The missing trust provisions

Our readers will remember the following paragraph from last month's article:

"The new deadline for registrations for non-taxable trusts in existence on or after 6 October 2020 is 1 September 2022.

The above is a quote from the HMRC's latest update, which, frankly, could be clearer. For example, if a trust is created on 30 August 2022, by what date will it have to register? Doubtless we will have some further clarifications from HMRC."

Well, HMRC indeed obliged and has now confirmed that "…the deadline for registrations for non-taxable trusts in existence on 6 October 2020 is 1 September 2022 and that non-taxable trusts created after 6 October 2020 must register within 90 days of being created or otherwise becoming registerable, or by 1 September 2022 (whichever is later)".

So, back to this month's topic. The reference to the "missing" trust provisions means not a lost trust document but a trust, whether created expressly or by operation of law (a statutory trust) where either there is no trust document at all or a trust has been created, usually by will, but without including any trust powers and provisions (we will call the latter "incomplete express trusts").

The remainder of this article is based on English law as the concept of a statutory trust does not exist in Scotland. Where a trust has been created under Scots law, but it does not include trustees' powers or other provisions, then, statutory provisions, e.g. under the Trusts (Scotland) Act 1921, will apply.

Statutory trusts - the types of trust

When referring to statutory trusts we usually mean those established under sections 46 and 47 of the Administration of Estates Act 1925. These are trusts created on intestacy (i.e. when a deceased person has not left a valid will) in England and Wales.

So, to discuss these further we need to consider those intestacy rules. Here, it is important to remember the changes introduced by the Inheritance and Trustees’ Powers Act 2014 (referred to in this article as “the Act”) which came into force on 1 October 2014.

In relation to the intestacy rules, the Act abolished the pre-October 2014 spouse's/civil partner’s life interest trust so that now, where a deceased leaves a surviving spouse/civil partner and children, the surviving spouse/civil partner will receive the statutory legacy of £270,000 (this was £250,000 until 6 February 2020), the deceased's personal chattels and half the balance of the remaining estate outright (with children or descendants of the children sharing the other half of the balance). Prior to 1 October 2014, the spouse/civil partner would be entitled to a life interest in one half of the estate over the statutory legacy of £250,000, with the remainder passing to the children.

For the purpose of this article the above changes are key. This is because, for deaths on or after 1 October 2014, the only statutory trust arising on intestacy would be a trust for minor children. Where the death occurred before that date and the deceased left a surviving spouse/civil partner and minor children, potentially two different trusts would have been created, a life interest trust for the spouse/civil partner with the children benefitting in remainder, and a separate trust for minor children if any. The statutory trust for minor children will be a "bereaved minor's trust" (TBM) for tax purposes.

So, when dealing with a trust arising on intestacy, despite there not being a trust document, the first thing that an adviser must do is to determine the type of trust. In practice, many advisers will come across statutory life interest trusts such as those mentioned above, where trustees need investment advice. The trustees in such a case would normally be the legal personal representatives (administrators) of the deceased's estate, unless they have appointed replacement trustee(s). There should, hopefully, be a document (such as a form of assent) evidencing transfer of assets from the estate under the control of the trustees of such a trust, (even if they are the same people). In some cases, the trustees would have, helpfully, made a declaration confirming that they hold assets on statutory trust.

Once the nature of the trust has been established, there are likely to be questions in relation to the rights of the beneficiaries and certain powers of the trustees, especially in relation to the investment of the funds.

Statutory trusts - the rights of the beneficiaries to trust income and capital

Under a TBM the beneficiary must become absolutely entitled to both income and capital at age 18. Until then the trustees can accumulate the trust income, however the relevant property provisions for inheritance tax (IHT) do not apply. For tax purposes such a trust comes also within the definition of a trust for the vulnerable.

Under a pre-1 October 2014 statutory life interest trust, the surviving spouse/civil partner is entitled to the trust income, but has no right to receive any trust capital.

In the absence of express provisions (as, obviously, under a statutory trust) the powers of trustees to apply trust income and capital for the benefit of beneficiaries are provided for in sections 31 and 32 of the Trustee Act 1925. Here, the above mentioned 2014 Act also made substantial changes for trusts created on or after 1 October 2014. The original provisions continue to apply to trusts created before that date. Therefore, an adviser must be familiar with both sets of rules.

Section 31 is particularly relevant to TBMs. Under the original section 31 trustees can apply income for the maintenance, education and benefit of a minor beneficiary at their discretion in circumstances in which they consider to be reasonable after due consideration of certain circumstances – including the beneficiary's age and requirements. Once the beneficiary attains age 18, they become entitled to the trust income.

The 2014 Act reformed the trustees' power to apply income during the beneficiary’s minority by removing the proviso that they that have to take account of certain circumstances and instead leaves trustees free to pay out as much of the income as they think fit.

Under the original section 32, trustees can advance up to one half of a beneficiary's presumptive share for their benefit. This includes beneficiaries who may or will eventually become entitled to it under the terms of the trust, such as remaindermen. If there is a life tenant under the trust, their agreement will be necessary before advancement to another beneficiary can be made. However, as mentioned above, no advancement of trust capital to a life tenant (i.e. the surviving spouse/civil partner under a pre-1 October 2014 statutory trust) will be possible.

The 2014 Act modified section 32 in two respects. First, it is now made clear that the advancement can also be made by a transfer of assets (i.e. not cash alone) and this change applies to all trusts whenever created.

The second modification, which only applies to trusts established on or after 1 October 2014, enables trustees to advance up to the whole of a beneficiary's presumptive share to them rather than just one half.

Investing trust funds

In the absence of express trust provisions, the Trustee Act 2000 will apply, which grants the trustees wide powers to invest. Most advisers will be familiar with these provisions. In relation to a statutory life interest trust, the fact that the beneficiary is only entitled to the income will mean that in most cases investment will have to be made in income-producing assets. So, say, an investment bond will not be appropriate. No such restriction will apply to investment of funds held in a TBM.

Appointment, retirement and removal of trustees

These matters are also covered in statute, namely in section 36 Trustee Act 1925. Most problems in this area arise when a trustee loses mental capacity. Generally in such cases, as long as there is at least one other capable trustee, they should be able to appoint a replacement trustee without involving a court application, unless the incapable trustee is also a beneficiary of the trust (say the surviving widow/er under a statutory trust is a life tenant and one of the trustees, which in practice happens frequently, as the widow/er would normally be the person granted the letters of administration). If the incapable trustee is also a beneficiary, then an application to the Court of Protection by the other trustee(s) will be necessary to replace them as trustee.

Incomplete express trusts

Typically, such trusts will have been created in a will, especially where a legacy is left to a minor child or a life interest is left to a spouse/civil partner.

If there is an unconditional legacy to a child under a will, this would normally be an absolute trust. If the legacy is contingent, for example on attaining certain age, the trust will not be an absolute trust. If there are no other provisions dealing with entitlement to the trust income then statutory provisions will apply, in particular the above mentioned section 31 Trustee Act 1925. Once the beneficiary attains age 18, they become entitled to the trust income, even if the entitlement to capital does not arise until later. So, if there is, say, an entitlement contingent on attaining age 21, the trust will be a discretionary trust (or can also be described as an accumulation and maintenance trust (although since 2006 no longer benefitting from the favoured IHT treatment) until age 18 and then an interest in possession trust until age 21.

A trust created in a will of the parent of a minor child may defer the child's entitlement to capital to age 25 and it will then be treated as an "age 18-to-25" trust, i.e. benefitting from favorable IHT treatment.

A life interest for a surviving spouse/civil partner, in the absence of express powers and provisions, will be treated in the same way as the statutory life interest trust described above.

In respect of other "missing" provisions, i.e. the rights to income and capital, investment powers and appointment, retirement and removal of trustees, the same provisions as apply to statutory trusts as described above will also be relevant.

Comment

The above covers the most commonly encountered questions arising in relation to the so called "missing" trust provisions, clearly not an exhaustive list. Whenever dealing with trustees and trustee investment, the same general principles will apply whether there is a comprehensive trust document or not. Clearly, though, the adviser's job is more difficult where no such document exists. On the other hand, at least you won't have to spend ages trying to decipher sometimes very obscure language, often in a very lengthy document.