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Settlor of the land

Over the last couple of weeks I have started to look at the main features

of, and the parties to, a trust, with particular anticipation of a deeper

discussion of the more frequent use of trusts in fundamental financial

planning transactions.

It is my contention, in this respect, that far too few “ordinary” life

policies are written or transferred into trust and even the polices – and

pension benefits – which are placed in a trust miss some important,

valuable and simple opportunities to make or save money.

Working towards this end, I would this week like to examine the type of

person – or indeed organisation – who should be considered for appointment

as a trustee.

First, it is important to rem-ind ourselves briefly of the fundamental

powers and duties of a trustee of a typical trust. These are wide ranging,

with powers including (depending on the terms of the trust deed) the power

to nominate future trustees and the power to determine who, from the

potential beneficiaries listed or named in the trust, should benefit from

the trust property.

This latter point is particularly important for us to note (although we

will discuss it further next week when we look closer at beneficiaries in a

trust), as, in my experience, far too many IFAs believe the benefits from a

trust will always automatically be paid to the initial or default

beneficiaries unless none is named or they are dead.

This is not true. In most common forms of trust used – especially those

used with life policies – the initial or default beneficiaries are simply

those whom the settlor has initial nominated to receive the trust benefits.

The trustees may instead, in determining the person or people to whom they

will pay benefits, select one or more people named or described in the list

of potential beneficiaries.

It is vital the reader fully understands and acknowledges the importance

of this last point. The settlor should not be led or allowed to believe

that the person or people he or she names in the initial document

establishing the trust will be the person or people who will actually

receive the payments from the trust.

The settlor must understand that, unless a different form of trust wording

is used (that is, different to the standard wording almost invariably used

or recommended for life policies), the list of potential beneficiaries he

or she agrees to has just as much importance as the list of initial

beneficiaries he selects at that time.

At the risk of unnecessarily repeating myself, but with the awareness that

this point is often misunderstood, I will use a simple example.

George effects a term insurance policy on his own life and completes the

standard trust form supplied by the insurance company and recommended by

his IFA.

He wants the money to be paid to his children in the event of his death

and names them as the only initial beneficiaries. He glosses over the part

of the trust form listing the categories of potential trustees as (even if

he thinks about this section at all) he believes this simply describes the

range of people he can subsequently select in place of his children if he

changes his mind about them receiving the policy benefits. He appoints

himself and his wife as the trustees.

George dies, leaving his wife as the only trustee. She, knowing or being

better advised about the powers of trustees and the rights of

beneficiaries, notes she is one of the potential beneficiaries and so

distributes all the money to herself. This is perfectly legal and ethical –

simply, she has bypassed the named initial trustees in favour of one of the

potential beneficiaries.

A first few pointers from this example. Do not overestimate the rights of

the initial beneficiaries. Do not underestimate the potential rights of the

potential beneficiaries (and therefore take as much care in listing or

describing them as should be taken in the listing or description of the

initial beneficiaries) and perhaps give some thought to the dangers in

appointing as one of the trustees someone who is, or could also be, a

beneficiary under the trust.

Moreover, as we are now starting to move towards features of desirable and

undesirable trustees, note should be taken of the possibility that a

trustee may favour, out of the potential beneficiaries, someone who he or

she knows would not have met with the approval of the deceased. This risk

could be particularly severe where there is animosity within certain

sections of the family and those out of favour with the deceased settlor

could nonetheless be paid the benefits if in favour with the trustee.

“I won&#39t let anything like that happen to me,” proclaimed one of my

clients some years ago when I brought the importance of these matters to

his attention while determining a suitable form of trust and wording. “If I

sense anything like that is about to happen I will simply sack the other

trustee and bring in someone I can trust.”

How wrong someone can be? First, he forgot that the situation would not

arise until a payment was to be made out of the trust. As the only asset of

this trust was to be the term insurance policy we were just arranging, he

would, by definition, be dead when the unfortunate problem materialised. So

the remaining trustee would have a free rein in determining the recipient

of the substantial sum assured.

Second, and this brings us on to our next issue worthy of consideration in

selecting trustees, very few trust wordings allow a trustee to be sacked

unless he or she wants to resign or commits some transgression such as

bankruptcy, insanity or going to live abroad for an extended period of time

(usually one year).

This second point is also commonly misunderstood. Most IFAs (again, if

they think about the issue at all) seem to believe that a settlor can

simply sack and replace a trustee at their free will and discretion.

The smarter IFAs realise that this power – even if it existed at all –

must be vested not in the settlor as such but in one of the trustees (who,

therefore, they reassure themselves, will presumably also be the settlor).

In fact, I must stress again this power rarely exists in trust forms and

so, once a trustee has been appointed, it could be extremely difficult, if

not impossible, to get him removed against his wishes.

I am told (reliably, I believe) that the reason that trust forms do not

give one of the trustees the power to sack other trustees is the Inland

Revenue could see this as giving the settlor the power to remain in control

of the trust property (assuming the settlor appoints himself as a trustee,

and giveshimself the power to sack other trustees) and, therefore, never

really giving the property away – thus leaving any IHT-saving aspirations

of the trust open to attack.

So now we have to consider the power of trustees to pay trust monies to

any of the initial or the potential beneficiaries and the lack of power of

the settlor to change his mind about who should act as trustees after the

trust has come into force.

Whoever said life policy trusts were simple and straightforward? (Actually

the person who first trained me in trusts almost 20 years ago).

I hope these issues do not make you believe trusts are an unnecessarily

complicated and dangerous option which should be invariably omitted from

consideration when effecting life insurance policies.

Rather, acknowledge that they should be a key part of the life policy

recommendation, acknowledge the difficulties and dangers and resolve to

tackle or avoid them in the most effective way available to the client.

That is where we are heading in this series of articles, starting next

week by pinpointing the type of person or organisation that we should

consider as trustees. Could this even include the IFA?

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