Advise on managing a Discretionary Trust

VJP

Hello, I'd be grateful for any advice.
I am the executor of my father's will as well as one of the Trustees for a discretionary Trust set up for my brother. (I am also a beneficiary of 50 % not via a Trust). I have been granted probate some time ago and since then have managed the property which makes up the whole of the estate (no cash in the bank). Now that there is an income on the property through rent I would really like to provide a regular payment to my brother. I thought I needed an accountant and so I contacted someone recommended by a friend. I now realise it seems the accountant is basically going to do the tax return, but I thought she was actually going to manage everything around the DT. I'm not experienced in this area. What is the next next step? Should I get a financial advisor? I realise a DT is a bit complex and have read up on various rules re whether the beneficiary is receiving income or capital, vulnerable or not and a ten year rule. I did probate by myself but am out of my depth here. If getting a financial advisor is the best next step, how do you recommend going about this? I feel nervous about choosing one and nervous about handing over money without understanding what they will do and what I need to ask etc. I have an under 2 year old at home and am more overwhelmed by usual by these kids of things. The person who was sensible about this kid of stuff is my father who has died while this is not y partner's area at all! I'd be really grateful for some sensible advice. Thank you.

Jeremy535897

The problem with this sort of situation is that the advice often costs far too big a proportion of the amounts involved. As the property is a discretionary trust, there is the potential for an inheritance tax charge on the ten year anniversary of your father's death, or, if earlier, when capital is appointed out. There are a number of questions that are relevant.
1. Was there any inheritance tax on your father's death?
2. When did he die?
3. Why was a trust set up for your brother? Is he a vulnerable person?
4. Are you the sole trustee of the trust?
5. What is the property worth now, what was it worth on your father's death, and what is the net income likely to be?
6. When was the property first let, and was the property empty before then?
It is for the trustees to exercise their discretion as to whether to appoint income, and if so, how much and when, to your brother. That is not any sort of adviser's job. Was there any letter of wishes accompanying the trust?

Keep_pedalling

You don’t need a financial advisor you need an accountant qualified to deal with trust 

https://www.step.org/about-step/public

why did you decide to keep the property, it would have been a lot simpler to sell and separate your inheritance from the trust.

poseidon1

VJP said:

Hello, I'd be grateful for any advice.
I am the executor of my father's will as well as one of the Trustees for a discretionary Trust set up for my brother. (I am also a beneficiary of 50 % not via a Trust). I have been granted probate some time ago and since then have managed the property which makes up the whole of the estate (no cash in the bank). Now that there is an income on the property through rent I would really like to provide a regular payment to my brother. I thought I needed an accountant and so I contacted someone recommended by a friend. I now realise it seems the accountant is basically going to do the tax return, but I thought she was actually going to manage everything around the DT. I'm not experienced in this area. What is the next next step? Should I get a financial advisor? I realise a DT is a bit complex and have read up on various rules re whether the beneficiary is receiving income or capital, vulnerable or not and a ten year rule. I did probate by myself but am out of my depth here. If getting a financial advisor is the best next step, how do you recommend going about this? I feel nervous about choosing one and nervous about handing over money without understanding what they will do and what I need to ask etc. I have an under 2 year old at home and am more overwhelmed by usual by these kids of things. The person who was sensible about this kid of stuff is my father who has died while this is not y partner's area at all! I'd be really grateful for some sensible advice. Thank you.

I suspect now that this trust is income producing, you are going to need professional advice from a trust specialist. Forget about financial advisors, not their skillset or area of competency.

 As pointed out by Keep_pedalling, your first port of call is an appropriate STEP qualified chartered accountant. STEP is the Society of Trust and Estate Practitioners. Accountancy practices with STEP members will be competent to;

   * Advise on the precise type of discretionary trust you have been tasked to administer. You have
    not indicated the age or mental capacity of your brother or why the necessity for a trust on his behalf. If your brother is not competent to manage his own affairs  ( through mental or or physical disability),  the trust may qualify ( depending on how it is drafted) as a special trust for vulnerable persons which attract favourable , income, capital gains and inheritance tax treatment.  The specialist accountant should be able to ascertain this on you behalf and arrange to submit a Vulnerable Person Election form (VPE1) to hmrc to secure the special tax treatment in due course.

  * Prepare compliant annual accounts. With just a single asset and one income source, such    accounts should be relatively straight forward and not overly costly to prepare. However they are a necessary duty of a trustee, and greatly assist with preparing annual tax returns.  The fact that apparently only 50% of the rental income would be attributable to the trust, means the accountant will also be ascertaining your share for tax reporting purposes.

  * Prepare annual trust tax returns.  Discretionary trusts ordinarily pay income tax at the rate of 45%.  However if a VPE1 election is in point, the trustees effectively reduce the trust liability down to tax that would have been due had the vulnerable person received the income direct. It is a complicated calculation but should be no problem for a qualified accountant.

 * Adminster inheritance tax compliance. Generally , discretionary trusts are subject to 10 year anniversary IHT reporting obligations. Simplistically, if the trust assets exceed the prevailing nil rate band at that time ( currently £325,000) the trust is liable to pay an IHT charge of 6% on the excess value above the NRB. In the context of  the property trust you administered with no available capital cash, this could be a future problem. So important to note that if the trust qualifies for Vulnerable Persons status, such trusts are wholly exempt from 10 year reporting and the potential iht charges implicit thereon. On eventual death of the vulnerable person, the value of the trust merely forms the deceased's personal estate for IHT purposes.


I think the above points should indicate you do need specialist intial advice to assess exactly what you are dealing with. I suspect for this purpose  the accountant you have already approached are not appropriately qualified. So back to STEP as suggested.


As regards day to day administration of the rental property, in theory I see no reason why you cannot not do this alone although being a property landlord can potentially come with challenges . Howevet simply ensure you have a dedicated property bank account, which will serve as the accountant's source material for preparation of the year end trust accounts and tax returns, and assessing your personal reportable share. The accountant should be able to advise on a safe level of interim distributions to your brother having regard to year end tax liabilities and professional fees.

As an observation, the lack of a capital pot of cash going forward, may become an issue. Minor repairs and maintenance can hopefully be accommodated from rents, but what if major costs arise such as roof renovation? A single illiquid asset can be problem in this regard, which is further aggravated by your 50% ownership. 

In this respect I echo Keep_pedalling's question, why not sell the property and establish a more flexible liquid investment portfolio for the trust, thereby keeping your personal finances entirely separate from that of the trust? This would be especially advisable if the trust is fully Discretionary and cannot benefit from the Vulnerable persons tax treatment.

Finally, being trustee for your brother in these circumstances and a landlord, will be a burden for which you cannot be compensated, so a helpful trust professional handling the  technical stuff on your behalf should help ease some of the headaches you will undoubtedly face going forward.

VJP

Jeremy535897 said:

The problem with this sort of situation is that the advice often costs far too big a proportion of the amounts involved. As the property is a discretionary trust, there is the potential for an inheritance tax charge on the ten year anniversary of your father's death, or, if earlier, when capital is appointed out. There are a number of questions that are relevant.
1. Was there any inheritance tax on your father's death?
2. When did he die?
3. Why was a trust set up for your brother? Is he a vulnerable person?
4. Are you the sole trustee of the trust?
5. What is the property worth now, what was it worth on your father's death, and what is the net income likely to be?
6. When was the property first let, and was the property empty before then?
It is for the trustees to exercise their discretion as to whether to appoint income, and if so, how much and when, to your brother. That is not any sort of adviser's job. Was there any letter of wishes accompanying the trust?

Dear Jeremy

Many thanks for your really helpful post. It's true that one of my concerns has been about the cost of getting advice and I had mistakenly thought, that as I've handled probate and others aspects of my father's 'death administration' I thought I could also manage the DT with help from an accountant.
1. Tax was due on my father's death which are being paid by installements
2. He died in Jan 2020
3. The DT was set up because my brother is unable to cope with financial decisions, has diagnosed and undiagmosed conditions which make keeping to a regular job difficut and he receives benefits - a situation which is unlilely to chnage in his lifetime. He has previously had addictions (probably to cope with his conditions). I'm not sure he passes the vulnerable person test as may not fit the categories. My father, seeing that he would never be financially independent wanted to ensure that he could receive some inheritance while receiving benefits or that the money could pass to his son who is 12 years old.
4. The other Trustee is my uncle.
5. The property was valued at 540K and might be worth more now.
The property was empty for just over a year and was then let from 2021 up until now.

Apologies for the late reply  - there have been various health issues to attend to within the family plus a toddler and work to keep me busy!

Looking at the posts below I think it's a good idea if I contact a STEP accountant.

Best wishes
VJP

VJP

Keep_pedalling said:

You don’t need a financial advisor you need an accountant qualified to deal with trust 

https://www.step.org/about-step/public

why did you decide to keep the property, it would have been a lot simpler to sell and separate your inheritance from the trust.

Dear Keep pedalling

Thank you for letting me know about STEP. I hadn't heard about them before and wish I had before I started asking aorund for accountants. I will get in touch with them now.

I decided to keep the property as my father died just before the pandemic hit so I didn't know whether it would be a good time to sell. It seemed better to rent out the property until I knew what would happen to the market but also because I wasn't in a psition to buy anywhere with the proceeds and so thought it better to have the income to pay off the inheritance among other things. Soon afterward further life changes (step children moving in, having a baby to name a couple of them) meant that I wasn't clear on what my work situation / living situation would be. But yes, selling would have made life simpler in many ways and I would like to sell soon.

VJP

Dear @poseidon1

Thanks you so much for your comprehansive reply. It's really helpful to have this kind f information and if only I'd had this quiet a long time ago!

In any case, you raise some very good points about the cost of maintaining the property. The idea was to keep it in the short term while the pandemic hit. Soon afterward I had a child and step children moved in, work situations changed and I knew I wasn't going to be able to get a mortgage at that time so preferred to ensure there was some income building up. I think selling sooner rather than later would be the best idea.

THe outline of what a STEP accountant can help with is very useful and I feel much more confident about getting the right information now. You're right, it's all a bit of a headache and with a 2 year old there really is no time for this so I'd much rather get the professionals to take care of it.

Hopefully I'll have made some progress soon and can report back.

Apologies for the delayed reply - family health issues, work and toddler have taken over these last few months so am just catching up with this now.

With best wishes

VJP

poseidon1

VJP said:

Dear @poseidon1

Thanks you so much for your comprehansive reply. It's really helpful to have this kind f information and if only I'd had this quiet a long time ago!

In any case, you raise some very good points about the cost of maintaining the property. The idea was to keep it in the short term while the pandemic hit. Soon afterward I had a child and step children moved in, work situations changed and I knew I wasn't going to be able to get a mortgage at that time so preferred to ensure there was some income building up. I think selling sooner rather than later would be the best idea.

THe outline of what a STEP accountant can help with is very useful and I feel much more confident about getting the right information now. You're right, it's all a bit of a headache and with a 2 year old there really is no time for this so I'd much rather get the professionals to take care of it.

Hopefully I'll have made some progress soon and can report back.

Apologies for the delayed reply - family health issues, work and toddler have taken over these last few months so am just catching up with this now.

With best wishes

VJP

Good that all the responses have helped identify your immediate priorities, top of the list being a competent STEP accountant to bring tax compliance and accounting  matters up to date ASAP.

One of the first tasks will be to quickly get the trust registerd on HMRCs trust registration system (if this remains outstanding), since this should gave been done within 2 years of your father's death. There are potential penalties for missing the deadline so if this is  indeed outstanding, hopefully your new accountant can offer mitigating factors on your behalf.

As regards income tax compliance, if the accountant you did approach has done nothing at all in this regard ( both for the trust and yourself), then sounds as if  there are at least 4 tax years of tax returns outstanding, which unfortunately will attract interest on late and unpaid tax and potentially a number of £100 penalties for late submission of the returns themselves. Again the new accountant can hopefully  make a case for leniency on the penalties although the interest on late payments will be unavoidable.

With above points in mind, definitely hold off on any trust distributions to your brother until all these liabilities can be quantified, and you know where you stand with regard to residual distributable income. 

Best of luck from hereon!

VJP

@poseidon1 Yikes! thanks for pointing that out about the Trust Registration. The accountant did do this last year, so four years after the date of death. I haven't received any penalty notice as yet. Fingers crossed.

I've been paying the income tax on the estate and sending in tax returns, but not for the TRust yet. One reason I wasn't in a rush to get in with the Trust is that initally there was no income and when there was it had to be paid to my uncle (the other Trustee) who fronted cash to get the property ina fit state for rental. I suppose this should still have been made clear on a Trust return. 

As you suggest, I'll hold back on payments until all this is clear. I'm starting to think we should look at disbanding the Trust and buying my brother a property so that he can manage it (with my help) and hand it on to his son if need be, especially if he doesn't meet there VT threshold. Let's see what comes up after working things out with an accountant.

Now I'm looking up STEP accountants and wondering which ones to approach that will handle what I suppose is a relatively small trust ie not for high net worth individuals! (Half of property plus a few royalties, under 300K). I;ve no idea how much they charge for this kind of thing.

Thank you again.