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New rules on accumulations "a great improvement"

19 January 2010

Solicitors have welcomed a change in the rules on accumulations, to be introduced under the Perpetuities and Accumulations Act 2009. It was announced last week that the Act would be implemented on 6 April 2010.

The 21-year limit on the ability of trustees of private trusts to accumulate rather than distribute income will be abolished and a standard perpetuity period of 125 years introduced for all new trusts.

Ian Bradshaw, head of private client at Goodman Derrick, welcomed the change.

“Previously, where you had family trusts earning huge amounts of income on an annual basis, trustees could no longer accumulate income after 21 years,” he said.

“You had to pay out the income, regardless of whether you wanted to or not. There may be occasions when it could be unhelpful, for example if beneficiaries were too young or they had drug or alcohol problems or had joined a religious sect.”

Bradshaw also welcomed simplification of the rules on perpetuity periods, though he said most trusts were not caught by the existing limit, which in most cases is 80 years.

Caroline Kirby, private client partner at Farrer & Co, said the change in the rules on accumulations would give trustees more ability to filter the flow of funds to beneficiaries.

She gave the example of assets in a family company being put in a trust for the benefit of grandchildren. If the shares greatly increased in income, trustees might have to distribute large amounts of income to young beneficiaries.

“Some may not be very mature,” she said. “They might not be capable of dealing with large amounts of income. The situation acted as a disincentive for some people in setting up a trust.”

“It’s a great improvement on what we had. The trust fund can grow and the trustees retain their discretion.”

The Act retains the existing 21-year limit on accumulations for charitable trusts. Any change would need the permission of the courts or the Charity Commission.

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