day job is to manage and run trusts can bring peace of mind that they will be able fulfil the client's wishes in the event of death or loss of capacity. They will also be able to manage the trust assets and take care of all the responsibilities during the client's lifetime, which could take a significant burden away from the client and leave them to do what they are best qualified to do – managing their own business and family.
The trustees will not perform their duties and responsibilities in isolation. They will work in close contact with you and your client. If your client wants a hands-on role in the decisions that need to be made they can set themselves up and/or appoint a trusted friend, family member or you as adviser, as a trust Enforcer/Protector, so that the trustees are required to consult before taking action. The trustees can then get on with implementation and record keeping so that the client does not have to be involved in the day to day chores.
Summary: Appointing a Professional Trustee means:
Your clients don't need to burden themselves, a friend or family members with unfamiliar responsibilities;
The trust assets are under the supervision of professionally qualified staff who
Relieve your clients from the burden of record keeping and administration;
Take care of your clients' instructions and wishes;
Are familiar with managing trusts and their assets on a day to day basis;
Are governed by a strict code of ethics;
Are independent and required by law to act in the best interests of the beneficiaries;
Keep up to date with trust law and best practice;
Are subject to supervision by a regulator.
Operation of the trust is not affected by death or loss of capacity of a trustee as replacement trustees will be on hand.