Converting a Statutory Trust to a Bare Trust

Trusts Discussion
1

Hi all

I am currently dealing with a sad case where husband has passed away without a Will, leaving his wife and 3 young children.

Under the rules of intestacy, my understanding is that three statutory trusts are deemed to be created, one for each of the minor children.

Due to the make up of the estate, there will be rental properties passing to the children’s trusts, such that income will be arising on an annual basis. We would be looking to distribute the income earned for the children’s benefit.

Rather than having to make 3 vulnerable persons election, complete 3 trust tax returns, complete 3 R185’s and deal with the tax pool issues, due to the 45% tax credit attaching to distributions, I was wondering if anyone could confirm that we would be able to advance all of the capital of the trust to the beneficiaries such that 3 bare trusts are created.

I believe this should be possible under s32, but I am struggling to find confirmation that this can be done.

This would greatly simplify matters, and keep professional filings and costs to a minimum for the family.

I also assume that converting to bare trusts would not create a parental settlements problem? I.e. I assume any income arising going forward would be deemed to be taxable on the minors directly, rather than the mother (where income exceeds £100 in the year)

Any help/comments would be hugely appreciated!

@malcfinney1 @simonnorthcott @paul (Copied for hope of a response)

Thank you all

Conor

2

Section 32 Trustee Act 1925 should allow you to convert the statutory trusts to bare trusts, if that is considered to be for the benefit of the beneficiaries. As the trust assets derive from a deceased parent, the settlements legislation should not be in point. You may also want to consider whether there is any merit in retaining the conditional element of the statutory trusts (which covers the hopefully unlikely eventuality that one of the children does not survive to the age of 18).

You will need to ensure that the relevant part of section 31 TA 1925 does not prevent the new trusts from being bare trusts.

Also, if there is something particular to any of the beneficiaries (eg their physical/mental health, overbearing parent / step-parent) that might mean that converting to a bare trust would not be for that beneficiary’s “benefit”, then the trustees ought to think twice before converting to bare trust.

Paul Davidoff
New Quadrant

3

Hi Paul

Thank you very much for the above, it is really appreciated. (And apologies for the slow reply!)

Conor