Discretionary trust and trustee's

jayne33

HI,

This is rather complicated and I hope someone can at least give me some guidance - but any advice will be really welcome!!

My husband had an accident in his early 20's approx 18 years ago now. He suffered a massive head injury and was awarded £500,000.00 for loss of income for life. This money was placed in a discretionary trust for his protection because he was unable to manage his own finances. His mum, sister and a solicitor have always been trustees.

He has over the years had regular monthly amounts of money given as gifts by the trustees as well as capital amounts.

He has since been rehabilitated and is now able to work, and has been for many years. He is back to normal and can manage his own affairs and would like to take more control of the money that he was awarded for his injury.

He has asked recently that his mum and sister stand down as trustees so that he could be a trustee himself.

His solicitor has informed him that due to recent changes in the law that ley people can no longer be trustees - so this does mean that his mum and sister will come off as trustees anyway. In their place though would be two further professional people.

This would give him even less control of the money that was original given has compensation for his injury.

We both fully understand the reasoning behind the trust been set up in the first place, but now my husband feels that it his time that he takes control of his own finances.

I suppose finally that my question is this:-

Can the trust be wound up and what tax implications will this bring?

Also, what is this new law that has been brought in so that we could research it before we go and see the solicitor who is dealing with the trust?

Please ask further questions if you need more info - thanks in advance for your advice.

Jayne

Willman_Rodders

Hi Jayne33,

I was not aware that lay trustees could not be trustees of a discretionary trust - but I could be wrong; If no one else clarifies the point on this site I'd ask your solicitor for proof to support his claim.

The Trustee Act 2000 defines lay trustees. It also imposes duties and responsibilities upon all trustees - and where investment of funds is a duty of the trustee(s) it states that the trustees must have sufficient knowledge to undertake this role, or seek professional advice from people who do have this knowledge.

As an aside the law relating to the management of pension trust funds has changed - the Occupational Pension Schemes (Trustees Knowledge and Understanding) Regulations 2006 requiring all trustees to be of a certain standard of knowledge, and those who lack the knowledge must undertake training within 6 months of becoming a trustee. But this legislation (as far as I know) applies to pensions trust funds, not to more general discretionary trust funds. But even here lay trustees do not appear to barred - they just need to be trained.

As for your husband wishing to take more control of the trust fund, would he be able to manage the £500,000 portfolio himself. I am just wondering whether he could ask for all the monies to be paid to him, now. The original trust document will set out how the trust should be operated, and who is to benefit from it, and whether the trustees should follow the wishes of the principal beneficiary. (Remember he can always then surround himself with advisers who he trusts e.g. financial advisers/solicitors etc - but he is then in control, not a third party solicitor.)

If he is capable of managing his own affairs, AND he is the sole beneficiary of the trust then he can insist that the trust be terminated - irrespective of what the original trust document states; this is known as the Rule in Saunders v Vautier case. You will need to see what the original trust document said; is he the sole beneficiariary or are other classes of people and/or charities also listed as potential beneficiaries?

Terminating a discretionary trust is likely to create an exit charge to the trust fund - 6% of the fund value being the maximum (if I understand the latest taxation rules.) But this exit charge is taken on every drawdown anyway so it will be paid at some point, either now or at some future date.

From what you have said I suspect the solicitor may be fearing loss of fee revenue generated from the trust fund. Adding more professional trustees allows those professionals to charge yet more for their services; the result is more income being diverted away from the main beneficiary. I may be very wrong - and indeed I hope I am (I am sceptical by nature) but my advice would be to have another professional look at the case on your behalf.

Hope that helps.

jayne33

Thank you so much - this is much what I was thinking with regard to the solicitor situation.

6% does not sound that bad - we were fearing 40% CGT. Obviously we are going to get some impartial advice legally and from an accountant as to the trust position and the tax position.

We are setting up a meeting with the trust solicitors and we have already asked for the trust deed to be present at this meeting, so we will have to wait and see. . .

Thanks again
Jayne

Willman_Rodders

Jayne,

Thank you for your quick response which made me think (and pick up a different text book).

I think I've dropped a clanger. My response regarding the tax position refers to trusts created from within a will and refer to the IHT regime that applies thereto, something which I deal with occasionally. Your trust will have been created not from a will but from a payout and as such there will be CGT of 40% applied to capital growth within the fund. Sorry.

If my understanding of the position is correct, the trustees can elect to roll this over so that the gain is transferred to your husband - but as there is a potential risk to the trustees an indemnity may be required by them.

Your accountant / financial adviser (or those specialists who post on this site) will be able to clarify the position with more certainty.

Again, sorry for misleading you.

Rod

localhero

Hi Jayne33,

I'm also not convinced why 2 lay trustees should be removed as I hardly think that would be in the your husband's best interests.

I believe, that if anything, the 1 professional trustee should be removed and the funds paid out to your husband - particularly if you can provide the appropriate medical evidence that he's able to manage his own affairs.

It sounds to me like the solicitor has got his eyes set firmly on his future fees from the fund rather than the best interests of his client. (I'm more cynical than sceptical!).

You definitely need to seek independent advice, and to find a decent trust specialist contact the Society of Trusts and Estate Practitioners (STEP). Sound out 1 or 2 on the telephone initially. They will also be able to advise how best to deal with the CGT situation.

Best wishes.