Most advisers will have spent at least some time considering whether and, if so, how trusts can help to achieve the financial planning objectives of their clients.
Either through examination studies or through practice, advisers will be well aware of the legal fundamentals underlying trusts. They will know that the three key parties involved in a trust are the settlor, the trustees and the beneficiary(ies).They will know about the key taxation aspects of trusts, especially in connection with inheritance tax and, increasingly, in connection with income tax and capital gains tax.
This will be especially so with the imminent increase of the trust tax rates on income increasing to 42.5 per cent and 50 per cent from April 6, 2010 for dividend and non-dividend income respectively.
It is maybe less likely that serious amounts of time will have been spent considering the perpetuities and accumulations provisions applying to trusts. The former (perpetuities) is about how long a trust can remain in existence. For the latter (accumulation), it is about how long trust income can be accumulated for and remain undistributed.
Broadly speaking, the current maximum permitted perpetuity period under English law is (in most cases, but there are other periods that can be used) 80 years. The maximum permitted accumulation period is 21 years. These facts are important to keep in mind when drafting trusts.
Well, it is all about to change. The Perpetuities and Accumulations Act 2009 received Royal Assent on November 12. However, the substantive provisions of the act will not come into force until a commencement order is laid in Parliament, which is expected to be some time in 2010.
The main aspects of the 2009 Perpetuities and Accumulations Act are as follows:
– A single 125-year perpetuity period will always apply (although a shorter trust period may still be chosen) but there is a clear exemption for charities and all pension schemes which are already not subject to the rule against perpetuities.
-There will be no restrictions on the accumulation of income for non-charitable trusts, that is, it will be possible to accumulate income for the entire 125-year period.
-For charitable trusts, two accumulation periods are available – either 21 years or the life of the settlor.
When will the act come into effect and to which trusts will it apply?
-It will apply to all lifetime trusts set up after the 2009 act provisions come into force.
-The act will not apply to a trust created under a will which is executed before the provisions come into force, even where the testator dies after that date.
-Where, under a trust created before the provisions come into force, there is a “lives in being” perpetuity period, it can be difficult to determine when the perpetuity period ends. The new act provides that, in such cases, the trustees can execute a deed providing that the perpetuity period will become a fixed 100 years.
-Where a special power of appointment is exercised to create new trusts, the act confirms the current law that the perpetuity and accumulation periods of the new trust will be the same as the period relating to the trust containing the power. Special rules apply to appointments made under pension scheme trusts.
-The act applies only in England and Wales.
The most important change is the abolition of the current rule against excessive accumulations for non-charitable trusts. The current rule can impose unnecessary constraints on the trustees as far as investment of the trust funds is concerned as well as forcing trustees to distribute income to beneficiaries when the trustees feel it would be contrary to the beneficiaries’ best interests. It is frustrating that even though we now have the act, we have to wait for the new provisions to come into effect.
As the application of the new provisions will not be retrospective, any trusts that are created before the commencement order will still be subject to the old provisions. However, potential settlors who would prefer to create a trust under the new rules need to consider the cost of delaying, especially any possible changes to the inheritance tax and capital gains tax rules that may have been introduced in the pre-Budget Report and in the next Budget.
The reason why charitable trusts will continue to be subject to the rule against excessive accumulations is given as one of public interest – it is better that income is spent for the public benefit rather than accumulated indefinitely.