How to make your life easier as a trustee

Tax implications of trusts

How a trust invests and withdraws money can significantly impact its tax position. For instance, a discretionary trust faces various tax rates: [1]

Beneficiaries can claim tax credits against tax paid within the trust, especially if they are non-taxpayers, which means these are not necessarily the ‘effective rate’ of tax paid. Keep in mind that discretionary trusts established since 2006 incur periodic charges every 10 years and exit charges based on the trust’s value.

The Trustee Act 2000

The Trustee Act 2000 extends the Trustees Act 1996 and outlines the powers and responsibilities of trustees when investing trust assets. It boils down to these four key principles:

Seeking proper financial and investment advice

One important part of the trustee act is that it lets trustees bring in professionals to help them out, instead of trying to handle everything themselves when they might not know all the ins and outs. For instance, I recently worked with a client who was a trustee for a trust set up by grandparents to support their grandson through university. With some careful financial planning to figure out how to cover tuition and living expenses, and making sure we used the grandson’s available allowances, we were able to ensure that the tax was recovered through the tax credits from the trust and ensure the maximum net income could be received.

Maintaining a truly diverse investment portfolio.

The next two principles overlap in nature but have some distinct differences. Diversification is one of the key foundations of a well-managed portfolio. If we look at 2022, for example, a year where investment returns went against the grain by bonds and equities falling simultaneously, diversifying across asset class, geographies and the use of alternative asset classes to generate returns, regardless of traditional market conditions was essential to achieve a well-constructed portfolio. Outsourcing to investment managers who are experts in their field can help to construct a portfolio that remains suitable over time.

Ensuring ongoing suitability in line with trust provisions

The suitability of the trust over time is a trustee’s responsibility which includes, but is not limited to, the investment solution. A careful balance of tax position of the trust and beneficiaries, investment approach through objective financial planning, and generational wealth planning all fall under the ongoing suitability of the trust. With changes in circumstances of beneficiaries, this is a part of an ongoing balancing act of the trust itself and the ultimate beneficiaries of the assets within the trust.

Reviewing the investment solution regularly, in line with trust provisions

The Act allows trustees to delegate to a Discretionary Fund Manager (DFM) when a suitable investment policy statement is provided.[2] This approach considers various factors like trust objectives, income needs, and ethical preferences. A good investment manager will review on an ongoing basis the trust situation to ensure the investment solution that is provided remains suitable, and any changes as a result of this can be made.

Trustees also have a duty to balance the interests of different beneficiaries when making investment decisions that may affect them differently.

What happens when things go wrong? Daniel v Tee, 2016

Without effective financial planning, things can go south, as seen in the case of Daniel v Tee in 2016. Two trust beneficiaries sought compensation for poorly managed trust assets. This mismanagement resulted in a total loss of £1,476,076 over just two years. An expert estimated the trust’s value in 2002 could have been £3,460,000 with proper investment, in line with the trust objectives, primarily down to over-exposure in equities to the extent that 85% of the total portfolio was invested in global equities, taking a considerably higher amount of risk than was necessary for the trust. The trustee’s argument to counter was based on them acting honestly and reliably and the losses were not caused by a breach of any trust. [3]

The judge sided with the claimants, finding that the trustees failed to devise a realistic investment strategy, conduct periodic reviews, and maintain a well-balanced portfolio. In this case, the excessive focus on equities led to significant losses. [4]The trustees had sought financial and investment advice but had failed to establish a suitable investment strategy, highlighting the importance of high-quality financial planning and investment advice for trustees. True diversification of assets across geographies and asset class could have improved the outcome in the above case, where excessive equities led to significant losses in troubled markets.

Summary

Ultimately, the responsibility for trust decision-making rests with trustees. They are chosen by the settlor to act diligently and in line with trust objectives. As long as trustees oversee the trust assets effectively and in line with the trust’s goals, they can breathe easy.

Managing trust assets is the trustees’ responsibility, and they should seek all available help if it is not a role they are used to or feel comfortable in undertaking.