Those ‘competing’ beneficiaries should be treated fairly unless perhaps the settlor had made it clear that one class of beneficiary was to be preferred over another.
For example, if the trust states that income is to be provided for a beneficiary, then trustees should consider income-producing assets such as open-ended investment companies or unit trusts. Investment bonds are not income-producing assets and withdrawals from bonds are a return of capital not income.
Where a beneficiary is only entitled to income, then the trustees should bear in mind that an insurance bond is not appropriate because regular withdrawals from a bond may erode the capital for the remaindermen, leaving no money for those beneficiaries on the death of the income beneficiary.
Also, the withdrawals could be taxed as income by HMRC and the trustees may not be fulfilling their duties to all of the beneficiaries appropriately, and could leave themselves open to legal action.
It may be that the trust gives the trustees power to pay capital to that income beneficiary. In this case, the trustees are following the terms of the trust, but they still need to consider the impact of eroding the capital for the remaindermen.
A trustee must not place themself in a position where their duties as a trustee conflict with their private interests.
The trustees can only act within the terms of the trust deed. If they act outside those powers they are said to be in breach of trust. In cases of breach of trust the situation must be remedied.
The beneficiaries may absolve the trustees from responsibility for the consequences of the breach. Otherwise the trustees have to make good any loss to the trust fund from their own resources.
A trustee has a general duty not make any profit from the fact that he or she acts as a trustee, although professional trustees may charge for their services in a number of circumstances.
Keeping accounts and records
It is important that trustees understand which records they need to keep. There is a core number of documents a trustee will need to keep, as well as others if the trust sells, buys or receives additional assets during the year.
Trustees should also keep records of important decisions and income payments made at their discretion to beneficiaries.
It would be sensible to retain documentation for as long as possible – ideally for the entire trust period – so evidence is available in the event of any dispute with beneficiaries.
HMRC suggests trustees should always keep certain documents, including: bank statements for current and deposit accounts; confirmation of interest received; national savings bonds or certificates; chargeable event certificates issued by insurance companies; dividend vouchers from companies, OEICs and unit trusts; stockbroker reports and record of dividends; details of expenses paid; and details of all taxes paid by the trust. In addition, the trustees of a discretionary trust should record income payments to beneficiaries.
