I have recently been appointed accountant and tax advisor for a trust, which has been established by will. The will stated that all assets of the deceased should be put into trust for their spouse and children (4 beneficiaries), which is relatively straight forward. The beneficiaries are also trustees. Some of the assets, however were in bank accounts or ISAs as declared on the probate forms, which has been transferred into the spouses name. The other beneficiaries (and hence trustees) have informally agreed that they are happy that the spouse invests/utilises these assets as they see fit. The will also states that the spouse should receive all income from the trust in their lifetime.
There are therefore a number of questions here, does this form a loan from the trust and if so should it be part of the trust agreement (assuming the spouse retains the income)? Or should it be treated as an income distribution?
I'm not sure there is a significant difference in terms of net tax position, whether the income is received by the trust or by the spouse and given that the will stated all income should be received by the spouse in their lifetime is there a legal issue? The income would be taxed in the trust at the prevailing rate (45% over £1k), the spouse would then be able to claim the tax back (using form R40 or via self assessment), and then pay the relevant tax rate on their income. Obviously if the income is taxed in the trust, this would be more detrimental to the trust and the remaining beneficiaries, and the individual spouse would benefit from claiming back the tax. Are there any rules or laws governing this area? I can't seem to find much in terms of tax, and legally everything seems to point purely to the trustees position to act in the best interest of the beneficiaries.
Are there any tax consequences that I'm missing, and in terms of the legality of the treatment of these assets, should I refer them back to the solicitor who drew up the agreement?
Any guidance will be gratefully received.