Spring Clean your Trust
Trusts can be set up for a number of different reasons. Some people set up trusts during their lifetime – possibly as part of a life insurance policy or an investment, such as a Discounted Gift Trust or a Loan Trust, or as protection for assets like property or funds for grandchildren. Sometimes trusts are created under the terms of a will, for example, holding funds for children until they reach a certain age, or holding a property (or a share of it) on trust for a spouse during their lifetime to protect the equity against remarriage or care fees.
It can be easy to think that once the trust has been set up, the property in the trustees’ names or the money invested in an account or investment, that there is nothing further to do. However, over time, the law can change, as can the investment markets and the circumstances of the trustees and beneficiaries. It is therefore important to keep reviewing the trust to make sure that everything is up to date and compliant, and that it will work as you want it to when the time comes, without any nasty surprises.
Here are some of the common issues with family trusts:
1. Has the trust been registered with the Trust Registration Service?
Almost all trusts (except a few specific trusts which are exempt) need to be registered with the Trust Registration Service (TRS). This includes new trusts, and those which have been in existence for a number of years. Even trusts that do not have a tax liability or which are of a low value need to be registered. Many family trusts that do not hold cash or investments (e.g. ones that hold land or property or company shares) may not have been prompted to register their trusts. If you are a trustee, it is important to check whether yours has been registered and whether it needs to be. Whilst it is possible to register the trust online yourself, you may wish to take some advice from your solicitor or accountant to make sure that this is done correctly.
2. Review the trustees – do any of the trustees need to be changed or retired?
Trusts are often established with friends or family as trustees. They need to be available to act, be in good health, and able to make decisions. Most trusts also require a minimum number of trustees to be in place for decisions to be made. It is therefore important to regularly review the named trustees, including those which relate to insurance policies. If trustees cannot be found, have become incapable or have died, it can cause complications and delays when the time comes to accessing the assets.
Trustees can usually be retired and appointed with a relatively straightforward document that your legal adviser can prepare. In some circumstances, it is necessary to make an application to court to remove a trustee who has become incapable, which is a more costly and lengthy process.
3. Review the Beneficiaries – have any circumstances changed?
Many trusts set out who the presumed beneficiaries will be, but also give the trustees the power to change this if circumstances change. It is therefore important to regularly review the trust to ensure that the right people will benefit. For example, named beneficiaries may have died or had marital/financial problems, which would make it unsuitable for them to receive money from the trust at that time.
4. Tax – has anything changed which may require the trust to complete a tax return?
Trusts are generally subject to three main taxes: Income Tax, Capital Gains Tax and Inheritance Tax. Trusts have to report to HMRC when they receive income (e.g. interest on savings, dividends on investments, rent on land or property). They also need to report when they sell investments or land, if they have made a gain, pay capital gains tax, or actively claim relief if it is available. Some trusts also need to report to HMRC for Inheritance Tax and/or Capital Gains Tax purposes when they distribute the assets held in the trust (e.g. cash, investments or land) to a beneficiary.
For example, when a property held in a trust is sold, there may be a gain to report to HMRC if the value of the property has increased since it was put into the trust. If the proceeds of sale are distributed to beneficiaries, depending on the type of trust, it may require an Inheritance Tax return. If the proceeds of the sale are going to be kept in the trust and invested, an Income Tax return may be needed going forward.