This article is part of our Estate Planning Essentials series. Here, we explore who you should appoint as trustees and why independence matters. In other blogs, we also look at protecting vulnerable beneficiaries through estate planning and how divorce affects your will and wider estate planning.
Choosing the right trustee is fundamental to the effective administration of a trust and to avoiding future disputes, delays and legal complications.
Trusts, and particularly their role in tax planning, continue to attract attention and debate. While much of the discussion focuses on how trusts are structured, an equally important and often overlooked issue is who should be appointed to run them.
Let’s explore why the appointment of trustees deserves careful thought, the risks of appointing beneficiaries as trustees, and why independence and neutrality are often key to protecting both the trust and those it is intended to benefit.
Why choosing the right trustee matters
The law around trusts and trusts set up to ‘avoid’ tax still seem to be a hot topic. However, I want to focus on an important consideration: the appointment of trustees.
Trustees play a vital role and it’s crucial to carefully consider who is appropriate to appoint. The prospective trustee should also be approached to check they are happy taking on the responsibility – an unwilling trustee is unlikely to administer the trust properly!
It’s also worth noting that although a trustee can retire (if circumstances permit), administration of the trust may have already been neglected by the time they seek professional advice to understand their duties and how they can potentially be replaced.
Can a beneficiary act as a trustee?
There is no law to prevent a beneficiary of a trust also acting as a trustee, but one doesn’t need to be legally qualified to understand that this may present some issues – yet all too often I see beneficiary trustee appointments. My advice is always to ensure there is at least one independent trustee for the following reasons:
Emotional and potentially contentious elements
Let’s take the example of a right to occupy where the beneficiary may live rent-free in a property subject to certain conditions e.g. insurance and repair. If the beneficiary is also the trustee, there is of course no accountability. If the trustees include a beneficiary along with other parties, what relationship exists between them? How likely would this aggravate what may already be a tense dynamic (e.g. between step-parents and children)?
Legal considerations
A conflict of interest is not merely emotional. The trust deed itself may restrict what a sole trustee can do, often requiring at least two trustees for certain transactions to take place. There is also much case law on trustee self-dealing rules – for instance, limiting the powers of trustees where there may be some self-interest in the transaction. A minimum of two trustees makes sense in terms of giving additional protection and ensuring there is a neutral party.
It’s also worth considering what might happen if the beneficiary of a trust loses their mental capacity. Hopefully, they will have made a lasting power of attorney – but bear in mind that an attorney could also be appointed as a trustee, keeping it all within the family.
The issue then is that there could be some circumstances where the trustee and attorney cannot wear two hats for a transaction. Worst-case scenario is that an application to court will be required to approve the transaction. So, this is another reason to appoint a third-party trustee.
Why trustee neutrality is essential
The bottom line is that trustees must act neutrally. They must comply with the trust deed, as well as laws and responsibilities such as those under the Trustee Act 2000 (e.g. to what extent they must seek advice and how to invest trust funds), as well as common law guidance.
Trustees not only have a duty to the trust itself (i.e. acting within the powers of the trust deed), but they must act for the benefit of the beneficiaries and, where appropriate, also report information to HMRC in terms of registering the trust and tax requirements.
A trustee doesn’t need to be a professional, although of course that can go some way to avoiding many issues. However, as a minimum, a trustee should seek legal advice, as well as potentially financial and other guidance, to ensure they are fulfilling their duties.
How can we help?
Pippa Bavington is a Partner in the Wills, Life Planning & Probate team, based at our Sudbury Office.
Choosing the right trustee is one of the most important decisions in any trust arrangement. Our experienced private client team can guide you through the options and help ensure your trust is structured for long-term stability. If you’d like to talk about trust planning, our Wills, Life Planning & Probate team are here to help. Call us on 0845 543 5700 email [email protected] or contact us via our online enquiry form.