Investment decisions as trustee of family discretionary trust - is professional advice necessary?

fbedhead

Hi there,

This is my first time posting, so sorry in advance if I do anything wrong.

My situation is that I and 2 other members of my family have become trustees of a discretionary trust set up by a deceased aunt. The beneficiaries are the seven children of the three trustees.

The money is currently split 13% cash, 36% shares in 5 individual FTSE 100 / FTSE 250 companies, 51% split between 3 unit trusts.

The children will have access to money at age of 23 and at some point will use it as deposit for buying first home. (Oldest is currently 20, youngest 15)

None of us know much about investing successfully in individual shares. One of the trustees is very concerned about the possibility of being sued by our children for mismanaging funds, and would like us to get a professional financial adviser to manage our portfolio, so we can't be sued (and can sue the IFA if anything goes wrong). The other two trustees feel that you would have to make some pretty extreme mistakes to be in that sort of legal trouble, such as investing in a friend's new musical that's bound to be a big hit on the West End (which we aren't intending to do!). And that as there is quite a lot of capital gain, it would be very expensive to make substantial changes to our portfolio, so an IFA is unlikely to advise anything very major anyway. These two trustees suggest selling the individual shares as far as we can each year without going over our CGT limit, and reinvesting in long-established investment trusts (e.g. Scottish Mortgage, Monks), thus widening the spread of investment and lowering the risk.

Can anyone with any knowledge of trust management or legal cases advise us, please? We certainly don't want to fail in our duties. Are we taking too great a risk if we don't get professional advice?

Thanks for any help you can give us!

Malthusian

None of us know much about investing successfully in individual shares. One of the trustees is very concerned about the possibility of being sued by our children for mismanaging funds, and would like us to get a professional financial adviser to manage our portfolio, so we can't be sued (and can sue the IFA if anything goes wrong). The other two trustees feel that you would have to make some pretty extreme mistakes to be in that sort of legal trouble, such as investing in a friend's new musical that's bound to be a big hit on the West End (which we aren't intending to do!).

You are both right. The test is whether the trust funds were managed as a prudent businessperson would manage their own money. You can violate that test without going so far as to invest in a West End musical.

The suggestion of selling the individual shares up to the CGT allowance and reinvesting in investment trusts is likely to pass that test on the face of it - the main question is whether they have adequately prepared for the possibility of withdrawals from the trust (see below).

As you say, using a financial adviser will cover your liability. As a lay trustee, DIYing saddles you with a large liability and zero benefit (unlike with your own investments). The problem with DIYing investments is not that it is difficult, but the astronomically high cost if it goes wrong. This goes double when you take on all the liability but get none of the benefit.

The children will have access to money at age of 23 and at some point will use it as deposit for buying first home. (Oldest is currently 20, youngest 15)

If there are no other potential beneficiaries they will have the right to wind up the trust and take their respective shares when the youngest turns 18. If any of them already has an indefeasible right to capital they can take their share individually after 18 (but if the trustees have discretion over who gets how much when, they don't until all the potential beneficiaries are 18 and compos mentis).

Risk-based investments are unsuitable over a 3 year timeframe so the trustees will need to establish when the money is likely to be paid out and how much. That being the case, using an adviser would be even more sensible because simple DIY solutions along the lines of "bung it all in Vanguard LifeStrategy" or "bung it all in NS&I" will not be appropriate.

You should look into whether the trustees can pass the shares to the children while rolling over gains; it may be more tax-efficient for the children to encash them in their own names and take advantage of the larger allowances and lower tax rates applicable to individuals rather than trusts.

Linton

It would seem that all the money could be distributed to the children within 3-8 years.  This is much too short a time period for serious investment.  You dont say what the 50% unit trust investment is, but the FTSE100 has lost about 30% in the past month. Scottish Mortgage is down about 27%, Monks is down 37%. Many years of history does not ensure safety.  So if I was one of the children I might be a little worried.

How much money is involved? If it's just a few £10Ks it may well be too small a pot for professional management to be worthwhile.  If you are talking about a few £100Ks I would say professional management, or advice at least, is essential for your and your children's protection. 

Your investment strategy really depends on the actual timescales.  If it is really going to be 3-8 years then a phased movement into cash might be appropriate.  If you are not going to exercise your discretion for perhaps 15 years possibly Scottish Mortgage could form a sensible component.  In between you need to be conservatively invested, which I fear you may not be at the moment.

fbedhead

Thanks so much for your responses. The pot is about 200k, which will eventually be split 7 ways equally (no discretion in that). We intend to pass each beneficiary's share to them as shares/trust holdings, so they can use their individual CGT allowances to turn assets into home-buying deposits as and when they want to. In other words, there's no specific time limit on when the investment comes to an end.

Good to see confirmed what we were going to look into, about winding up the trust when youngest is 18, not 23.

xylophone

You are certain that this is a  purely discretionary trust?
Have you discussed this with the solicitor who drafted the Trust Deed?

fbedhead

xylophone said:

You are certain that this is a  purely discretionary trust?
Have you discussed this with the solicitor who drafted the Trust Deed?

Ah, yes, good spot. It was set up as something else (I forget what it was called - accumulation????) but then the tax man changed the tax situation so that kind of trust basically didn't exist any more (from a tax POV). So for tax purposes it's discretionary but for paying beneficiaries it isn't. We have to do an equal split between all great nieces and nephews. Anyone born after a specific time limit (in 2 years' time) won't be eligible (not that any of us will be reproducing again anyway).

Shedman

How long ago was the trust set up?  Are you aware that there are potential IHT calculations required on 10 year anniversaries on the trust and if/when any of the elements of the trust are assigned to beneficiaries (or, that if encashed within the trust, the trust could suffer potentially 45% tax dependent on the nature of the assets within the trust).   You say there is some cash in the trust and if this is earning interest (or the shares are paying dividends) then income tax self assessment returns for the trust may also need to be submitted (taxed at 20% on first £1000 of income, 45% above that).  

The trust may also need to be registered with HMRC.

We are trustees of a Discretionary trust and, even though I am a retired qualified accountant, I am discovering the tax rules around trusts are very tricky (and quite frankly difficult to gather the information needed) , especially as it requires knowledge of what other trusts etc that the settlor may have settled and when or if they've have settled PETs or Chargeable Lifetime transfers etc within 7 years of the trust being established.

I think professional advice through either an accountant conversant with trust tax and legislation or an STEP registered IFA would be highly recommended in your circumstances.

xylophone

I agree with the poster above. Take expert advice.

but for paying beneficiaries it isn't. We have to do an equal split between all great nieces and nephews. Anyone born after a specific time limit (in 2 years' time) won't be eligible 

But when is this split to occur? When the youngest reaches a specified age?

What exactly does the Trust Deed say? 

Heedtheadvice

I comment only as an ex trustee.

I hope you have gathered by now if is an onerous task, without direct benefit to the trustees, potential big downsides, trust deed content that you really need to follow, trust law that also applies plus everything (without limit as far as I remember apart from the foregoing) must be done in the beneficiaries best interest and specific tax implications -that you seem to have come across already.

Your ideas of any or all of that could well be wrong.

I am glad xylophone raised the trust deed question and the other posters raise important points too.

IMHO you need expert and specialist advice to ensure you perform correctly and do the correct things on the financial front. You seem go be of the opinion that investment is fine owing to expected  contnuing investment by the beneficiaries but as trustees you have no control over that. You need to concentrate on the duration of the trust and as Linton suggests what you currently are doing and/or what you intend might be inappropriate.

fbedhead

What an amazing bunch of knowledgeable people you are. Thank you so much for a lot of valuable advice. Wish I'd thought of posting here when we first started out as trustees - would have avoided a lot of complications. I feel we're now on top of the tax stuff, after a lot of hard work, but it does sound as though we should hire a pro to sort out investment policy as soon as we can. Very grateful to you all!