A Trust is basically a way of controlling an asset for the benefit of another person so that they do not have absolute or immediate control over it. A trust may arise under a person’s Will or be set up in their life time, and the rules regulating a trustee are found in the Trust Deed setting up the trust, in statute law and also in decided court cases which are not fully or clearly covered by statute.
The person setting up a trust is called a Truster or Settlor, and they appoint in the Trust Deed one or more Trustees who hold and administer the Trust Assets for the benefit of the Beneficiaries. In Scotland, if a Settlor is also a Trustee they must appoint at least one other person to act with them, and a Trustee must be aged at least 16 years.
The duties of a Trustee can be onerous, and careful consideration is advisable before you agree to be a Trustee. An all too common but completely wrong approach is to be reactive rather than proactive. It is necessary to be familiar with and understand the terms of the Trust Deed, so that you know what you can and cannot do. If you act beyond your powers both the Beneficiaries and third parties may challenge your actions and it is possible to become personally liable.
Unlike the position in England, where all Trustees must agree before acting, in Scotland a majority decision will usually suffice, unless the Trust Deed states otherwise with regard to any particular matter. A sole Trustee cannot retire unless another Trustee is validly appointed to take their place, and even then a retired Trustee may be held liable for any acts or decisions made while they were a Trustee. In certain circumstances a Trustee can be forced to retire, although this usually happens only if they become incapable, neglect their duties, cause loss to the Trust or leave the UK for more than 6 months.
You will also need to keep the suitability of the Trust assets under regular review and to safeguard them. This may well involve you seeking and acting upon professional advice. If the Trust assets become unsuitable in changing circumstances you may have a duty to change them for something more appropriate. For example, favouring high income over capital growth may be unfair to one or more of the beneficiaries who may challenge you.
Keeping adequate records of your decisions and actions is an important aspect of Trusteeship, and being proactive will involve regular reviews of the Trust Assets. One of these records will be Trust Accounts, setting out the value of capital at the beginning and end of a certain period, usually one year, as well as the growth (hopefully!) in value and any income received and sums paid out as liabilities or as distributions to beneficiaries.
It is a principle of Trust Law that a Trustee cannot use the Trust Assets to benefit themselves personally, unless this is specifically authorised under the Trust Deed, and even then there are usually restrictions on this. This can be a particularly difficult line to tread if you are both a Trustee and a Beneficiary, although in these circumstances it is common for a completely independent and impartial (non-Beneficiary) Trustee to be appointed.
If the Trust Assets include a house you may have a duty to insure it for its full replacement value, and the liability for insurance premiums may fall upon the Trust Assets (ie a separate cash fund) or a Beneficiary having the right under the Trust to occupy the house. In these circumstances the Beneficiary may also have a duty to keep the house in a reasonable state of repair and to meet the usual outgoings (eg utility accounts).
Trusts designed for the benefit of a minor Beneficiary typically require the Trustee to hand over the Trust Assets to the Beneficiary when they attain a certain age, but before then the Trustee may have to consider whether it is appropriate to pay some income or capital for the education of the Beneficiary.
When a Trust ends, or sometimes before this happens, there may be tax payable and it is the duty of a Trustee to make the appropriate tax returns to HMRC and pay the tax that is due on time.
If you have any queries regarding the issues raised in this article please contact Chris Wallace in our Private Client Department.