Trusts and trustees: what it means to be chosen as a trustee?
What is a trust?
In simple terms, a trust is a legal arrangement that enables property within the trust (money, assets, investments, property for example) to be held in ‘trust’ for the benefit of another person or group of people (beneficiaries) until a specific time.
The cash and investments held in the trust are also called the ‘capital’ or ‘fund’ of the trust. This capital (or fund) may produce income, such as interest or dividends. The land and buildings may produce rental income. The way income is taxed depends on the type of trust.
When is a trust set up?
A trust can be created under the terms of a will, when someone leaves instructions that when he or she dies some or all of the estate is to be placed in trust.
The person who sets up the trust is known as a ‘settlor’ and he or she chooses people to run the trust for its beneficiaries. Those people in charge of the trust are its ‘trustees.
What is a ‘trustee’?
Trustees are the legal owners of the trust property. They are legally bound to look after the property of the trust in a particular way and for a particular purpose. Trustees administer the trust and in certain circumstances make decisions about how the property in the trust is to be used.
The trust can continue even though the trustees might change, but there must normally be at least one trustee.
What is a ‘beneficiary’?
A beneficiary is anyone who benefits from the property held in the trust. There can be one or more beneficiaries, such as a whole family or a class of people, and each may benefit from the trust in a different way.
For example, a beneficiary may benefit from:
• the income only, or
• the capital only, or
• both the income and capital of the trust
What are the responsibilities of the trustees?
The responsibilities depend on the type of trust and the terms under which the trust is created. The ‘Settlor’ may have given instructions that trustees carry out various functions, and trust law may impose further obligations.
For taxation purposes responsibilities may include:
• Notifying the Inland Revenue that tax is due, within six months of the end of the tax year, where you have not received a tax return for the year
• Keeping records of the income and capital gains
• Completing and sending back any tax return issued to you
• Paying any tax due on the income or capital gains of the trust
• Supplying certificates to the beneficiaries to show how much income they have received from the trust in the tax year and how much tax the trustees have deducted.
Depending on the terms of the trust deed, trustees can appoint a professional adviser, such as a solicitor or accountant, to carry out some or all of these tasks. However, trustees are still responsible for ensuring that all tax obligations are carried out satisfactorily.
What happens when a trust ceases to exist?
If a trust is wound up, Trustees should notify the Inland Revenue and complete a tax return for the period up to the date the trust is wound up.
Remember, trustees will need to
• Make provision for any tax that may be due
• Consider capital gains tax liability.
If the property of the trust is distributed before any outstanding tax is paid then trustees might have to pay that tax out of their own pockets.