A trust may be brought to an end in a number of different ways: it may naturally end on the death of a life tenant or, less frequently, on the expiry of the trust period; more commonly trustees may choose to bring the trust to an end and distribute the trust assets to one or more of the beneficiaries.
A well-drafted modern trust deed may give the trustees a number of powers, which might be used to break a trust. The most common are powers of appointment, powers of advancement and powers of resettlement (i.e. a power to transfer assets to a different trust). So trustees need to check the scope of the power. Does it enable them to achieve the desired result?
While the vast majority of powers will be exercisable by the trustees, some trust deeds will be drafted to give the power to the Settlor, or will require the consent of the Settlor to its exercise.
Are all the persons the trustees want to benefit objects of the power? If not, it may be possible to benefit them by exercising a power of advancement. All trustees will have the statutory power of advancement, but unless this has been specifically widened in the trust deed, it will only apply to one half of each beneficiary’s share.
If the trustees wish to transfer assets to a new trust, do they have a specific power of resettlement? If not, they may be able to exercise a power of advancement to achieve the same goal.
If the distribution to beneficiaries is by reference to a class, such as the children
or grandchildren of the Settlor, do you have details of all the children and/or grandchildren? Does the class include or exclude illegitimate or adopted children? If the distribution is to “the Beneficiaries,” does the trust deed contain any powers to add or exclude beneficiaries and, if so, have they been exercised?
Has any beneficiary assigned his interest? This is more common where a life interest trust ends on the death of the life tenant. It is not unusual for a remainder beneficiary to give away his interest during the life tenant’s lifetime, as a reversionary interest is exempt from inheritance tax.
A beneficiary should, in those circumstances, give notice to the trustees of the assignment of his interest. If a beneficiary has not given the trustees notice of his assignment, they are protected if they do distribute to that former beneficiary, but it is a point worth checking.
Do the beneficiaries want to receive the assets? The trustees should discuss the distribution with the beneficiaries. There may be circumstances in which a beneficiary would not wish to receive assets outright from the trust, such as if it might result in adverse tax consequences for him, or if the beneficiary’s assets might be at risk from creditors or on divorce. Some beneficiaries simply may not need the assets themselves but would prefer, for example, to pass their entitlement to their children.
Administrative issues
Should the trustees retain a reserve and/or take an indemnity?
A trustee is personally liable for the debts of the trust. He may, however, indemnify himself from the trust assets. The trustees will wish to ensure that they do not distribute all of the assets to the beneficiaries before they have satisfied themselves that no liabilities remain. They should therefore consider retaining a reserve from the distributions to beneficiaries until all known liabilities have been paid.
An alternative would be for the trustees to take an indemnity from the beneficiaries.
In this way, if any claim is made against trustees in future, they can recover from the beneficiaries under the terms of the indemnity. However, if indemnities are involved, the distribution is likely to become more complex. If there has been a previous indemnity given on a change of trustees, it may be necessary for the beneficiaries to give a direct covenant with the former trustees.
Transferring assets to the beneficiaries
In addition to drafting the necessary trust documentation to terminate the trust, what paperwork needs to be completed in order to formally transfer the title to the assets into the names of the beneficiaries? Are there any restrictions on transfer? For example, in the case of leasehold property, are consents required from the landlord? In the case of shares, particularly in a family company, are there any restrictions or pre-emption rights in the articles of association or shareholder agreement the trustees must follow?
Finally, the trustees will need to ensure that all necessary tax compliance formalities are completed, final trust accounts are prepared and the trust’s papers archived.
