Settlor/Trustee’s getting advice for investments

DT2001

I have been asked a question by a friend after I had relayed how I received guidance on this forum last year.

Settlor put money into trust for her 3 adult children (late teens/early twenties). Trustees were the eldest child and two of the settlor’s friends. IFA set up according to settlors risk questionnaire and has reviewed annually. My friend is one of the other two children and he was asking how the investment decisions were being made as the 3 children (10 years down the line) are in quite different financial situations. After a few searches for information we think the trustees should be controlling/reviewing the investments.
The questions we think we need to ask are: -

1. Should the trustees have an agreement with an IFA for advice as none are experts?
2. Should the IFA have set up the investments in line with the settlor’s risk profile?
3. Is it possible to, in effect, have 3 different pots within the trust each in line with a different beneficiaries situation? If possible is it practical or should the trustees consider ending the trust or potentially paying part out to either 1 or 2 of the beneficiaries and then changing the beneficiaries?

dunstonh

After a few searches for information we think the trustees should be controlling/reviewing the investments.

The trustees are responsible. They would normally protect themselves by getting a written report from the IFA on the recommendations on the portfolio to match the objectives.

1 Should the trustees have an agreement with an IFA for advice as none are experts?

2 Should the IFA have set up the investments in line with the settlor’s risk profile?

3 Is it possible to, in effect, have 3 different pots within the trust each in line with a different beneficiaries situation? If possible is it practical or should the trustees consider ending the trust or potentially paying part out to either 1 or 2 of the beneficiaries and then changing the beneficiaries?

1 An IFA is not mandatory, but it is a way to protect themselves

2 The risk profile should be agreed with the trustees who are required to consider the ojectives. The trustees are the client. Not the settlor. (although in my cases they can be both)

3 WIth some providers, it is possible. WIth some it is not. Although the use of mixed funds for each strategy can achieve that. The trustees have to act within the rules of the trust. What they can or cannot do will depend on those rules.

Dead_keen

They might have already considered this but …

I'd go back one stage and ask what kind of trust it is and why it is still necessary?

Depending on the type of trust and the fine print, it may be possible for the beneficiaries to end the trust and get the assets regardless what the trustees think - google "the rule in Saunders v Vautier"

If not, it may be possible for the trustees just to give the assets to the individuals and end the trust.

Or that may be a completely silly idea if the beneficiary would do a George Best ("I spent a lot of money on booze, women and fast cars. The rest I just squandered.")

Once I knew the answer to this, the next question would be about how the trustees should invest the assets of the trust.

DRS1

It would not be that unusual for the settlor to decide what assets are subject to a trust. In fact it is pretty much universal. The trustees may have powers to change the investments but the initial set up will have been decided by the settlor

You talk about the settlor's risk questionnaire or risk profile as if the investments were determined as being suitable for the settlor not the trust but that seems highly unlikely. Perhaps a misunderstanding by your friend?

If your friend wants to know if the trustees can end the trust or make distributions from it then your friend will need to look at the trust deed and maybe any letter of wishes left by the settlor to guide the trustees in their exercise of their powers. Of course there are different types of trust so some trustees may have some powers which other trustees don't. No-one on here will know about this particular trust.

Any termination or distribution may have tax implications so your friend and the trustees would need professional advice.

On the subject of the IFA your friend should check who actually employs him - it may well be the trustees (if he is doing some annual review). Also if it is the trustees then the IFA's fees will have to come out of the trust.

poseidon1

I recall our dialogue last year, when you were assisting someone with various investment bonds held in a number of different trust structures.

You have not really provided enough background information to address your questions. That is to say -

a ) Is this a discretionary trust or do the beneficiaries have absolute rights to income as it arises?

b) Are the trust assets investment bonds ( as in the previous case we discussed) , or a conventional unit trust portfolio generating taxable income and gains?

c) How long has the trust been in existence ( 10 years ?) it's value at commencement and value now.

d) If the trust is not fully discretionary, is there a pre determined vesting age by which each child gets a share of the trust fund ?- ( age 25 for instance).

What I can say is it would have been helpful from outset of the trust, if the trustees had put in place a Trustee Investment Policy Statement, which acts as a form of road map for both the investment adviser and the trustees, as to the trust's aims and objectives and how that might change as the years go by - see sample pro forma document below

https://library.standardlife.co.uk/iht18.pdf

Answers to the questions I posed above will give a better basis to address your third question relating to either a potential trust break up, or earmarked 'investment pots' for each beneficary during the continued exsistence of the trust.

DT2001

It is a discretionary trust invested in onshore investment bonds. £25k in 11 years ago and at last valuation just over £35k. No withdrawals.

Nothing in writing, as far as I know, from the trustees. They have the original suitability report that refers to the settlors risk tolerance.

The investment is on the paperwork of the settlor for annual reviews (no changes in funds held within the bond). Ongoing fees are paid from the bonds.

Thanks to everyone. The beneficiaries are going to have a discussion and then take advice to see if they can wind the trust up, split the funds equally and add to their own investments.

From what I saw previously and now with this trust it seems ‘amateur’ trustees are put in place without too much thought and reliance put on advisors presumably to keep costs down. Hopefully with greater awareness that is not the case now

DRS1

"From what I saw previously and now with this trust it seems ‘amateur’ trustees are put in place without too much thought and reliance put on advisors presumably to keep costs down. Hopefully with greater awareness that is not the case now"

What exactly is the problem with "amateur" trustees? This isn't a multi million pound pension fund. It is a family trust and the ideal trustees for that sort of thing are people who know the family. If they need help with anything then they can always get professional advice. I should have thought the last thing such a trust needs is a "professional" trustee charging money for just being there.

If this is a discretionary trust then there will be a class of beneficiaries. That class may well be wider than just the three children of the settlor. Your friend would need to check just how wide. A very common item to find with a discretionary trust is a letter of wishes (especially if the settlor is not around any more). Your friend should try to find a copy of that letter (I imagine it will be with the trust deed). It may say what the settlor would want to happen in certain circumstances - eg one of the children gets married has kids of their own etc.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81860093#Comment_81860093

Trying not to be rude but £25k was a ridiculously small amount to establish a discretionary trust.

I can see no justification for keeping it going. The underlying capital would be better served in the ownership of the now adult beneficiaries to reinvest in ISAs (should they choose).

As a discretionary trust there will be overt powers to appoint capital to the beneficiaries, hopefully without incurring legal fees for a formal deed.

As for tax, if the settlor is very firmly within basic rate, encashing the bond should avoid a chargeable event tax charge via top slicing relief. Cash can then be distributed thereafter.

As a passing observation, discretionary trusts should generally only be established for IHT mitigation purposes with a high 6 figure sum ( upwards of £300k+). At this level inherent complexity and running costs of such trusts can be justified.

DT2001

The problem I perceived was the lack of guidance explaining the trustees duties (all of the trusts I have come across are over 7 years old so time may have dimmed people’s memory). The link from poseidon1 is an excellent starting point. I agree that professional trustees would be inappropriate.

How much would getting help cost? I do not know if there are more trusts in this case however the situation I asked about last year had 4 trusts all with a different combination of trustees so would an IFA be willing to take on, in effect, 4 different clients?

DRS1

I am not sure an IFA is really what you need. Someone more like @poseidon1 might be more appropriate but it depends what you are after. Is it investment advice or breaking the trust advice?

DT2001

https://forums.moneysavingexpert.com/discussion/comment/81860157#Comment_81860157

Most interesting. Even the previous situation you kindly helped with only had 4 trusts with a total of £200k. Unraveling and understanding them, to any degree, is quite time consuming. At least with this one it looks possible to break without paying any tax, unlike the discounted gift trusts.

Our ‘excess’ assets are in the process of being passed over hopefully to be used wisely.