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
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
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
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't 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?