Choosing trustees and trustees’ responsibilities

This article is intended to help you understand the options in respect of choosing trustees for a trust and to give you an overview of the responsibilities of a trustee.

The trustees of a trust are entrusted with holding the legal title to the trust assets for the benefit of the beneficiaries. The person establishing the trust chooses who they want to act as the initial trustees of the trust and, thereafter, the trust deed sets out how trustees may be retired and/or appointed going forward.

In principle any person can be a trustee except an individual under 18 years of age. This can include the Settlor, a beneficiary, a professional person such as a solicitor or accountant or, as is described below, a trust corporation.

However, when choosing a trustee, serious consideration should given to whether the trustees may have a conflict of interest when making decisions regarding the trust. For example, if a trustee is also a beneficiary there could be a conflict of interest which leads them to potentially favour themselves when appointing income or capital from the trust. This could lead to disputes between beneficiaries in future. It is preferable to ensure that trustees not only are impartial but are also experienced at administering trust assets and understand their tax compliance obligations. This can be daunting for lay trustees.

Different types of trustees offer different advantages, for example:

• An individual trustee (i.e. a lay trustee) may know the settlor and their family well and act without payment (except for expenses). However, there could be technical problems if they die or lose mental capacity while acting as a trustee;
• A professional person provides expertise and in most cases will charge for their services. However, the same issues arise as above in that there could be problems if they die or lose mental capacity while acting as a trustee;
• A trust corporation provides the same expertise as a professional person but has the added advantage of offering continuity in the trusteeship. As with a professional person they will charge for their services.

There are no general rules as to what clients should do as everybody’s circumstances are different. However, for small trusts where there are family members who are able to act as trustees for no charge this may be the preferred route. For medium sized trusts and large trusts where the assets are significant and require investment or management then it may be preferable to appoint a professional or a trust corporation.

Even with small trusts there is a growing tendency for people to appoint trust corporations due to the personal liability that trustees take on when acting as a trustee.

Trustee obligations

Trustees are personally liable for their actions in relation to the trust and therefore an appointment as a trustee should not be taken lightly. Not only is the investment of the trust fund of paramount importance to the trustees there are also an increasing number of reporting obligations placed upon them.

From September 2022, more trusts will have to register with HMRC’s trust registration service. This change in the law may well escape the attention of lay trustees who may find themselves liable to penalties for non-compliance.

Trustees are also responsible for ensuring that, where appropriate, a trust and estate tax return is filed with HMRC each year to take account of any trust income and/or capital gains. Trustees are likely to need some assistance from accountants with regard to this responsibility and therefore even if your lay trustees are not charging for their time, they may have to engage a professional to charge for completing this return.

In addition, trustees must understand the rules relating to inheritance tax payable on trust additions and appointments of capital. These charges can apply on entry to the trust, exit from the trust and also on every 10 year anniversary of the trust. There are also other issues to consider such as related settlements legislation which is likely to be beyond the scope of a lay person’s knowledge and expertise.

PCO trust corporation can assist with providing a professional trustee for you. Get in touch to find out more.