How Trusts can go wrong

Sadly, over the years, we have had to pick up the pieces when a client’s estate has not been set up properly, particularly Trusts. So we wanted to share with you how Trusts can go wrong…

Choosing the wrong Trustees is one of the most common problems.

This is so important. You need to choose people who are going to have the best interests of both your beneficiaries and your estate in mind. They are able to take a balanced and pragmatic view on when is the right time to release monies to ensure your legacy is used wisely.

Moving on from choosing the Trustees, often the Trustees do not understand their role and responsibilities.

It is a legal role, and they are required to fulfil their duties in line with the Trustee Act 2000. Please check out our Resources section for a handy document detailing more about the role of the Trustee.

Trustees are required to have an annual meeting to ensure all monies in the estate are invested wisely for the benefit of the beneficiaries. Those decisions require consideration of tax implications, should beneficiaries be based outside of the UK for example, and return on investment.

In 1993 there was a very famous case: Nestle v NatWest Bank. NatWest Bank were appointed trustees of the Nestle estate. The beneficiaries were his wife, two sons and one grandchild. The funds were invested in tax free gilts because both sons lived outside of the UK.

When Miss Nestle, the granddaughter of the Nestle inheritance, became the sole beneficiary she was entitled to the whole estate which was valued at just over £269k. She argued that, with prudent investment, the estate should have been worth well over £1m.

She stated that NatWest Bank did not regularly review the Trust investment criteria, and should have moved the money out of tax free gilts when the tax implications for non-UK domiciles no longer applied. Miss Nestle and her legal team deemed this a breach of trust.

In the Court of Appeal the judge determined that there was no breach of trust. However, he stated that the bank fell “woefully short of maintaining the real value of the fund, let alone matching the average increase in price of ordinary shares”. He went on to say the bank had not acted “conscientiously, fairly and carefully” and there was “not much for the bank to be proud of in its administration of the… trust”.

We are sharing this as a strong example of what is expected of a Trustee.

Being able to demonstrate at all times that they have acted fairly, equitably and appropriately is vital to the character of the role, as well as a legal expectation.

To support this, Trustees should have a meeting at least once per year, which should be minuted. At those meetings the funds under Trust should be discussed to ensure they are still invested appropriately, and that the Trust remains supportive of the needs of the beneficiaries.

All Trust funds should be formally set up as Trust accounts, not put into the personal account of a Trustee.

In line with new regulations any Trusts set up after 6 October 2020 must be registered with HMRC, within 90 days of being set up. However, by 1 September 2022 all Trusts, irrespective of when they were set up, must be registered. There are a few exceptions, but we recommend assuming you will need to ensure they are registered.

The Trustees need to deliver an annual return to the Revenue to demonstrate the Trust has been administered properly.

If the Trust is wound up the Trustees must be able to show where all of the money has gone. This is for both tax purposes and the legal responsibility to both the beneficiaries and the deceased’s estate.

If you would like more information about Trusts and appointing Trustees, please contact us on 01344 875 310.

How Trusts can go wrong