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Tried and trustee

Our client approached us, having been asked by her mother’s financial adviser to act as a trustee for a gift & loan inheritance tax scheme. She asked what responsibilities she would be taking on and whether she could agree and leave everything to her mother’s adviser.

It is quite common for family members to be approached and asked to become a trustee of various arrangements, from life insurance policies taken out to provide protection benefits to pension policy death benefits and a variety of types of investments.

Unfortunately, it is equally common for potential trustees simply to accept what can be quite onerous responsibilities with no knowledge of what they are undertaking or the responsibilities that they are assuming.

First, looking at the general requirements, the trustees are responsible for oper- ating the trust in accordance both with the terms of the trust and in accordance with relevant legislation.

The most recent relevant legislation was the Trustee Act 2000 and so we should turn our attention there.

Put simply, the trustees are responsible for the correct administration and operation of the trust. They are responsible to the beneficiaries, in whose interests they are acting, and to the Inland Revenue, to whom they must account for and pay any relevant tax arising.

If and when the trustees take on a liability, for instance accepting a loan, then they must ensure the trust is operated in such a way that it is capable of servicing and repaying the loan as and when due.

They may appoint agents and advisers and, indeed, one of the terms of the Trustee Act 2000 is to ensure that trustees appoint professional, qualified and regulated financial advisers when drawing up and operating the investment of the trust’s assets.

The investments need to be planned and should meet the stated written objectives of the arrangement. It is as well to appoint a legal adviser, in part because most insurers only provide trust wording in draft form for consideration by the settlor and trustees. It is their responsibility to seek legal advice on the relevance and effectiveness of any trust wording.

If the trust requires self-assessment or other tax returns to be completed or if the trustees are in any way in doubt about the taxation of the trust, they may want to appoint, or at least consult,a tax specialist or accountant. However, the appointment of agents in no way reduces the trustees’ responsibility or their liability if things go wrong.

Finally, looking specifically at the gift & loan inheritance tax plan, if you were to accept the role as trustees you would have to balance the possibly conflicting objectives of the arrangement.

The trustees must be able to pay the settlor, on demand, any loan repayments they require. This means that the trust should have a degree of liquidity and any investments must facilitate likely payments to the settlor.

It is essential to work closely with the settlor to ensure that you are aware of their likely loan repayment requirements in advance so you can plan to meet them.

The trustees must also take into account the interests of the trust beneficiaries, who are no doubt expecting to receive a capital sum on the death of the settlor, being the difference between the value of the trust assets and the remaining balance of the loan, if any.

Therefore they need to consider investing to achieve long-term capital growth, which almost inevitably means some risk to the invested capital.

This brings us to possibly the most significant risk of all to the trustees in this type of arrangement. So far, we, the trustees, have had to balance the conflicting requirements of liquidity and longer-term investment growth.

However, the loan is also repayable on the settlor’s death. We have experienced a period of sharp falls and high volatility in the UK equity markets and many of the funds invested in by the trustees of gift & loan schemes are below the outstanding loan repayment value.

If this situation occurs on the death of the settlor, then the trustees become personally liable for the outstanding balance.

Following the death of the settlor, the right to the loan passes to the estate of the personal representative of the settlor. They can, if they wish, defer repayment and continue the investment and benefit from an income but this is voluntary and they can insist upon repayment of the outstanding loan by the trustees.

I appreciate you would like to help your mother and she would like to involve you in her inheritance tax planning. If you want to help her and protect her interests and your own over the coming years then by all means become a trustee.

However you must appreciate the responsibilities and liabilities the role entails and you must remain actively involved and take your duties seriously.


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