“Can I put my house in trust?”. A question often asked of Private Client Solicitors and the answer is rarely yes. Nonetheless, there are many other assets that can be settled into trusts, be that during lifetime or upon your death through your Will. Investment properties, holiday homes, cash, stocks and shares, investment portfolios all lend themselves to being put into trusts, provided the person creating the trust does not wish to continue enjoying those assets.
Aside from what to put in your trust, another key question to consider is who will act as trustees of the trust. Trustees manage the trust for the benefit of the beneficiaries. The trustees and beneficiaries may often be the same people. Their role is broad and requires an ability to think pragmatically, make decisions and manage competing interests. The choice of trustees is particularly important for a trust created in a Will because it only comes in effect after the testator has died, so the testator has no ability to change the trustees if he/she realises the current trustees are not working together effectively.
Druces’ Contentious Trusts and Probate team recently advised a trustee of a Will Trust who was at risk of being removed as a trustee by her fellow trustees. The Will Trust was created in the testator’s Will and applied to his entire residuary estate. The testator appointed his second wife and the children from his first marriage as trustees of the Will Trust, which was a life interest trust. The second wife was the principal beneficiary of the Will Trust as well as being a trustee of it. After her death, the remaining assets will pass to the testator’s four children.
Relations between the testator and his second wife and his children were distant during lifetime but the situation only worsened after the testator’s death. From the children’s perspective, the second wife was spending their inheritance that they were already having to wait to receive. From the second wife’s perspective, she had been married to her husband for 25 years and deserved to continue living in the matrimonial home and receiving an income from the investments, as she had received during her husband’s lifetime. The result being a trustee dispute over the management and investment of the trust assets. The relationship between the five trustees had irretrievably broken down and the Will Trust was at an impasse when decisions had to be made. The children trustees brought proceedings to remove our client as a trustee.
Our client was upset and frightened by the proceedings. She was concerned as to the future of the Will Trust, which provided her livelihood, should she be removed as a trustee. Druces assisted the second wife with successfully negotiating a settlement that provided for her financial and living needs in exchange for her retiring as a trustee. To ensure our client’s interests remain protected and she is represented amongst the other trustees, we agreed with the children that in exchange for our client retiring as a trustee, she could choose her replacement. Disputes such as this are never easy to resolve but the settlement agreed met each side’s needs and wishes as far as possible, without causing the other side too much inconvenience.
This matter illustrates how important the choice of trustees is. Individuals often think appointing all of their children, for example, is a solution to the problem but too many cooks spoil the pot. When appointing trustees, thought should be given to their ability to understand the trust structure in the first place, their ability to make decisions and their willingness to engage. Disputes between trustees often arise because of trustees who are unenthusiastic about their role or because of trustees who are extremely risk-averse which paralyses them when making a decision. A frivolous trustee is ill-advised but a trustee should be able to analyse risk and recognise when a risk is small and worth taking.
Another key consideration when establishing a trust is sufficient funds within the trust to pay for professional fees and running costs. Trusts must prepare yearly accounts and file tax returns. Trustees sometimes need to obtain legal advice or ask a solicitor to prepare deed, such as a deed to appoint a replacement trustee. These are all costs associated with running a trust and must be paid by the trust. If a trust owns only a property and has no surplus cash for expenses, it will quickly run into problems. Not only will it leave a question as to who will actually fund these expenses, but if money is put into the trust after it is created to fund running costs, it can create tax problems.
Due consideration should be given to creating a trust and its subsequent management. It is important appropriate professional advice is taken. Druces’ Legal 500 ranked Private Wealth team is able to advise on all aspects of creating and running a trust, whether in lifetime or on death, and its partners are willing and able to act as trustees. On the other side, Druces’ Private Wealth team is also able to advise on trust disputes and situations where trustee relations have broken down.
If the points raised in this article sound familiar to you, please contact either Paul Levy, a Partner in Private Wealth, or Zoe Norton, a solicitor in Private Wealth, or your usual advisor at Druces.
