Trusts

Part 3 Trusts

October 2012 

31.5.40 Introduction

A precise definition of a trust is difficult to provide because they have been adapted to achieve many different ends. The basic idea of a trust is that the right of legal ownership is split between two or more persons. The trustee is the legal owner whilst the beneficiary enjoys equitable ownership. The trustee owes a fiduciary duty to the beneficiaries of the trust. The creator of the trust is known as the settler if the trust is created during his/her lifetime, or the testator if created in a will. It is important to understand what the different terms used in relation to trusts/types of trust mean (see paragraphs 31.5.41 to 31.5.50). The official receiver is most likely to encounter trusts in relation to freehold or leasehold property and life policies, see paragraphs 31.5.120 to 31.5.122 for further details. A trust may also be created as part of a person’s will or to provide an income for a person’s children or grandchildren.

 

31.5.41 Fixed trusts

A fixed trust, alternatively known as “an interest in possession” trust, is one where the interests of the beneficiary or beneficiaries are determined at the outset. The trustee must distribute the trust rights in accordance with the trust. An example of a fixed trust is one where the dividend payments from a number of shares are paid to each beneficiary equally. In such a trust the trustee cannot refuse to make payments to the trustee in bankruptcy who stands in the shoes of the bankrupt beneficiary (see paragraph 31.5.56 for further details).

 

31.5.42 Discretionary trusts

A discretionary trust provides the trustee of the trust with the power to decide how the beneficial rights are disposed of. An example of a discretionary trust would be one where the trustee can decide whether to distribute the dividend payments from a number of shares held in trust to the potential beneficiaries and, if so, the amount which is paid to each of them. Over a period of time the amount paid to each beneficiary by the trustee may vary considerably. The trustee in bankruptcy, like the bankrupt, would only receive payment at the discretion of the trustee of the trust (see paragraph 31.5.62 for further details). The bankrupt’s beneficial right does not vest in the trustee in bankruptcy.

 

31.5.43 Bare trusts or “nomineeships”

A “bare” trust is one where the trustee holds the trust rights “to the order” of the beneficiary or beneficiaries. The trustee has no discretion and acts on the instructions of the beneficiary or beneficiaries. An example of a bare trust would be a stockbroker holding shares on behalf of one or more beneficiaries. The stockbroker would complete all the legal procedures to deal with the trust rights whilst following the instructions of the beneficiary or beneficiaries as to what to do with the shares and dividends. A trustee under a bare trust is sometimes called a “nominee”. A bare trust is sometimes referred to as a “nomineeship”. A bare trust is a very simple kind of fixed trust (see paragraph 31.5.41). A trustee in bankruptcy would acquire the rights of the bankrupt beneficiary, if any, in relation to the trust. Further information on dealing with shares held by a nominee can be found in paragraphs 31.5.188 to 31.5.189.

 

31.5.44 Hybrid trust - trusts with fixed and discretionary elements

A trust which can include fixed and discretionary elements, is also known as a hybrid trust. For example a fixed number of shares in a company may be allocated to each individual beneficiary, whilst the monies paid as dividends from these shares are allocated at the discretion of the trustee. Any interest a trustee in bankruptcy will have would be dependent upon the terms of the trust.

 

31.5.45 Accumulation trusts

An accumulation trust is one that gives the trustees the power to accumulate income. The income will be added to the trust capital to be distributed to the beneficiaries at a later date. The trustees may have discretionary powers (see paragraph 31.5.42) to make payments to the beneficiaries. It is possible that payments made between the bankruptcy order date and the date of discharge may be claimed by the trustee in bankruptcy (see paragraph 31.5.56 for further details).

 

31.5.46 Accumulation and maintenance trusts

An accumulation and maintenance trust is a special type of discretionary trust (see paragraph 31.5.42). The beneficiaries must be the grandchildren of a common grandparent and must receive part or all of the income before their 25th birthday. The trustees may use the trust’s income for the maintenance, education or benefit of the beneficiaries or to increase the trust’s capital. It is possible that any such payments made between the bankruptcy order date and the date of discharge may be claimed by the trustee in bankruptcy (see paragraph 31.5.56 for further details).

 

31.5.47 Other types of trusts

A number of trusts have been created by statute, for example, title in land   can be held by up to four joint owners on trust for themselves as joint tenants [Note 1]. A number of trusts, called constructive trusts have been created over time by decisions of the court, to deal with, for example, claims for personal damages. The court retains the power to create constructive trusts if they believe it would be “just” to do so. For more information on constructive trusts see paragraphs 31.9.200, 31.9.201 and Chapter 31.9 Annex M. Finally a testamentary trust comes into operation when the testator dies and his/her will is executed by his/her executors.

 

31.5.48 Transferring an interest in a trust and protective trusts

Under a fixed trust a beneficiary may assign (transfer) his/her interest to another person, for example his/her spouse. The assignee, in this example the beneficiary’s spouse would have the right to demand the trust rights, for example a monthly income payment, from the trustee. Under a fixed trust the trust rights of a beneficiary pass to the trustee in bankruptcy on his/her appointment after the making of a bankruptcy order. A protective trust can be created to prevent a beneficiary transferring his interest to a third party or to stop the rights passing to a trustee in bankruptcy. Under a protective trust the beneficiary may lose the right to receive an income from the trust upon his/her bankruptcy or other event. A protective trust is a defeasible fixed trust (see paragraph 31.5.50) which becomes a discretionary trust (see paragraph 31.5.42) after a defeating condition such as bankruptcy, has occurred.

 

31.5.49 A contingent interest in a trust

A beneficiary’s interest in a trust is said to be a contingent interest if it is dependent upon a certain event arising. For example, the beneficiary receives an income when he/she starts a university degree course and continues to receive the income until he/she obtains their degree. The trustee in bankruptcy would have an interest in the trust if the event triggering the trust payments occurred before the date of discharge.

 

31.5.50 A defeasible interest in a trust

A beneficiary’s interest in a trust is said to be a defeasible interest if it comes to an end if a specified event occurs. For example, the beneficiary would no longer receive income from the trust if he/she became a parent. In this instance the trustee in bankruptcy’s interest in the trust, if any, would terminate if the specified event occurred.

 

31.5.51 The creation of a trust – transactions at an undervalue or defrauding creditors

A company director or bankrupt may create a trust with the intention of putting assets beyond the reach of a liquidator or trustee in bankruptcy. A trust that transfers the assets of a company, the benefits of a company director or the assets of a bankrupt to another person or person(s) for no consideration or for a consideration which is less than the value of the assets may constitute a transaction at an undervalue [Note 2] or a transaction defrauding creditors [Note 3]. Where the official receiver suspects that the creation of the trust constituted a transaction at an undervalue or was a transaction defrauding creditors the advice in Part 3 of Chapter 31.4A should be followed.

 

31.5.52 Trusts and insolvency – obtaining the initial information

Where a company in liquidation or a bankrupt is suspected of being a beneficiary of a trust the official receiver should take the appropriate steps to establish the interest, if any, of the company or bankrupt. The director or bankrupt should be asked to provide the name(s) and address(es) of the trustee(s) together with a copy of the trust deed.

 

31.5.53 Trusts and insolvency – writing to the trustee(s)

The official receiver should write to the trustee(s) as soon as possible asking for his/her potential interest in the trust to be noted together with a schedule of payments made to the company or bankrupt. If the director or bankrupt has not provided a copy of the trust deed the trustee(s) should be asked to provide a copy.

 

31.5.54 Trusts and insolvency – establishing the official receiver’s interest

On receiving a copy of the trust deed the official receiver should check the document to establish what, if any interest (see paragraph 31.5.42), the company or bankrupt has in the trust. The company or bankrupt may have an interest in both the trust’s capital and the income generated by that capital dependent upon the terms of the trust deed. In particular, the official receiver should establish that there are no clauses in the trust deed referring to the bankruptcy of a beneficiary or restricting the transfer of the beneficiary’s interest (see paragraph 31.5.48). Paragraph 31.5.55 provides a number of examples where the official receiver has an interest in a trust. The examples are not exhaustive. The official receiver should consult Technical Section in those instances where he/she is unsure of the extent of his/her interest, if any.

 

31.5.55 Examples of trusts in which the official receiver may have an interest

A fixed or hybrid trust (see paragraphs 31.5.41 and 31.5.44) where the company or bankrupt receives property, for example an interest in a freehold property, shares, a bank account, etc on reaching a specified age or a particular event takes place (see paragraph 31.5.49). A fixed or hybrid trust where the company or bankrupt receives a specified income for life, or other specified period. A fixed trust where the company or bankrupt receives a regular income from identifiable assets which will be transferred to him on reaching a specified age or a particular event takes place. Accumulation or accumulation and maintenance trusts that provide a regular income to the bankrupt.

 

31.5.56 Realising an interest in a trust – assets

The official receiver, after reading the trust deed and establishing that the he/she has an interest in the trust assets and/or trust income, should take the appropriate steps to realise his/her interest. Where the official receiver has an interest in the assets of the trust, for example in a freehold property or company shares he/she has a number of options. The potential asset can be treated as a long term asset and should be dealt with in accordance with the Case Help Manual chapter Long Term Assets. The official receiver may decide to sell his/her interest, if the trust deed allows him/her to do so. In such cases it may be prudent to obtain the agreement of the major creditors as the sale proceeds are likely to be significantly less than the value of the asset(s). The official receiver in making his/her decision must weigh the potential benefits to the insolvent estate against the delay incurred before realisation. The interest may be sold by private sale if a valuation is agreed or by a specialist outlet in the financial markets.

 

31.5.57 Realising an interest in a trust – income not subject to an IPO/IPA

Where trust assets are held for the benefit of the bankrupt and payments are made to him/her from monies generated by those assets the official receiver will be entitled to the payments in full for the duration of the trust. The asset may be treated as a long term asset (see the Case Help Manual chapter Long Term Assets) or the official receiver may decide to sell his/her interest. In such cases it may be prudent to obtain the agreement of the major creditors as the sale proceeds are likely to be significantly less than the value of the asset(s). The official receiver in making his/her decision must weigh the potential benefits to the estate against the delay incurred before realisation. The interest may be sold by private sale if a valuation is agreed or by a specialist outlet in the financial markets.

 

31.5.58 Realising an interest in a trust – income subject to an IPO/IPA

A bankrupt may receive an income whilst not having a beneficial interest in the trust assets. The official receiver in this instance would take into account the trust income in deciding whether an income payments agreement or order was appropriate in accordance with the guidance provided in Chapter 31.7.

 

31.5.59 A reversionary interest in a trust

A reversionary interest in a trust is created where the balance of the trust assets revert to the creator of the trust (in reversion) or to a named person or persons when the trust comes to an end. The company or bankrupt would have a reversionary interest in the trust whilst it was in existence. For example, if a company created a trust for a period of ten years after which time the trust assets revert back to the company. A further example would be where a bankrupt’s grandfather leaves a freehold property in trust for the bankrupt’s father until such time as he dies after which it reverts to the bankrupt. The official receiver should obtain the trust deed to determine whether the trust contains a reversionary interest.

 

31.5.60 Protecting a reversionary interest in a trust

A reversionary interest is an asset in the insolvency and the official receiver should immediately contact, in writing, the trust trustees and inform them of his/her interest. Where the trust includes land or freehold property a restriction could be lodged with Land Registry. For guidance in lodging the appropriate restriction for companies and bankrupts see paragraphs 31.3.25 to 31.3.27 and paragraph 50.38. Additional information is contained in Chapter 50 Dealing with the Land Registry.

 

31.5.61 Realising a reversionary interest

The liquidator or trustee in bankruptcy may not realise a reversionary interest in a trust immediately. The liquidator or trustee in bankruptcy must wait until the trust property has reverted to the company or bankrupt before realising the asset(s). In a bankruptcy the asset(s) may revert to the bankrupt after discharge. However the asset(s) vest in the trustee in bankruptcy and can be realised for the benefit of the estate. If the reversionary interest is treated as a long term asset it should be dealt with in accordance with the Case Help Manual chapter Long Term Assets. As an alternative liquidator or trustee in bankruptcy may decide to sell his/her interest. In such cases it may be prudent to obtain the agreement of the major creditors as the sale proceeds are likely to be significantly less than the value of the asset(s). The official receiver in making his/her decision must weigh the potential benefits to the insolvent estate against the delay incurred before realisation. The interest may be sold by private sale if a valuation is agreed or by a specialist outlet in the financial markets.

 

31.5.62 Dealing with payments from a discretionary trust

A trustee of a discretionary trust may make payments from income or capital, depending on the terms of the trust, to a bankrupt. Any payments made to a bankrupt whilst undischarged should be claimed by the official receiver as after-acquired property unless they are paid solely for the “maintenance and support” of the bankrupt. In which instance the monies paid should be treated as income and an IPA/IPO obtained by the official receiver.

 

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