HNW Client wants his Trustees to be remunerated

[DavidPark]

Hi. I have a HNW client who wants to remunerate the Trustees named in his Will (his brother and his best friend) a monthly amouint for managing the trust (likely to be 8 figures) for the benefit of the beneficiaries (his descendants). Can this be done by also making them beneficiaries of the Trust? Can it be done by leaving a separate legacy in the Will?

I can see potential conflicts of interest and am not fully averse with Trustee remuneration of discretionary Trusts. Would appreciate any input from the wise heads on here.

David Park

[AGB (Andrew Taylor)]

If the Will contains an express charging clause, the Trustees may be able to charge a reasonable fee.
I say ‘may’ because the difficulties of these clauses were set out in da silva v Heselton [2002] EWCA Civ 880.

A precedent clause my say:

1. Trustee charging

1.1

A trustee which is a Trust Corporation or a company authorised to undertake trust or estate business which acts in a professional capacity as defined in s 28(5) of the Trustee Act 2000 shall be entitled

(a)to remuneration out of the Trust Fund for its services in connection with the Trust Fund in accordance with its published terms and conditions for trust business in force from time to time, and, in the absence of any such published terms and conditions, in accordance with such terms and conditions as may from time to time be agreed between such trustee and the person by whom the power of appointing new trustees is for the time being exercisable unless such person is also the sole Trustee; and

(b)to reimbursement out of the Trust Fund of its proper expenses in connection with the Trust Fund (including expenses incurred in connection with professional or other fees and charges for business done, services rendered or time spent by any firm or member of a firm associated or connected with such trustee).

1.2

A trustee who is an individual who acts in a professionalcapacity as defined in s 28(5) of the Trustee Act 2000 shall be entitled

(a)to be paid out of the Trust Fund all normal professional or other fees for business done, services rendered or time spent by such trustee personally or by such trustee’s firm or company in the administration of the Trust Fund, including acts which a trustee not engaged in any profession or business could have done personally; and

(b)to reimbursement out of the Trust Fund of proper expenses incurred in the administration of theTrust Fund.

1.3

A trustee who does not fall within the provisions of sub-clause 1.1 or 1.2

(a)may nevertheless be paid out of the Trust Fund such reasonable remuneration for time spent and servicesrendered in the administration of the Trust Fund as may from time to time be agreed between such trustee and the person by whom the power of appointing new trustees is for the time being exercisable, unless such person is also the sole Trustee; and

(b)shall be entitled to reimbursement out of the Trust Fund of proper expenses incurred in the administration of the Trust Fund.

1.4

A trustee, and (where applicable) such trustee’s firm or company, shall be entitled to reimbursement out of the Trust Fund of proper expenses and reasonable remuneration for services rendered in relation to any activity which is ancillary to the administration of the Trust Fund or to determining whether or not assets are comprised in it.

2. Power to receive remuneration

A trustee may be employed and remunerated as a director, other officer or employee or as agent or adviser of any business or Entity in any way connected with the Trust Fund, and may retain (without being liable to account for) any remuneration, fees or profits received by such trustee in any such capacity, notwithstanding that the appointment may have been obtained, or may be held or retained, by means or by reason of the trustee’s position as one of the Trustees, or of any shares, stock, property, rights or powers whatever comprised in or connected with the Trust Fund.

3. Power to retain commission

A trustee may retain (without being liable to account for) any commission received personally, or by such trustee’s firm, for any transaction carried out in relation to the Trust Fund for which such trustee, or such trustee’s firm, is in the normal course of business allowed commission, notwithstanding that the receipt of such commission results from an exercise by such trustee, or the Trustees, of the powers conferred by my Will or by law.

However, Practical Law’s commentary cites:

"The fees charged by any executor/trustee must be reasonable and where the executor/trustee is not acting in a professional or business capacity it may be more difficult to establish what is reasonable. The factors to be taken into account will include whether the “lay” executor’s work has achieved an overall saving in fees, that person’s usual remuneration and, possibly, the matters set out in Solicitors’ (Non-Contentious Business) Remuneration Order 2009 (SI 2009/1931) art.3."

A letter of wishes could set out the Testator’s views on what is reasonable.

[DavidPark]

Thank you for this response. Most helpful.

[mark.hubbard]

I agree the answer is a well drafted charging clause. The position of a non-professional remunerated trustee, which seems to be what your client has in mind, can be a tricky one and a bespoke clause would probably be best, which itself makes clear what the remuneration for these particular trustees should be or how it should be calculated, as well as a more standard charging clause for any successor/professional trustee who may take office in future.

Your client should also make clear what he expects his non-professional trustees to do when it comes to, for example, appointing an expert financial adviser or fund manager to help them deal with the size of fund you mention.

[andrew.goodman]

It occurs to me that remuneration is subject to income tax whereas a legacy is not. It may be worth pointing out to the client that a fixed “fee” in the form of a legacy to non-professional executors may be better (and simpler) for everybody involved.

[DavidPark]

Thanks Mark - very useful.

[DavidPark]

Yes, I was considering this option so good to have it suggested as a viable solution.

[Tigs (Tigger)]

I think Andrew is right that, in normal circumstances, a legacy is not subject to income tax. But I don’t see that as always right.

If, for example, the conversation were to be along the lines: “I’ll remunerate you £10,000 per year to be my trustee”, “No, don’t pay me £10,000 per year for doing the job of being your trustee. Instead give me a legacy of £10,000 per year and I will save tax” , “sure, ok, let’s change the trust deed to give you a legacy of £10,000 per year - saving tax is a great idea!”, then I am not so sure.

A trustee would appear to be an officeholder and so I struggle to see why, in the circumstances I just made up, that the £10,000 per year would not be employment income. Now obviously the facts in a particular case may be very different to this such that it is clear that there is no employment income.

[DavidPark]

Hi Tigs. You make a good point.

I have just spoken to the client and he now wishes to leave a lump sum legacy to each of his Trustees on the proviso that they assume the role. Is this sort of conditional gift allowable in these circumstances?

David

[Tigs (Tigger)]

I have zero HMRC experience of paying non-professional trustees (sorry Jack). The discretionary trusts that I have been involved in have either had professional trustees (so trading income) or individuals (who become unpaid directors of a trustee company) but are fully paid for their related employment role (so already PAYE).

Ultimately, I am not going to be able to give you a proper answer because I don’t know the full facts or how it will be documented. So that’s a judgment for you to make.

To try to help you, I could start writing that there are lots of cases that look at what “from an employment” means (and how that is narrower than “by reason of employment”) and what “emoluments” means. But that gets a bit long and boring quite quickly. Especially as the lump sum legacy will be funded by someone who is not the “employer” of the office holder.

If it was me I’d try to answer the question “what is it that enables the individual to enjoy the benefit?”. If the answer is:

• “his brother’s love”, not employment income.
• “his brother’s love and [in small font] agreeing to be trustee”, then probably not employment income as agreeing to be a trustee [in small font] is only incidental to the main reason.
• “because he has become a trustee and [in small font] was a trusted mate” then it sounds like there might well be employment income.

To me though, a conditional gift does not suggest it all about “his brother’s love” (“if you stack the shelves in my supermarket, I will give you £10,000”). But as I say, it’s all about the full facts and how it is documented.

[paul (Paul Saunders)]

Have you considered s.90 IHTA 984 – see IHTM16221

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals