When setting up a trust arrangement and gifting money or making a loan to the trust, the original advice is given to the clients who become the settlors or donors. It is they who need to pay the fees for this advice and services they have received. Capital is then invested and held in the trust. The legal ownership of the investments falls on the trustees and they have to fulfil their duties.
Under the Trustee Act 2000 they have a general power of investment allowing them to make any kind of investment that they could do, as if the money belonged to them. This is therefore wide-ranging and, unless the trustees have a good knowledge of the investment options available to them, and the tax consequences of a trust holding a particular investment, they are duty bound to seek advice. This is essential to ensure the trust is managed in a proper manner and in line with the trust objectives.
Traditionally the cost of providing any advice to the trustees may have been paid for by a trail commission from the underlying asset within the trust. With the introduction of the Retail Distribution Review at the end of last year, commission has been removed for new retail investment products and advisers are now remunerated by fees. Trail commission is therefore no longer available for new investments.
If trustees have a duty to manage the money they are responsible for and take professional advice where appropriate, how do they pay for that advice if the money within the trust is invested?
The trustees are not going to want to pay for any advice from their own funds so it is important that the trustees have a way of paying fees for the advice they receive.
Some larger trusts may include a trustee bank account, which can facilitate this, but a large number of trust investments are held in life assurance products such as bonds.
These are non-income producing assets and are considered easier for the trustees to administer.
Let us look at some of the options available:
The settlors or donors pay fees on behalf of the trustees
It is possible for the trustees’ fees to be paid by the settlors or donors. This does have implications. Firstly, the payments will be treated as further gifts being made by the settlor or donor. They would be treated as further gifts for inheritance tax purposes as chargeable lifetime transfers or potentially exempt transfers depending on the type of trust.
While this could be within the donor’s annual gift allowance, if this has been used elsewhere then it could cause complications. And while the settlor or donor may not mind doing this periodically, to commit over a longer period may not be desirable and may deter some people.
The trustees maintain a cash holding
One of the advantages of an arrangement such as a discounted gift trust or flexible reversionary trust is the relative simplicity from the trustees’ perspective. Investments are held under a trust and distributed when they are required.
If the trustees were to need a cash holding then this would be held outside of the investment, for example in a bank account. They would then need to divert some of the funds away from the investment initially and then maintain this account. Problems could arise if the account ever ran down to a zero or negative balance and investments would have to be realised, if that were possible. How much should be disinvested? What is the potential drag on being out of the investment markets? Add to this the difficulty in finding a bank willing to accept a small trustee bank account and many may find the process cumbersome.
An adviser charge deduction is taken from the underlying investment
If the product provider of the underlying investment allows ongoing adviser charges from its product, the trustees can request the required amount be deducted from an investment and paid to the adviser on their behalf. This can be a relatively simple solution, however care needs to be taken.
The impact of any withdrawals needs to be properly assessed and the trustees and settlor must be fully aware of the tax implications. Also, the deductions need to be suitable for how the adviser wants to work and how the trustees and adviser have agreed the fees.
Whatever solution is provided it is important that the trustees have access to funds with which to pay for the financial advice they receive. Many packaged trust arrangements may not allow the flexibility that advisers and trustees will desire or require. While an adviser charge facility may not be the main factor in selecting a provider for a trust investment, its availability will make life easier for both the trustees and the adviser.
