Trust Administration

Trust Administration

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I have a client which is an old grandparents A&M trust, which has had the necessary done to convert it to a discretionary trust, capital payable to the two children when they reach 25.  Trustees are the parents.  Both children currently under 18.

In the past, money would be paid out to the parents after the event - ie parents would keep a tally of money spent and then claim from the trust once or twice a year.

This year, they have opened up a current account in the trust name and put some trust funds in there, and are paying for everything direct from the trust - so there is quite a big volume of transactions going out - some for only a few £ (eg weekly bus ticket for school), others quite a bit more. 

I am not worried about whether the trust can pay for the items that it has paid for - all seems quite reasonable - school fees, trips, music lessons etc etc, but I am concerned that no consideration is made into how these payments are structured when they are made.  They pay for everything as they go along with no thought as to whether it is a capital payment or an income payment. 

One of the children reaches 18 this year, and then capital payments to her would be subject to an exit charge, so I can see this all going horribly wrong.  The solicitor seems ok with all of this but I am concerned.

Any thoughts?

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By WhichTyler
11th Jul 2014 13:12

What is the difference?
When the parents paid first, someone had to do a post-hoc analysis of capital or income, didn't they? So is your concern with the setting up of the current account, or the total amount of the drawings?

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By taxhound
11th Jul 2014 13:35

ad hoc

In the past, the distribution did not happen until the trustees were reimbursed and then it was in one lump sum, so just one or two distributions per year. 

Now we have multitudes of distributions each year - several in a week.  Maybe not such a big issue now (although no one ever seemed to worry about whether a distribution was capital or income until after the event, which is surely not how it is supposed to be), but once the beneficiaries reach 18, then any capital payment will be subject to an exit charge so this just won't work (or it will be a logistical nightmare and I foresee penalties and late filing notices). 

I guess I am comparing this scenario with that of a shareholder who draws money out of his company whenever he feels like it without reviewing the accounts or drawing up dividend vouchers, and I know many people on here would have something to say about that!  So should I not be concerned that more structure is not put into the administration of the trust?

 

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