Trust Advancements And Appointments

This is the trustee’s power to advance capital from the trust to a beneficiary or to appoint (assign) capital on different terms to those laid down by the testator (the person who left the property/assets in their will).   These two powers enable beneficiaries to gain access to trust property at a time or in an amount not provided for under the terms of the trust.  On some advances or appointments the trust property will become the property of the beneficiary benefiting from the power or, on other occasions the trust property will remain trust property but under new/varied terms.  A beneficiary that has a right to capital (known as vested or presumptive) has the benefit of a statutory power for the advancement of trust capital to them Trustee Act 1925 s32. (‘TA 1925’).

What is advancement?

Case law states that this is ‘the establishment in life of the beneficiary who was the object of the power’ Pilkington v IRC [1964] AC 612.  Essentially, meaning any significant step or advantage that results in the material improvement of the beneficiary’s life in a substantial way.

A statutory power of advancement (see below) can be used to adjust the terms of a trust to delay the payment of capital to a beneficiary if they are, for example, not yet considered capable of handling the capital they will receive at a specific age (say 21).  The trustees could use their statutory power of advancement and create new terms requiring the income from the capital to be paid to the beneficiary but not the capital until they attain a certain older age (say 25).

What is appointment?

A power of appointment is an express power and will need to be drafted into a trust – there is no statutory power of appointment.  Therefore, trustees can only amend the existing terms of the trust (as drafted), they cannot make unaccounted for changes such as taking capital out of the trust and paying it to a beneficiary.  As a result, trust powers of appointment are usually drafted very broadly to ensure the trustees have the power they need to satisfy the requirements of the trust and the beneficiaries.

Power of advancement by law

Prior to 2014 the law provided the power to trustees to advance up to half of a beneficiary’s entitlement.  In 2014 The Inheritance ad Trustees’ Powers Act removed the one half limit allowing trustees to exercise their discretion and if they consider it appropriate, advance the entirety of a beneficiary’s entitlement.   This is not limited to cash advances, capital may also be advanced.

Trustees may only use their statutory power when it is for the beneficiaries’ advancement or benefit.  If the trustees do not use their powers properly they risk personal liability to the trust fund.  The trustees use of their statutory power to advance to beneficiaries must be reasonable and the beneficiaries cannot coerce the trustees into making the advancement.

Only beneficiaries that are entitled to the capital in the trust fund can benefit from the statutory power of advancement i.e., those trusts where a beneficiary has to attain a certain age (often 25) before the capital becomes theirs.  Beneficiaries of a discretionary trust, i.e. the trustees retain the power to decide when and how much they receive from the trust, do not benefit from the statutory power of advancement.

Capital advanced to beneficiaries will reduce the amount due to them on the date set down in the trust by virtue of the fact they have already received part of the capital due to them.  This is called the sum being ‘brought into account’.  The reduction could be applied on a nominal basis, i.e. the sum already paid out is then deducted from the amount to be distributed to that beneficiary from the trust (usually resulting in a more financially favourable outcome for the beneficiary), or the advancement could be calculated as a proportion of the value of the trust fund to be divided.

What are the differences between advancement and an appointment?

Both of these powers are entrusted to the trustee to control property for the benefit of the trust and the beneficiaries, i.e. they are fiduciary powers.

The beneficiaries are the ones that would usually approach the trustees for an advancement or appointment because they are in financial need and the trustees are obliged to consider if they have sufficient powers to implement the beneficiaries request and exercise their powers.   However, trustees can also raise the matter of advancement or appointment if they consider or have been advised that, for example, a tax liability may be avoided if their powers are exercised.

When the trustees exercise their powers, very often, trust property will be moved out of trust and paid to a beneficiary (or more than one).  In some cases, new trusts are created so the trust property will be transferred to other trustees rather than the beneficiaries.

Tax consequences will apply to trust advances and appointments and exercising these powers or drafting settlements enacting these powers requires specialist advice from a solicitor.

The power of advancement is statutory whereas the trust appointment is not.

A power of appointment only exists if this has been drafted into the trust instrument.  As mentioned above, these can often be drafted very widely so as to give the trustees more power when the need arises.

How do the powers work in practice?

Continuing with the example above where a beneficiary is aged 21 and not yet considered capable of handling the sums due to them under the trust, the trustees could agree to advance sufficient capital to enable the beneficiary to buy a property earlier than the age of 25 when the capital will be conferred to them.  This is the power of advancement.

Powers of appointments must be created by deed.  They are usually found in discretionary trusts.  This power enables the trustees to give a benefit to a beneficiary of capital or income from the trust or even pass trust property to the beneficiary entirely, i.e. that property no longer forms part of the trust.  Powers of appointment are usually defined as special or general power of appointment.

General Powers

Are not very common as they are very broad in their scope and allow trustees to appoint (i.e. to distribute from the trust) to any person they choose including themselves.

Special Powers

Enable the trustees to appoint to beneficiaries who are chosen by the settlor.  The trustees may not exercise power in a way that surpasses the terms specified by the settlor (the creator of the trust).  The trustees can only appoint property or income from the trust pursuant to beneficiaries or classes of beneficiaries chosen by the settlor and is called ‘the objects of the power’.  Further, the trustees must consider ‘the perpetuity period’ which requires property to be passed to a beneficiary or a class of beneficiary during the life of the trust which is specified in the original trust settlement.

Changing the Statutory Power

The statutory power of advancement will often only need minor amendments and are like the amendments made when drafting a will.  Usually a trust settlement will create a wide power of appointment and quite often trustees will prefer to use their power of appointment as set out in the trust settlement rather than exercise the statutory power.    However, if amendments (by express provision) are made to the statutory power then the sort of amendments your legal adviser would make would be i) to remove the above mentioned statutory provision that earlier advancements must be ‘brought into account’ ii) to allow the trustees to advance up to all of the beneficiary’s share and iii) to remove the statutory requirement for all beneficiaries with an interest to agree to the advancement.

IHT and CGT

When the trustees exercise their powers in respect of both powers of advancement and appointment, the effect is that capital from the trust is passed to a beneficiary or the assignment of interests in the trust change meaning that IHT and CGT liabilities will likely be incurred.  Therefore, the trustees must consider the consequences of the tax liabilities when exercising their powers.

The creation and management of trusts is a complex area of law.  You are strongly advised to take expert legal advice if you believe your circumstances require the creation of or amendment to an existing trust.