We have taken over as trustees from two solicitors. Will leaves one-third of residue to A absolutely and remaining two-thirds on life interest to A, remaindermen are B and C. No discretion in will to pay capital to A from life interest trust.
Trustees invested in an investment bond in 2014. Since then they have made to 5% annual capital withdrawals and paid those to life tenant. Also interest of around £100 pa on the £25k or so held on designated deposit accounts. Are we incorrect in thinking:-
(i) By paying the 5% withdrawals to the life tenant the previous trustees have been capital and as such have been in breach of duties.
(ii) By investing in an asset which does not generate income the trustees are in breach of their duty to strike a balance between the interests of the life tenant and remaindermen when deciding on the investment strategy.
The trustees have taken the withdrawals of around £5,000 per annum, have paid accountancy fees of £600 plus VAT per annum and trustee fees of around £2,000 per annum and have paid the life tenant around £2,000 per annum. On an investment of £180,000 this represents a return of 1.1%. Would also be interesting to hear members’ views on what is an appropriate target return.
Galloways Accounting Trust Corporation Limited.
Withdrawals from a life assurance bond are capital in nature.
Prima facie, therefore, the trustees have been in breach of their duties.
Investment advice should be taken from an independent financial adviser or stockbroker.
Many accounts with ‘high street’ banks/building societies currently offer returns in excess of 3%. However investing in such assets would result in the ‘real’ value of the trust fund being eroded by inflation - to the detriment of the remaindermen.
A stockbroker/financial adviser should be able to construct an investment portfolio which provides dividend and/or interest income with the possibility of capital growth.
It would be worth obtaining the investment report or suitability letter provided by the financial adviser advising the trustees to ascertain the basis and reasoning behind the advice and whether it is worth questioning the advice.
Why was a non-income-producing asset recommended?
Why did the adviser not recommend investments where the income could have been mandated to the life tenant which the appropriate tax benefits?
Using a bond in this way means the CGT allowance has not been used and lost; why was this not considered by the adviser?
The bond route will also have caused unnecessary costs concerning withdrawals, was this taken into account in the initial advice?
There are also questions to be asked of the previous trustees.
Further questions around this theme should be asked, and advice should be sought on restructuring the investments if this is the chosen route.
The quality of IFAs is as variable as that of other professional service providers.
Unfortunately, there are many who recommend the use of investment bonds for a trust, regardless of the nature of the trust.
As identified by others, the payment to a life tenant of the amount withdrawn under an investment bond will invariably include an element of capital, which gives rise to a breach of trust by the trustees. The new trustees must therefore both consider if it would be appropriate to take action against the former trustees who made the investment, who may have a right of action themselves against the IFA (although this may now be statute-barred).
As regards the low return on the deposit accounts, under the Trustee Act 2000 trustees may apply the “whole portfolio” approach, mixing high and low income (and even no income) investments. They may also retain “cash” and many investment managers recommend that an element of any portfolio is held as “cash” – it really depends upon the percentage of the trust fund that has been retained as cash.
Having said that, TA2K also requires trustees to regularly review the trust portfolio to be satisfied that it remains “appropriate” for the circumstances of the trust. If the original trustees merely took advice to set up the trust and have not since undertaken any, or sufficiently regular reviews, this could be another lapse that gives rise to an actionable breach of trust.
I suspect the trustees in this matter are not alone in their approach to the investment of a trust fund.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals