R05 Trusts and life assurance: free practice questions

1. Question 1 of 5

   Who are the three parties to a trust?

   Option A: The settlor, the trustees and the beneficiariesOption B: The assignor, the assignee and the insurerOption C: The testator, the executors and the legateesOption D: The insurer, the adviser and the policyholder

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   The answer is A: The settlor, the trustees and the beneficiaries

   The settlor creates the trust, the trustees manage it and the beneficiaries benefit from it.

   Why the other options are wrong

   B

   Assignor and assignee are the parties to an assignment.

   C

   Testator, executors and legatees are the parties to a will.

   D

   The insurer and adviser aren't parties to the trust itself.

2. Question 2 of 5

   Owen has no will and a life policy not written in trust. He wants the proceeds to go to his partner, to whom he is not married. What is the risk if he dies without taking action?

   Option A: They pass under intestacy as part of his estate, which may leave out his partnerOption B: The insurer will refuse to pay the claim until a will is foundOption C: The proceeds will be paid to his partner, but only after probate is grantedOption D: The proceeds will be paid directly to HMRC as bona vacantia within six months

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   The answer is A: They pass under intestacy as part of his estate, which may leave out his partner

   Without a will or trust, the proceeds form part of the estate and pass under the intestacy rules, which do not provide for unmarried partners. A trust ensures the money goes where the settlor wants.

   Why the other options are wrong

   B

   The insurer pays the estate once there's a grant; it doesn't wait for a will to be found.

   C

   Without a will or trust, the money passes under intestacy, which doesn't include unmarried partners.

   D

   Bona vacantia applies only where there are no relatives entitled under intestacy.

3. Question 3 of 5

   How does a discretionary trust differ from a flexible interest in possession trust?

   Option A: A discretionary trust can only benefit a spouse and childrenOption B: No beneficiary has an entitlement until the trustees make an appointmentOption C: A discretionary trust names a default beneficiary who receives proceeds if no action is takenOption D: A discretionary trust has no trustees

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   The answer is B: No beneficiary has an entitlement until the trustees make an appointment

   In a flexible trust, the default beneficiaries with an interest in possession receive the proceeds unless the trustees act. In a discretionary trust nobody is entitled until the trustees exercise their discretion.

   Why the other options are wrong

   A

   Discretionary trusts can have a wide class of beneficiaries.

   C

   Naming a default beneficiary is a feature of flexible trusts, not discretionary ones.

   D

   Discretionary trusts have trustees, who exercise the discretion.

4. Question 4 of 5

   A settlor wishes to remove a trustee who refuses to step down. Unless the trust deed contains a specific power, what would normally be required?

   Option A: A majority vote of the beneficiariesOption B: An application to the courtOption C: Consent from the life assurance companyOption D: A written notice from the settlor

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   The answer is B: An application to the court

   Trustees can resign freely, but removing one against their will generally needs a court application, which is costly and uncertain, unless the trust gives someone a power of dismissal.

   Why the other options are wrong

   A

   Beneficiaries don't have a general right to vote a trustee out.

   C

   The insurer has no role in appointing or removing trustees.

   D

   A settlor can't simply dismiss a trustee by notice unless the trust deed gives that power.

5. Question 5 of 5

   Trustees hold an investment bond and begin taking regular withdrawals. What is the effect for trust registration purposes?

   Option A: The bond must be surrendered in full within two yearsOption B: No change, as all life assurance trusts are permanently exempt from registrationOption C: Registration is required only if the withdrawals exceed 5% of the premium a yearOption D: It must now be registered, as HMRC treats withdrawals as outside the exemption

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   The answer is D: It must now be registered, as HMRC treats withdrawals as outside the exemption

   The exclusion covers policies paying out only on death, terminal or critical illness, disablement or healthcare costs. HMRC treats full or part surrenders from a bond as outside those definitions, so registration is required.

   Why the other options are wrong

   A

   Nothing requires the bond to be surrendered; the change is that the trust must be registered.

   B

   Life trusts aren't permanently exempt: the exclusion covers policies paying out only on death, illness or disability.

   C

   The 5% figure relates to tax on withdrawals, not to trust registration; any withdrawals trigger registration.

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