Placing trust in trustees
John Humphreys, Inheritance Tax Specialist at WAY Investment Services Ltd.
At a recent seminar, questions from the audience of advisers brought us on to the subject of trustees, and how and why to choose them. It is a decision which can have very long-lasting and far-reaching effects for families, and certainly one to be taken with due care and consideration. In the first place, transferring any assets into trust can be a very big decision for families, and it is important not to underestimate the emotional complexity that can accompany it. Once made, equally important is the question of who should manage the trust. Acting as a trustee is a significant responsibility, requiring skill and experience. Whilst previously it was typical to see the role being given to family members, it is becoming increasingly common for clients and their advisers to consider appointing a professional trustee for new trusts, or even switching older family-run trusts to be managed by professional trustees.
It is essential for those involved to understand the responsibilities at stake. Being a Trustee involves much more than simply being trustworthy. The trustees are the legal owners of the trust, and it is their responsibility to administer the trust fund in the best interest of the beneficiaries. Two or more individuals must be appointed, and all trustees must agree on the decisions taken regarding management of the trust. The Trustee Act 2000 introduced a number of new reforms, including a duty of care. Increased regulation, as well as increased litigation, have served to make the roles and responsibilities of trustees more complex. A trustee today needs to be expert in law, an investment adviser and a tax specialist. With this rather tall order, in practice trustees will often take advice about many aspects of running a trust, which may incur a cost. They then need to spend due time evaluating the advice and ensuring they are acting on it properly and appropriately.
In practical terms, there is plenty of paperwork involved for trustees. Since 2017, it has been necessary for all trusts to register with the Trust Registration Service. The trustees will need to complete annual accounts and tax returns, any additional tax reporting requirements and arrange payment of any tax due. They will also need to administer any reversion payments, income distributions, and payment of trust expenses. All the while they need to ensure that investments held in the trust are reviewed regularly to ensure they remain suitable, as well as consider tax implications of their decisions. The needs of the beneficiaries will also need regular review, in line with the type of trust and wishes of the Settlor.
Trustees need to act impartially, treading the diplomatic and sometimes delicate line between settlor and beneficiaries, as well as ensure confidentiality. The situation where trustees are also named as beneficiaries creates an obvious conflict, making it near-impossible to act in a truly unbiased way. Disputes can, and do, arise. Families also need to consider continuity. Where an individual has been appointed, as opposed to a professional trustee service, those involved need to think what would happen if that person dies or becomes too ill to manage the paperwork. An alternative plot line occurs if the trustees decide to move abroad – for whatever reason – which can make a trust become ‘offshore’ with tax implications for those involved.
With such a long to-do list, as well as the diplomacy required, it is no wonder that family and friends may think twice before accepting an invitation to become a trustee. Conversely, families may well wish to consider the option of an impartial, independent, and expert trustee. An inexperienced trustee may not fully understand their duties, and fallings out do happen. Getting it wrong and making mistakes can cost time, money, and immense emotional upset. People may not think it will happen to them, but it does, as professional trustees who have then had to pick up the pieces will tell you.
Ultimately, families need to be completely comfortable with the choices they make when appointing trustees, and confident that those they choose understand the roles and responsibilities, and have the skills to carry them out. Advisers are able to listen and to guide. Forewarned is most certainly forearmed when it comes to understanding the implications of the choices made.