The workings of trusts will be important to brokers under FSA regulation. Eddey Norman explains

One of the critical factors of FSA authorisation is that approved persons and all relevant staff are competent to do the job they undertake.What is clear in our work around the country is that one area where there is a general lack of knowledge and understanding is the subject of trusts and trust accounts.This is not good. So, over the next two weeks we are going to run what is one of the most important articles in our two-year history.The objective is that at the end of studying the articles every reader will know and understand the basic principles of a trust and, in particular, a trust account and statutory account and why they are so important to the FSA in regulating general insurance intermediaries.It is quite possible that if certain key approved persons cannot demonstrate knowledge and understanding of (and in time how to operate) a trust account, they could be deemed not competent and by inference not compliant.The purpose of a trust is for one party (the settlor) to pass property to another (the trustee) who carries out a settlor's wishes in holding and dealing with the property for others (the beneficiaries).It is the trustees who are legal owners of any property in the trust.A trust need not be in writing, although it is advisable. It can be implied or verbal. This case is important to remember, Knight v Knight [1840]. The decision in this case stated three certainties that must exist for a trust to be legally valid:

  • The words must be imperative. It must be clear from the words used that a trust was intended
  • The object [the assets] must be certain
  • The subject [the beneficiaries] must be certain.
  • The courts will generally prefer to support the wording of a trust deed that is the stated wishes of the settlor. The trustees legally own the assets. For example, a house in trust will have the trustee's name on the deeds, a bank account will be in the trustees name.Someone who has the right to interest from or use of property is called the life tenant and is deemed to have a life interest or an interest in possession. The legal definition used is "the present right to present enjoyment of trust property". Example 1: John leaves a house to his children but allows Great Aunt Maude to live in it until she dies: Aunt Maude is the life tenant.Example 2. John leaves a parcel of shares to his children, but Aunt Maude is entitled to the dividends for her lifetime. Once again, Aunt Maude is the life tenant.But remember, if a valid trust is to be established, the legal ownership of trust property must change from settlor to trustee. And, if assets leave a trust to go to a beneficiary there must be a change of legal ownership.There are several types of trust.

    Bare trustLet us consider a situation where Grandad owns a cottage in Dorset worth £50,000. When he dies, there is potential for a charge to inheritance tax at 40%. He wishes to give the property to his grandson, James when he reaches the age of 21. However, James is not yet 18 (the legal age of majority) and so cannot legally own the property. Grandad goes to his solicitor, who advises him to set up a bare trust.A bare trust is identified by the fact that the only duty of the trustees is to hold the property for the beneficiary(ies) and to transfer the property at a time stipulated in the trust deed. In this case, this will be when James reaches the age of 21. James is termed the absolute beneficiary. (No one else may benefit).Now, suppose Grandad wanted to give the property to James, but was concerned that in the event of his death, Grandma should retain the right to live in the property, or alternatively, to benefit from the rental income to supplement her pension?

    Interest in possession trustIn this type of trust the procedure is the same, but here, the wording of the trust is such that James will only receive the property when Grandma dies. In the meantime, she has the right to income and/or to live in (enjoy) the property.Grandma is said to have a 'life interest' and James is the 'remainderman'.If Grandma dies before James is 18 the property will be held on bare trust until he reaches that age.

    Discretionary trustIn simple terms, this type of trust allows Grandad to hand all responsibility to the trustees on how and when income and capital are distributed. All he has to do in order to satisfy the certainty rule is define the class of beneficiary.

    Accumulation and maintenance trustOne of the main features of the English legal and tax system has, since medieval times, been the protection of children and the advancement of their education. An accumulation and maintenance trust (A&M) is a discretionary trust. These are the requirements of this type of trust:

  • The trust must be set up for beneficiaries under the age of 25
  • The trust must not last for more than 25 years, nor be for the benefit of grandchildren of a common grandparent
  • Up to age 25, the trustees may use income from the trust for the maintenance or education of the beneficiaries
  • One of the beneficiaries must take a life interest in the trust at age 25 at the latest.
  • In other words, at age 25 at the latest, a beneficiary must personally take income as his or her share. The distribution of capital may be deferred. If income is not spent, it may be accumulated as capital.Saunders v Vautier [1841] is an important case that highlights one of the only rights of control that beneficiaries have over trustees. These are:
  • If all the beneficiaries are known
  • If there is no possibility of any other beneficiaries
  • If all beneficiaries are 18 or over and have the mental capacity
  • If all beneficiaries are in agreement
  • Then they may bring an end to the trust.
  • That is a very brief resume. Next week we will look at the duties of trustees and how the rules and law of trusts is applied in the current situation of insurance mediation but as an exercise, take your pad of A4 paper and identify what sort of trust you might be using for holding client money and also what part the various parties take.Eddey Norman is responsible for financial services training and competence at RWA Group

    Using this CPD pageFor the vast majority of practitioners and indeed support and supervisory staff in our industry, CPD is about regular learning and study that is planned, recorded, timed and evaluated. If you are a member of a professional body with a CPD requirement then there will be certain rules regarding the quality and nature of study material, and the way in which it is recorded.For staff of GISC members this means recording on your individual training file what the learning was, who provided it and when.It might be structured, such as a course, a learning programme or exam study. But it can be unstructured. This form of study encompasses reading the trade press, technical material or taking part in activities to support your professional body. Some CPD requirements are points related (a little antiquated) and others require a time value to be allocated. For example, it might take one hour to read Insurance Times each week. Most of that could be put as a time value but, in reality, perhaps only an half hour was devoted to learning something. The rule is to be honest with yourself and record the time that is relevant. Always take time to make a note of what you felt you gained from the activity. This is useful information for anyone else considering the same activity.In response to the popularity of our CPD programme each week's CPD page can now be downloaded from our website.To download a PDF of this article as it appears in the magazine click here .