Mirror trusts were a common way to arrange family affairs. They were fashionable 20-30 years ago as they offered a specific tax advantage which now no longer applies.
Those who currently have their family assets held in mirror trusts might want to replace them with a single, family trust.
This article explains:
- what a mirror trust is,
- why you might want to change your trust arrangements if you have mirror trusts, and
- how you can do that.
What is a mirror trust
Mirror trusts are a twinset of trusts usually established by couples. Each partner is the settlor of one trust. The terms of each trust are designed to “mirror” each other and have a provision that the settlor of each trust cannot benefit from that trust.
Why you might want to move away from having mirror trusts
Mirror trusts are impractical. Distribution of one trust will necessarily benefit the settlor if it benefits the couple. This is because of the simple fact people in a serious relationship, acting together, will tend to benefit from the same things. This means breaching the trust deed is all too easy to do.
Ownership of the assets is also split in two. Each mirror trust might own half the assets of the couple. This means twice the number of trustee resolutions and other documents must be prepared to manage assets that the couple might want to deal with together.
Mirror trusts also present an issue for estate planning. If one of the settlors dies, then half of the assets could be locked in a trust which cannot benefit the living partner.
These difficulties are a good reason to consider restructuring mirror trusts. Instead of having two mirror trusts, you could consider having just one family trust.
To create a new family trust, you would need to wind-up the old mirror trusts and move all the assets onto the new trust.
The problem with restructuring mirror trusts
Moving the assets of each onto a new trust likely breaches the terms of both mirror trust deeds. It is a breach if the settlors will be beneficiaries of the new trust.
This is a breach because each is supposed to be prevented from benefitting from the trust of which they are the settlor, and each trust would be transferring the assets to a trust structure in which they both now benefit.
How to address the breach of trust
Section 74 of the current Trustee Act 1956 essentially allows a beneficiary to ask the trustees to breach the terms of the trust. Such a beneficiary would not be able to make a claim against a trustee for a breach of trust because they have consented to it.
One purpose of this law is to allow families to give effect to new family arrangements or compromises that should be encouraged.
Therefore, all the beneficiaries who are entitled to the trust fund can:
- request the act which may be a breach of trust;
- consent to the act which may be a breach of trust; and
- indemnify the trustees of any consequences of the act which may be a breach of trust.
In consenting, each beneficiary must be fully informed and have the capacity to consent. This means that beneficiaries will need to seek independent legal advice before they do this, or waive that requirement so long as they are fully informed about the consequences.
The Trustee Act 1956 will become outdated soon. There is a new Trusts Act which will come into force in 2021. The rule remains in that Act at sections 82 to 84, with slightly varied wording and clearer requirements.
The benefits
Assuming you check all the boxes to do this properly, the benefits of having just one new trust are:
- You now only need one set of trustee resolutions/accounts etc. to manage the trust
- You can manage the assets of the family together in a way that means you are not risking breaching the mirror trust deeds each time the trustees decide to do something which benefits the couple
- You have modernised the terms of the new trust to follow best practice, as the old mirror trust deeds may have been drafted some time ago
- If one of the settlors dies, then the assets of the family are held in one family trust which can easily make decisions
Final important matters to note
It is crucial to obtain legal advice before proceeding with altering your mirror trusts or contemplating a breach of trust such as this. If the requirements are not met, the trustees may be in breach of the trust deed and will be exposed to liability for their wrongful actions.
Obtaining tax advice is also key, as moving assets between trusts can create tax consequences. Some of these may be mitigated by entering into a relationship property agreement. Whether or not you are able to do this will depend on your particular situation – including who the beneficiaries are and the terms of your mirror trusts.
For More Information
For more information regarding making changes to your trust, contact our trust and estate specialists on 04 472 0020 or email matthew.whimp@morrisonkent.com