Trusts? No thanks!
Simon Sweetman wonders why advisers and clients don’t realise that trusts are often more trouble than they’re worth.
As I finished putting another trust case in order and getting its tax returns up to date, I reflected on the problems caused by trusts.
There have always been problems. Twenty years ago I was dealing with a countess who wished to do some IHT planning. It turned out, however, that there was nothing to do because she owned almost nothing. All the assets were in a trust of which she was the life tenant. When she married the man who was then the heir to an earldom she was on the stage and well to do families are often cautious about that sort of thing.
But at least they knew they needed advice. The proliferation of nil-rate band discretionary trusts used as a simple inheritance tax (IHT) planning device in recent years has left untold numbers of disconnected trusts out there, all set up by over enthusiastic will planners, even when the size of the estate didn’t merit it.
Passing over the embarrassing ones where the trust accidentally absorbs the whole estate, there are still problems.
Continued...
The full article is available to registered AccountingWEB members only. To read the rest of this article you’ll need to login or register.
Registration is FREE and allows you to view all content, ask questions, comment and much more.
Or if you are already registered, login here
The Law of Trust Accounts
How interesting this is raised after the Income Tax Law re-write and the very welcome HMRC papers (x 2) in 2006!
The true nature of Trust Accounting has been buried by Lincolns Inn and other bodies since the 1930's, for instance:-
1) It is Life Interests / Life tenants who in fact "sign off" as express approval with formal signification an Income and Expenditure account looking at "stated accounts" produced by trustees or a Life Tenant account (in either hands the Gross Income is vested in the lifeowner of income) to derive an agreed balance for a "settled account", not trustee accountants merely "dumping a set of accounts" on beneficiaries
2) Books such as "The Law of Trust Accounts" by Walter Strachan 1937 are still the true law today, also Gover on "The Law of Capital and Income" and "The Law of Repairs and Improvements" by Jackson, where in fact a sole Life Interest or all fixed vested indefeasible shares for Life Interests or (if no more beneficiaries in a discretionary trust) all Income Beneficiaries can "call on" the gross Income (not net income as Lincolns Inn propounds) putting a stop to ongoing income expenses initiated by trustees, it being a personal indemity for expenses at the consent of the Life Interest so enabling the Life Interest to do his own accounts and tax return!
3) This is all Re Nelson 1916, re Smith 1928 and the usual Saunders-v-Vautier" but few know it applies to Income not just Capital....it means Life tenants are not liable to repairs per se as the whole income for the whole year for the whole property is as of right theirs
4) S.38 and S42 FA98, 02, 05 and S.500(4) ITA 2007 means "straight conduit accounting" for in specie enjoyment of Gross Income for (why is ICAEW dragging its feet) the Accountants Report "...in accordance with UK GAAP" for any tax return
5) The legal Model is Court Order, Settlor's Powers and Charging Provisions over Statute over Case Law meaning Accountants Report is ".....in accordance with the Settlement Deed and Trust Instrument Powers and Provisions"
6) S.13 Public Trustee Act 1906 is good law in England aand many Commonwealth Countries as the only means of a beneficiary trust audit in equity...IT IS ENFORCEABLE IN THE COURTS WITH EQUAL STANDING TO A MASTERS REPORT AND CERT AND ACCOUNTS, the Act being in lieu of an expensive Court Account. The Common Account is adopted by a Judge and enforced like any other debt where the trustee is forced to hand over the balance, the Public trustee being the "surrogate accounting function" standing in the shoes of Master AND normal trustee.
7) The old law for S.29 LPA now S.12/S13(1) TLATA is for the same "beneficial Estate in Land" as already recognised in SLA 1882 where in fact it does not matter a trust for sale (conversion) exists since the Enitlement in Possession is in "unsold money land" in specie Gross Income until sold ...displacing the discretionary S.28 LPA
If anybody wants to know things Lincolns Inn dont want to publicise, ask me....I contributed to this years Bill for Capital and Income of Trusts before parliament Tim Smith
Thank you Simon
I feel this is a bit of a "taboo" subject with tax advisers and it's good to see someone airing it.
Like investments, I feel strongly no one should set up a trust unless they fully understand what it is all about, what it is going to cost in professional fees and how you get out of it - and who needs to agree to that exit route.
It is very easy for an adviser to suggest a trust and then walk away from the consequences down the line when these could be years away.
I was asked (before the IHT rules changed) to comment on a nil rate band discretionary trust to be set up for a widow ie the solicitor was planning to vary her late husband's will. On paper - a saving of about 100k IHT (maybe slightly less). Standard planning you'll think.
Problem I saw - she was only 52 and could live another 40 years - so what IHT was being saved? What might the rules be in 40 years' time and even if they were the same add up the £1k or more a year on professional fees to do returns/check position - and that alone halves the saving (and if the fees were nearer 2k the saving could disappear).
And of course the rules changed anyway.
She and her children had absolutely not the most basic idea of what a trust was or what it did. They would have had to pay out for professional advice at every step.
A better option would have been a life assurance policy to cover any IHT when she died (she had few other assets).