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Closing Down a Trust

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A trust is a legal relationship where one party (the settlor), through a second party (the trustee) holds the right to manage the settlor's assets or property for the benefit of a third party (the beneficiary). In simple terms, a trust is a financial arrangement between three parties that hold assets for a beneficiary.

Once the trust has served its purpose or is no longer needed then it needs to be closed down in an appropriate manner. There are similarities to closing down a company, however there are a number of specific matters that should be considered before proceeding to close down a trust. These can be divided into four categories: (1) Assets, (2) Liabilities, (3) Tax and (4) Administration.

Assets

A trust ends when there are no assets in the trust. This usually happens when the trustees transfer the assets to the beneficiaries who are entitled to them. This transaction is known as an “asset transfer”.

The two most common ways that beneficiaries become entitled to the assets are either under the provisions of the trust deed or because the trustees exercise a power of appointment or advancement. It is important to check the scope of the trustees’ powers as the powers may apply to the whole or part of the trust fund. It is also worth noting that if all the assets are not transferred the trust will continue.

Liabilities

If a trust is not closed down properly, i.e. all the assets are not transferred to the beneficiaries, the trustees could face liabilities and claims from the beneficiaries. To avoid liability, it is important to carefully read through the terms of the trust deed and any related documents. It is essential to check the following:

  • Are consents needed from the beneficiaries?
  • Have there been previous distributions to beneficiaries?
  • Identity of the beneficiaries
  • Any changes in assignment to beneficiaries?

Tax

When closing down a trust it is very likely that there will be tax consequences. When exercising their powers, trustees should always seek tax advice, as it is usual for there to be reporting requirements to HMRC. The trustees will be protected against any liability if they are able to evidence that they sought professional advice to deal with tax compliance.

Administration

The responsibility of managing a trust rests with the trustees. However, they can employ trust administrators and advisors to assist them. Similarly, as directors of a company record their decisions by board resolutions or minutes, the trustees should endeavour to record their decision to close down the trust. The trustees should ensure that trust accounts are updated to guarantee that all the assets have been transferred. It is also important to make sure that the all original documents are stored safely.

In summary, once the trustees have considered and actioned all of the above, they should seek professional legal advice for drafting the distribution document to close down the trust. This document will be prepared in accordance with the trustees powers and will need to be signed by the trustees (and the beneficiaries if they are giving indemnities). Closing down a trust is not straightforward and it is therefore prudent to seek both tax and legal advice. The implications and consequences of failure to seek such advice could result in the personal liability of the trustees.