Trust Terms Explained
The purpose of today’s post is to outline an overview of some of the most common Terms and Clauses written into Trust’s and break down the meaning or purpose of these into plain speak.
List of Common Trust Terms and Clauses
The Clauses and Terms contained within your Trust are going to depend very much on your own personal circumstances and the type of trust used. Below is a list of the most commonly used Terms and Clauses.
Settlor and Trustees
The Settlor is the person who has placed/settled assets into the trust. Trusts must be settled with a Trust (de minimus) payment which in most cases is usually a minimum amount of £10. Any further assets may be directed into the trust by means of a legacy in the Will.
The Trustees are the legal owners of the assets in the trust and they have the responsibility and obligation to manage the assets for the benefit of those named as potential beneficiaries of the trust.
- Under English law, trustees must act unanimously, decisions cannot be made by a majority of trustees unless the trust specifically allows this.
- Trustees should familiarise themselves with the terms of the trust so that they can administer it in accordance with the trust deed.
- The trustees must use their utmost diligence to avoid any loss.
- If they are negligent and a loss arises they could be responsible for that loss to the beneficiaries.
- All dealings with the trust fund by the trustees must be for the benefit of the beneficiaries.
There are several statutory powers and these can be quite comprehensive, below are are some common main powers:
- Trustee powers of investment, section 3 of the Trustee Act 2000 permits trustees to “make any kind of investment that he/she could make if he/she were absolutely entitled to the asset of the trust”. This provision is subject to any restriction imposed by the trust itself.
- Act in the best interest of all beneficiaries. The trustees must judge the suitability of investments having regard to the best interests of all beneficiaries, past and present.
- Exercise reasonable care and skill. A trustee must pay regard to any specialist knowledge or experience that he/she holds.
- Review investments from time to time. Trustees must undertake periodic reviews of the investments held by the trust.
- Take proper advice when considering any investments, or when carrying out a review of the investments of the trust, the trustees must obtain and consider proper advice.
- Power to apply income for the benefit of child beneficiaries. The trustees have the discretion to apply the whole or part of the income of a trust for the maintenance, education or benefit of a child beneficiary.
- Power to delegate. The Trustee Act 2000 empowered trustees to delegate to agents any of their functions except certain defined responsibilities.
The Trustees’ Common Law Responsibilities / Duties
Below are just some of the many Common Law Responsibilities a trustee has:
- Duty to take account of the Settlor’s wishes, a settlor may sometimes write a ‘side letter’ to the trustees containing a ‘memorandum of wishes’. This is not binding upon the trustees but stands alongside the trust document to provide guidance to the trustees as to the way in which the settlor would like them to carry out their duties.
- Duty to ensure fairness between beneficiaries, trustees must hold the balance fairly between different categories of a beneficiary. For example if a trust provides that one class of beneficiary is to receive the income from the trust fund during their lifetime and a second class is to receive capital on the death of the income recipient, it would be unfair to the income recipient if the trustees were to invest in assets which produce little or no income, but offered the prospect of greater than usual capital growth.
- Duty to take account of tax considerations, trustees must take into account considerations such as tax and administrative costs when choosing investments.
Memorandum of Wishes
In a standard Will, a Memorandum of Wishes is a letter of Wishes that allows you to make informal gifts such as personal chattels. A memorandum of wishes attached to a trust is different because it provides guidance to the Trustees detailing how the settlor wishes their trust assets to be utilised.
The Settlor of a Trust leaves a Memorandum of Wishes for their Trustees to follow after their death. This ensures monies are used for the chosen beneficiaries.
The maximum amount that can be directed to a Discretionary Trust on death is the inheritance tax Nil rate band (currently £325,000). If any assets above the Nil rate band enter and stay in the Trust, a tax rate of 40% will become due to the HMRC. This is charged on the assets that are over the Nil Rate Band, on the first death.
This is the person who has been given a life interest, or the right to income, in the trust. They may also be listed as potential beneficiaries of the trust.
This is a clause that lists the individuals that the settlor wishes to benefit from the trust assets. As a trust has a perpetuity period/lifespan of 125 years. The potential beneficiaries can also include bloodline planning for further generations that are yet to be born, these are referred to as issue and remoter issue.
This clause will contain details of the powers that are available to the trustees. An overriding power of appointment enables the trustees to change the terms of the trust.