Over the last few weeks, I have been trying to identify the perfect individuals to select as trustees of a trust holding investments and/or life insurance products as assets.
After pretty much rubbishing the settlor's spouse as a candidate – except where the settlor deludes himself or herself that they are in and likely to remain in a blissfully happy marriage – I started to look at close friends and business colleagues.
Before expanding on this, it is perhaps worth looking at a further danger in selecting the wrong trustee or trustees – misappropriation of trust assets. Consider the situation where an individual effects an own-life, own-benefit life policy with a sum assured of £1m and selects as trustees himself and his brother Dave, who is also a close friend and business colleague. The settlor is not married and lists his young children from a former marriage as the initial beneficiaries, although they are not made aware of this nomination, using a standard life insurance company trust form with the list of potential beneficiaries unaltered.
The settlor then dies and the £1m benefits from the life policy are paid to the trust. Dave, as sole remaining trustee, elects to pay all this money to himself, as a potential beneficiary, completely ignoring the settlor's obvious wishes that the monies should be paid to the children.
End of story, the moral of which might be generally to avoid having as a trustee someone who is also a potential beneficiary, except if this is done deliberately, as we will look at in future weeks, where the spouse might be an obvious tax planning candidate for these combined roles.
What if the trustee – Dave, in our example – is not also a potential beneficiary? Here, the death benefit is again paid to the trust. But consider how the cheque from the insurance company is made out – generally to “The trustees of XXXX (the settlor), deceased.” With this cheque, Dave opens a bank account in the name of the trust, furnishing (if, indeed, the bank takes the necessary precautions of asking) the trust document and his appointment as sole remaining trustee to establish himself as the sole signatory on the account. He then withdraws the £1m for his own use, telling no one of his misappropriation.
Who is to find out? The insurance company has made the payment in the correct manner to the correct person. The bank has correctly opened and operated the bank account. No one knows Dave was not entitled to the money personally and did not use the money correctly and it is nobody's responsibility to ask or check.
With this additional risk of nominating a dodgy trustee, we can perhaps get closer to deciding whether a close business colleague or family member might be appropriate for selection as a trustee. Certainly, I would suggest there should be at least two of these people (but probably not many more than this number) if this category of candidate is to be considered at all.
Moreover, it is perhaps worth repeating that these people should usually be excluded as potential beneficiaries unless there is good reason to include them.
If, after taking into account the considerations we have discussed in these articles over the last couple of weeks, the trustees include spouse, family, friends or business colleagues, it is worth reviewing the selection periodically – ideally, every year – to reconsider each person's appointment and the overall balance of trustees.
As part of this, it should be determined whether one or more existing trustees might be asked to resign and/or whether it might be advisable to bring one or more people into the trust as replacement or additional trustees, at least as a check or balance to the existing trustees.
This review should verify the continuing desire of the settlor to maintain the current trustees, the continuing desire of those people to act as trustees and, indeed, confirmation that they are still alive. True, this places further servicing responsibilities on the adviser but most will see this as a positive duty giving rise to further consolidation of the client/adviser relationship.
Many of the dangers of selecting individuals as trustees are based around the lack of certainty that the trustee will want to and be able to act – for example, if they lose interest or die – and the lack of provision for compensation if the individual misappropriates the trust's assets, either negligently or fraudulently. For these reasons, it may be advisable to consider a firm of accountants or solicitors as the sole trustee or one of a number of trustees.
In favour of this suggestion, the trust could be expected to benefit from impartiality (as regards the selection of beneficiaries, for example), continuity (namely, there is no reliance on the continued interest or survival of one individual), potential compensation (in the event of loss due to negligence or fraud) and knowledge and experience of trust matters (where such expertise is legitimately claimed by such a firm).
Against these potential benefits, it should not always be taken for granted that all accountancy and solicitor firms will be able to fulfil all these duties properly. Trust law is just as much a specialist area of the law as pension transfers, for example, is a specialist area of personal financial planning.
Moreover, relatively few firms of accountants will have specialist trust knowledge and even fewer will be able to combine such knowledge with ability or experience in the field of investment portfolio planning. This latter failing also applies more or less equally to law firms.
The main drawback of appointing accountancy or law firms as trustees is, of course, the level of charges they levy, which are frequently seen as extortionately high where, for example, on the face of it their only duty is to receive the lump-sum benefit from a single life insurance policy and pay it to the initial beneficiary stated in the trust document, unless there is good reason to the contrary.
In defence of their charges, however, it can be claimed that many trusts start life with a simple appearance but change in nature as more assets are transferred into them and/or the identity and certainty of the desired beneficiaries and their rights in the trust assets become increasingly blurred.
Whatever the rights and wrongs of the level of charges of these professional firms, it remains my personal belief that law firms (much more so than firms of chartered accountants) represent the only realistic choice as a trustee for most trusts.
IFAs agreeing with this view should, of course, ascertain the answers to the questions raised above and, certainly, should verify the level of charges appropriate to different types of trust. In my experience, law firms will be more than happy to negotiate a special rate where they are asked to act as trustee where the only trust asset is a death-benefit insurance policy.
This is especially so if they can expect a number of such appointments from a single source, that is, the IFA firm, and even more so if they can expect most of the suggested trust forms to be one of only three or four main types (that is, where the IFA uses the suggested trust forms of the three or four main insurance companies he might use for this class of business).
Do not underestimate the willingness of law firms to negotiate their fees to a more realistic level for these standard appointments.
Moreover, it is also my experience that law firms may be open-minded about the suggestion that these trusts should appoint the introducing IFA as the trust's investment adviser with appropriate remuneration.
A nice relationship between two professional firms but one which brings us on to the suggestion that the IFA firm itself might consider promoting itself as a trustee. We will bring the whole issue of trustees to an end next week, starting with this thought, before moving on to other trust issues.
In the middle of my article published on June 7, I carelessly transposed the words trustees and beneficiaries in the George example. This should have read: “He glosses over the part of the trust form listing the categories of potential beneficiaries [not trustees] This is perfectly legal and ethical – simply, she has bypassed the named initial beneficiaries [not trustees] in favour of the potential beneficiaries.” My apologies for any confusion this may have caused.