I have been given documents for a trust and am unsure of the type of trust. The IFA who passed on the documents has been no help.
The only trust deed I have been given was when a life assurance policy (worth £50k) was placed in to trust in August 2006.This was just called a ‘flexible’ trust by HSBC.
So i have details of settlor, trustees, and 2 beneficiaries who are both minors.
A further £260k was then put into an investment portfolio by the settlor in 2015. The settlor died in 2016 and the £50k proceeds from the life insurance policy were paid into the investment portfolio too.
So now £310k has been paid into this portfolio. The broker schedule is showing dividends being received, but nothing has been paid out the the beneficiaries.
So my question is - is this a discretionary trust or not? There is no reference in any documentation as to whether this is a discretionary trust or not, so I don’t know how to proceed when producing the Tax Returns which are overdue.
Is the original trust deed from HSBC, still adequate for the other £260k of introduced funds? is that trust deed now defunct, as the policy has paid out?
I have no idea how to proceed on this or even what additional questions to ask the IFA. He just says its a ‘flexible’ trust, and points me back to the original HSBC deed.
Although i’m a general tax practitioner, my trust experience is very limited, so any help would be gratefully received.
To recap – the policy trust was created in 2006; the settlor died in 2016 and the trust fund added to an investment portfolio in the deceased’s estate.
Without more, I cannot see how the trusts impressed on the policy proceeds extended to bring the investment portfolio into the trust.
It looks more likely that the policy proceeds remain within a separate trust, which has been inappropriately merged with other assets.
Was the settlor’s estate settled under his will in trust for the minors who are also the beneficiaries of the policy trust? If so, then there are 2 trusts in existence and, it is likely they have been merged to reduce the investment manager’s fees/ administration costs. This can make it really quite messy for the trustees of each trust, and their advisers.
Rather than ask the IFA, I would be inclined to recommend your clients seek legal advice from someone well versed in trust and estate matters: to identify what steps now need to be taken in relation to both the policy proceeds and the deceased settlor’s estate. To leave matters as they are might only create more significant problems other than those already identified.
The flexible trust is a discretionary trust - the term flexible being used to denote that beneficiaries are not absolute but from a class or classes, although they can be named.
This is common practice with life company trusts.
They are usually only for the proceeds of life insurance.
If there is an aggregation clause in the trust then it would be possible to add investment proceeds to the trust, but I have not seen a life company trust with such a clause. The trust document should inform and there is rarely more than two to three pages of clauses to go through as these are relatively straightforward trusts.
I agree with @paul that this looks like an inappropriate merger of funds. Unless… the trustees of the life policy fund had the power to transfer the funds to a second trust, the one that houses the investment portfolio, again the clauses would need to be studied.
I can see why this would be advantageous in this case from an administration viewpoint - all funds administered as one for tax purposes - but the trust terms would remain separate.
Powers of investment
5 a) All monies liable to be invested under the provisions of this trust may be invested by the Trustees in the purchase of such investments whether or not income producing (including policies of life assurance) and whether or not authorised by law for the investment of trust funds which they may in their absolute discretion think fit in all respects as if they were absolute beneficial owners of such investment.
(b) The Trustees may from time to time vary such investments at their absolute discretion and shall be free of any obligation to diversify investments.
explanatory notes-The Trustees have wide investment powers, which may be used if the Policy proceeds are paid or bond encashed but the cash is retained in the Trust.
I can see no aggregation clause here so this trust has no power to accept other investments other than the proceeds of the life insurance - unless a variation to do so has been applied by deed under clause 18.
Similarly there appears to be no power to transfer the funds under this trust to any other trust (unless of course the trust was varied).
The power of the trustees is limited to the management and investment of the life proceeds only and the distribution of such to the beneficiaries… This is primarily what these life office trusts were designed to do.
However, re-reading your initial post, it appears that the life proceeds were amalgamated with the investment portfolio, which was not in an explicit trust, but now the settlor has died, is the portfolio being held on a constructive trust for the benefit of the minors.
This aggregation may be OK but the life proceeds element will still have to be administered under the terms of the discretionary life office trust and accounted for separately. You will have to determine how much income accrues to the original 50K life policy settlement as one trust and how much to the other investment.
Yes, it’s a discretionary trust with named default beneficiaries. No idea why life insurance companies decided to call them flexible power of appointment trusts. It’s one reason I decided to do my STEP qualification, so I could speak the same language as the solicitors I work with (I’m a financial adviser).
It sounds like you have a mixed fund which is partially funds from the life policy (which are still in the original trust - it doesn’t sound like it’s been wound up and distributed) and partially funds from the estate. If that’s the case, I assume you’ll need to apportion the assets, and then it’ll be normal discretionary trust tax rules re the investments held in the trust.
The devil is in the detail of the precise wording of the trust that you have, but I suspect that what you have is in fact an interest in possession trust for the “Named Beneficiaries” in the specified (or equal) shares, with an overriding power of appointment during the trust period. These were quite common pre Finance Act 2006 because distribution of the policy proceeds to the Named Beneficiaries in their respective shares would not trigger an IHT charge and any additions (eg by way of payment of premiums) would have been PETs (unless qualifying as normal expenditure out of income).
Many life insurance companies continued to have this form of trust after FA2006, even though, at that time, a new inter vivos IIP trust would normally have been a relevant property trust, with the result that there could be an exit/proportionate charge on distribution (there might even be a ten year anniversary/periodic charge in some circumstances). You ought to check the precise date of settlement so that you know what sort of trust you have for IHT purposes.
The trustees of the trust and the PRs of the estate need to look very carefully at what has happened with the trust’s funds and whether/how any additions may have been made to the trust (or separate gifts made to the trustees to hold on similar trusts). You will need to speak to those involved (including the legal/financial advisers at the time) and look at any other related documentation that you can find in order to determine what the present position is.