Discretionary trust

Edgie7

I sincerely hope that this is the correct forum, if not please let me know and will move it.

My son received a payment from the CICA and a part of this is in a Discretionary trust which was an insistance from the authority. My son is now 41 and his award was made in 2021 following the incident in 2009 when he was 25. There are significant charges being made against the invested capital which has not been growing at a healthy rate. To make matters worse one of the trustees is a firm of solicitors which was another insistance from the authority. We have received charges when the original firm of solicitors was aquired and the trusteeship had to be altered. My son wishes for the capital to be invested into a pension fund because he is a very low earner and cannot afford to pay very much in a normal pension scheme. I would welcome any advice or direction in which to go because currently the trust is being charged for every possible activity carried out by the solicitors involved.

Something needs to happen because currently nothing is in his best interests.Many thanks in advance

Keep_pedalling

You cant simply transfer assets held in a trust into a pension fund, he will be limited by his earnings as to the maximum amount can be payed into a pension each year.

Discretionary trust are expensive to manage especially when it is being done by professionals.

dunstonh

. There are significant charges being made against the invested capital which has not been growing at a healthy rate.

What is your definition of significant?

What is it invested in and what is your definition of not growing at a healthy rate? (you would expect 2022 to have been dire but 2023,2024, and 2025 have been strong - 2026 is largely flat YTD).

 We have received charges when the original firm of solicitors was aquired and the trusteeship had to be altered

Who is the solicitor using to provide the investment advice to the Trust? Normally its an IFA and the solicitors would typically require a written report from the IFA. Are they using an in-house adviser or are they contracting it out?

 My son wishes for the capital to be invested into a pension fund because he is a very low earner and cannot afford to pay very much in a normal pension scheme.

That will be up to the trustees and the terms of the trust.

Have the solicitors been approached to discuss removing them as the trustees and replacing them with alternative trustees? (does the trust deed allow a change)

gm0

It seems likely - given the insistence on a trust that there is vulnerable adult situation of some kind. Which complicates matters. And whether there is a financial POA in place etc. And if a family member has any status to "act" on the trust beneficiary's behalf.

Be careful. There are many complexities with winding up trusts, and costs of doing so for the "professionals" involved in the paper chase, accounts etc. If that is even relevant, or a good idea. It may not be. Winding up into a simpler structure can trigger deeply unwelcome tax consequences. Turning the "good intention" into a bad mistake. Or not. It depends.

It is awkward in such cases many (not all) solicitor trustees (for trust admin and tax reporting) are not investment managers or financial advisers in the investing sense - though there may be such regulated folk - also involved and also taking a sip of investment returns. Some legal practices are multi-discipline.

Nobody among the middlemen - is really incentivised to "take more risk" on behalf of your son - and be held even mildly accountable should said risky investments turn out badly. So booking their fees. And muddling through in a less risk embracing i.e. a mediocre fashion - that is reasonably defensible as "reasonable behaviour for them in the role" when held up against documented known future needs and objectives for the trust. That is the entirely expected behaviour that their incentives dictate. And they expect to get paid for their time.

Yet as a result - lower potential investment returns from lower risks can arise from the incentives, alongside the higher cost drag from the professional admin of trust at lawyer hourly rates. So it can be "normal as expected" and "perceived as expensive" at the same time.

Perhaps - to be more generous to the lawyers for a moment - there is some unavoidable lack of clarity on needs/timing etc. For the use of the money. From the specific situation your family are in.

The ability to "lock up" investments very long term and not need to cash them out. Allows particular investment strategies. If the money is, or may be needed - sooner - some approaches become questionable - or completely unsuitable. More than 10 years. Less than 10 years - being a widely used view of what "long term" means. Hence the comment. Once there is ambiguity. Caution will bloom. And it is not sensible for me to suggest second guessing that.

It is really close to impossible to comment more meaningfully without specific understanding of situation and future need. Which is not really public internet forum stuff.

But the likely purpose of and use of these funds as cashflow in the future. How this money should be managed is driven fundamentally by a fairly settled view on that question. What is it needed for. How much is needed. Critically when might that be - especially if there are ongoing health/care/other issues.

A difficult situation. But stable.

While it is possible to change a trust - and its trustees (as has already happened) and thus wrestle it away from the current lawyers feeding off it. That either requires lay trustees with the motivation - and the longevity - to perform the same duties - as volunteers. And be "acceptable" substiututes as the "new trustees".
For your son as beneficiary. Which in the longer term - creates generational aging out challenges.

Or it requires paying some other professional outfit - somewhere - having shopped around the trust admin/investing business again - and found something where the ongoing costs are lower and outweigh the one off costs of effecting the change. Which may work out in a few years net. Or it may not.

On the questions on pension - if a low earner - it is not normal to be able to contribute capital to a pension due to the pensionable earnings matching rules for tax relief on contributions. And without the tax relief. It is not as immediately obvious why a pension wrapper would be needed in addition to the trust.

But absent employment earnings the 2880/3600 "non earner" exemption can be used outside the trust. for pension saving. Regardless of earnings. For your son. This requires money to be found either via disbursement from the trust, or otherwise saved - to take advantage of that option outside the trust structure.

Investments in a trust - just like in an ISA have their own tax rules. And so the returns and capital dispersed as cashflow can later be used in a "pension like" way in consumption - even if not in the pension tax wrapper. I am not sufficiently expert on typical CICA trust usage or this instance to comment further on what tax optimisations are or are not available here.

poseidon1

https://forums.moneysavingexpert.com/discussion/6653433/discretionary-trust

I can understand the concern especially if the trust funds are conventionally invested in a stockmarket portfolio, since there will no doubt be an additional layer of costs related to annual accounts and HMRC trust tax compliance.

However, as pointed out by Keep_pedalling there is simply no option to transfer these trusts assets into a pension fund for your son, so put that out of your mind.

At this point in time, best option would be to change trustees. To this end you need to examine the trust document to determine who has the power to do so. This will be explicitly set out in the trust deed.

If you or your son has this power, I suspect you will still be constrained in having a professional handling the trust on your behalf since I assume neither of you have the necessary competency to do so yourselves.

With this in mind you should explore the option of appointing a professional accountant with specific competency in trust administration and compliance to take over from the current firm of solicitors.

It will be a firm that already has a significant number of trusts under their management and on a like for like basis should be able to discharge their duties at a lower fee rate then the solicitor. Certainly that was my experience of comparative costs, from a London perspective.

If you are able to change to a more sympathetic trustee arrangement, the next stage would be to rethink the current costly trust investment arrangement.

As I said at opening of my post, costs of running such a trust can be aggravated by a conventional trust portfolio of income producing stocks and shares. As an alternative life company investments bonds could be a very cost effective alternative as set out in the article below -

https://www.canadalife.co.uk/media/wtehbqe0/setting-up-a-personal-injury-trust-for-vulnerable-clients_te4.pdf

The new trustee would likely have to get an IFA involved to review options in this area, but certainly potentially worthwhile for the long term cost savings involved.

Incidentally, what is the current value of the trust fund ?

Edgie7

Oh heck, sounds like a real can of worms. Please bear with me whilst I get my ducks in a row. My daughter is on of two Trustees, I am just the very concerned father of the son who needs to have this sorted

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81866994#Comment_81866994

Yes trusts can be a difficult area for the layperson ( or for anybody ) Often they are set up needlessly and cause more trouble than they are worth, although in your case it seems you had no choice.

Regarding the pension issue. A pension is just one way to save for later life, but not the only one. Pensions generally work best for people in employment, especially for higher earners. If that is not the case then you can certainly invest/save money outside a pension, for use later in life.

If you are saving later for later life and you are still not that old, it is usually recommended to go for higher growth/higher risk investments ( to a point). They can be a bit volatile but over the long term the trend is up. As explained by a previous poster the solicitors involved are probably wary of this sort of strategy, in case investments go through a bad patch and they get blamed for that, and it is making them too cautious in how they deal with the funds.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81866994#Comment_81866994

That's a good start that your daughter is one of the trustees.

Hopefully, a change to a more amenable professional trustee could improve outcomes.

However, what is the current value of the trust fund?

I have a view of what quantum of funds justifies the continuance of a discretionary trust (bearing mind running costs), especially as in the present case there is only one primary beneficiary.

DRS1

There must have been a reason CICA insisted on a trust for someone in their 30s. What was that reason?

Did your son have means tested benefits at the time?

Quite apart from the other reasons why moving the money into a pension may not be possible you need to bear in mind that you can only get money out of a pension when you are 57 (for someone who is currently 41). What would he do if he needed the money before then?

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81867291#Comment_81867291

My assumption is the son suffered life changing injuries as a result of a serious criminal assault/incident when younger.

Compensation from CICA can be as high as £500k, and it would not be unusual for this to be established by way of a formal settlement on behalf of the victim. In the present case this seems to be in the form of a discretionary trust which likely benefits from favourable Vulnerable Persons tax treatment, and helps preserve any means tested benefits the person may be entitled to.