If you've been appointed as the trustee of a trust, what are your responsibilities and how do you fulfil them efficiently? This article will consider the following:
The trust deed will set out the powers and duties the settlor has given to the trustees. These powers will be ‘dispositive’ (how, and in what circumstances, the trustees are to distribute trust income and/or capital) and ‘administrative’ (how the trust is to be ‘run’).
The trustees must act solely in the interest of beneficiaries. The beneficiary has a right to have the trust administered, the trust fund invested and income distributed in accordance with the terms of the trust. A beneficiary who is of “full age” (generally 18 in England, Wales and Northern Ireland and 16 in Scotland) should be told of his or her interest in the trust.
The trust deed will set out a mechanism for the appointment of trustees. This mechanism must be followed – if it stipulates that the appointment must be by way of deed then a duly executed deed is essential.
The investments comprising the trust fund should be in the name of the trustees.
Certain parts of the trust fund might require management. For example, in the case of a property which is let out then the trustees need to ensure that rent continues to be received, the property is adequately maintained and so on.
It is a fundamental duty of trustees to invest the trust fund so that the beneficiaries’ interests (whether in terms of income or capital appreciation) are enhanced.
The duty of the trustees in relation to investment is to use their powers in the best interests of current and future beneficiaries.
Trustees should also consider whether they are under any duty to sell any part of the trust property.
Trustees can access a wide range of potential investments. Which particular product, or combination of products, is used depends on the specific requirements of each trust. A trustee must from time to time review the investments and consider whether having regard to the standard investment criteria, investments need to be varied.
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The standard investment criteria are:
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What are the trustees’ duties in relation to investment?
“Trustees must invest the trust fund and not simply sit on cash. Assets must be acquired (or retained) to produce a financial return for the trust.” [Stone v Stone (1869) 5 Ch App 74]
Trustees have a duty of care.
“The duty of the trustee is not to take such care only as a prudent man would take if he had only himself to consider, the duty is rather to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.” [re Whiteley) (1886) 33 ChD 347]
And on further appeal to the House of Lords:
“Business men of ordinary prudence may, and frequently do, select investments which are more or less of a speculative character; but it is the duty of a trustee to confine himself to the class of investments which are permitted by the trust, and likewise to avoid all investments of that class which are attended by hazard.” [1887 12 App Cases 727]
The duty of the trustees in relation to investment is to use their powers in the best interests of current and future beneficiaries.
“In the case of a power of investment, as in the present case, the power must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the
Investments in question; and the prospects of yield of income and capital appreciation both have to be considered in judging the return from the investment.” [(Cowan v Scargill) [1984 3 WLR 501]
Trustees should obtain the best rate of return regardless of their own, or the beneficiaries’, political, social or moral views.
Trustees have a duty to seek ‘proper’ advice unless they conclude that in all circumstances it is unnecessary to do so.
Trustees must act impartially between the beneficiaries and ensure that one beneficiary does not benefit at the expense of another. Consider for example an interest in possession trust where one beneficiary is entitled to income with others entitled to capital on the death of that person. Those ‘competing’ beneficiaries should be treated fairly unless perhaps the settlor had made it clear that one class of beneficiary was to be preferred over another.
A trustee must not place themselves in a position in which their duties as a trustee conflicts with their private interests.
The trustees can only act within the terms of the trust deed. If they act outside those powers they are said to be in breach of trust. A breach of trust will cause some detriment to the beneficiaries. As trustees can only act in the interests of their beneficiaries a newly appointed trustee is obliged to check that there have been no previous breaches of trust. If there have been such breaches the situation must be remedied. The beneficiaries may absolve the trustees from responsibility for the consequences of the breach. Otherwise the trustees have to make good any loss to the trust fund from their own resources.
A trustee has a general duty not make any profit from the fact that they act as trustee. Nevertheless, professional trustees may charge for their services in a number of circumstances, including:
HMRC make it clear that a record of trust income and expenses must be kept to complete the trust and estate tax return and pass information to beneficiaries.
You can find out more information at:
https://www.gov.uk/guidance/trust-record-keeping-for-tax-purposes
The HMRC guidance details
Clearly a non-income producing insurance bond will simplify the accounting and record keeping requirements.
In a discretionary trust the trustees will have a power to accumulate income. Accumulation is the process whereby, under the terms of a trust, the trustees are authorised or required to accumulate income, thereby converting it into capital.
In ‘interest in possession’ trusts the beneficiary (or beneficiaries) having the right to income must receive that income – within a reasonable period of the trust’s accounting year end. The beneficiary will need to include this income in their self-assessment tax return so needs to know the quantum of income fairly promptly.
Further reading
The basic principles to follow when acting as a trustee (ICAEW) Types of trust (HMRC) https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem1560
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