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Understanding the STEP Provisions

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Understanding the STEP Provisions Understanding the STEP provisions In this month’s CPD paper we will consider the STEP (Society of Trust and Estate Practitioners) provisions in detail. We will specifically be looking at the 2nd edition of the STEP provisions as this is the most up to date version. There are a lot of provisions to cover so this will be a two-part paper. WHY DO WE NEED ADMINISTRATIVE PROVISIONS IN A WILL? It is important to include administrative powers when drafting a will. Without express powers in the will executors and trustees are reliant only on statutory powers, which are spread out across multiple different statutes. These statutory powers may not cover all powers that the executors or trustees need in some cases, for example there is no statutory power for trustees to make loans. Since 1992 the easiest method of incorporating the administrative powers that an executor or trustee might need has been by incorporating the STEP provisions by reference in the will. This is much easier than writing out all of the powers within the will itself and can make wills quite a bit shorter and more to the point. In 2011 an updated version of the STEP provisions was introduced (the 2nd edition). While it is still possible for drafters to incorporate the 1st edition and previously drafted wills that referenced the 1st edition aren’t invalid, it is best to now incorporate the 2nd edition. This newer version takes account of some changes in legislation since the 1st edition, namely the Trusts of Land and Appointment of Trustees Act 1996 and the Trustee Act 2000. It also incorporated some changes that drafters commonly made to the provisions anyway. Administrative powers apply to executors and trustees. They may not ever need to exercise all of the powers granted to them by the STEP provisions, but as the saying goes it is better to have and not need than to need but not have. Powers that are irrelevant to the executors do no harm, for example the power to accept the receipt of a treasurer for a charity when there are no charitable gifts in the will. WHY USE THE STEP PROVISIONS? The STEP provisions were drafted by James Kessler QC, a leading barrister and author in the areas of wills, trusts, and taxation as well as one of the founders of STEP. They are drafted in a way that makes them easy to understand for drafters, and more importantly for testators and their executors. They are also accompanied by a set of guidance notes to explain each provision in more detail, which is also useful for testators. They are split into the standard provisions, which is the main bulk of them, and the special provisions that cover some more unique aspects of administration. It is possible to pick and choose which should apply. The standard provisions are contained in provisions 1-13 and the special in 14-23. They are easy to incorporate as it can be done by reference. For example: Page 1 of 8 “The standard provisions and all of the special provisions of the Society of Trust and Estate Practitioners (2nd Edition) shall apply.” Different wording can be used if you only wish to incorporate the standard provisions, or the standard provisions and only a few select special provisions. If incorporating the STEP provisions a full copy of them should be provided to the client as they do form part of their will. They should not be bound to the will though, incorporation by reference is enough. A drafter should familiarise themselves with the STEP provisions and be aware of each provision’s use and effect on a will. Care should be taken to avoid conflict between the provisions and the testator’s wishes, especially with the special provisions. It should also be noted that where there is a conflict between a STEP provision and an express provision in the will the will prevails: “2.2 These provisions have effect subject to the provisions of the Principal Document” (Principal Document being the will or trust in which the STEP provisions are incorporated in). THE STANDARD PROVISIONS We will now examine the standard provisions in detail. This section should be read alongside a copy of the STEP provisions, which can be found here: https://www.step.org/sites/default/files/Comms/SSP2_rebrand.pdf 1. Incorporation of STEP provisions This section gives guidance on what wording should be included in the will or trust in order to incorporate the provisions. This includes how to incorporate the full set, just the standard provisions, or only select provisions. 2. Interpretation This section details key definitions used throughout the provisions. It is important to note that these definitions relate only to the STEP provisions and do not alter any definitions already used within the will. An important definition here is at 2.1.2 for ‘income beneficiary’. This term is often misinterpreted by drafters as simply meaning a ‘life tenant’ but note that it also refers to a beneficiary who may have income paid to them at the trustees’ discretion. Any references to powers the trustees have in relation to an ‘income beneficiary’ must therefore not be limited to just a life tenant of an interest in possession trust: “2.1.2 “Income Beneficiary”, in relation to Trust Property, means a Person to whom income of the Trust Property is payable (as of right or at the discretion of the Trustees).” 3. Protection for interest in possession trusts This provision prevents any other provisions accidentally overriding any IPDI trusts created by the will, preventing any IHT benefits of such trusts being undermined. 4. Additional powers Page 2 of 8 4.1 Investment This provision grants trustees wider powers of investment than are allowed by the general law. It allows them to invest in property situated anywhere in the world and also in secured and unsecured loans. As with all other powers executors and trustees exercise they have a duty of care and must also consider the standard investment criteria set out in section 4 of the Trustee Act 2000. These criteria include a duty to review the trust investments from time to time, to consider the suitability to the trust of investments of the same kind, and the need for diversification of investments. 4.2 Management This provision grants trustees wide management powers over trust property. They can affect any transaction, carry out maintenance or repairs, or develop it as though they were absolutely entitled to the trust property. Wide powers of management are already granted by TLATA 1996, so an express provision is not strictly necessary but is included to make the position clear to trustees. 4.3 Joint property The trustees may acquire property jointly with any Person. This allows the trustees to act together with any other person in purchasing and holding trust property. This is beneficial when downsizing property held in an IPDI trust where the life tenant is also a co-owner of the property. STEP’s own guidance notes give a useful example of this power being used by trustees purchasing a property for young beneficiaries jointly with their parent or guardians. 4.4 Income and capital Income may be set aside by the trustees and invested so that a fund is available to pay any liabilities payable out of the trust fund. Non-professional trustees of an interest in possession trust should be encouraged to take advice before exercising this power as setting aside income in this type of trust may cause an issue. Ordinarily the life tenant of an interest in possession trust is entitled to the income of the trust, so the trustees would need good justification to set aside income in theses cases as they are depriving the life tenant. 4.5 Accumulated income This provision allows trustees to apply income as though it is income arising in the year that it is applied. This does away with some fairly complicated rules relating to apportionment of trust funds, where income arising at different times would be treated differently and have to be separately considered. Now, all income that is accumulated may be treated as though it arose in the year it is paid. This change was also made by the Trusts (Capital and Income) Act 2013, shortly after the 2nd Edition of the STEP provisions were published. 4.6 Use of trust property This provision gives trustees wide powers in relation to acquiring interests in property for the use of an Income Beneficiary. Remember that this is not just those beneficiaries with an entitlement to income. The trustees may purchase property anywhere in the world and allow an Income Beneficiary to occupy it or use it on whatever terms the trustees see fit, for example to rent it out to produce an income for them. This power, for obvious reasons, does not conflict with any powers that a person with an interest in Page 3 of 8 property has under TLATA 1996, i.e. it cannot interfere with the rights of an owner of the property or someone else with a beneficial interest in it. 4.7 Application of trust capital This power only applies if the trust grants the trustees the power to transfer Trust Property to an Income Beneficiary absolutely, or if they have a power to do so with the written consent of another person and that consent is given (this second power is more common in lifetime settlements, with the person who can provide permission often being the settlor). If it applies, this power allows trustees to make loans of the Trust Property to an Income Beneficiary on terms the trustees decide.
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