Free CISI PCIAM Practice Questions: Trusts and Trustees

CISI means Chartered Institute for Securities & Investment. PCIAM means Private Client Investment Advice and Management. Use this focused CISI PCIAM page as a short practice test for Trusts and Trustees. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Trusts and Trustees

A discretionary trust has two individual trustees. They ask the adviser to arrange a switch from gilts into an authorised OEIC already held by the trust.

Trust deed extract:

The trustees may invest as if absolutely entitled, subject to any specific limits in this deed. No more than 25% of the trust fund may be invested in any one collective investment scheme immediately after a purchase. Trustees must minute compliance with this limit before giving an investment instruction.

Proposed switch:

Which conclusion should the adviser reach before arranging the switch?

• A. The switch may proceed because the deed gives the trustees power to invest as if absolutely entitled, so the 25% wording is only guidance.
• B. The switch may proceed if both trustees sign the contract note after execution, because post-trade approval satisfies the administrative requirement.
• C. The switch should not proceed as instructed because the OEIC would be £440,000, or 27.5% of the trust fund, and the trustees must revise or validly authorise a compliant instruction.
• D. The switch should be limited to £280,000 because 25% of the current trust fund is £400,000 and the existing OEIC holding is irrelevant.

Best answer: C

What this tests: Trusts and Trustees

Explanation: Trust documentation is the starting point for trustee investment authority. A modern deed may give wide investment powers, but any express restriction in the deed still controls what trustees can do. Here, the trustees must test the position immediately after the proposed purchase. The OEIC would become £120,000 + £320,000 = £440,000. With no costs or market movement, the trust fund remains £1,600,000, so the holding would be 27.5% of the fund. That exceeds the deed’s 25% cap. The deed also imposes an administrative responsibility: the trustees must minute compliance before giving the instruction. The adviser should not treat a broad statutory or deed power as permission to ignore a specific documentary limit.

• A broad power to invest as if absolutely entitled is subject to the deed’s specific restriction.
• Post-trade signatures do not cure a requirement to minute compliance before giving the instruction.
• The existing OEIC holding is directly relevant because the limit applies to the total holding immediately after purchase.

The trust deed’s specific 25% limit overrides the broad investment power, and the proposed holding would exceed that limit after purchase.

Question 2

Topic: Trusts and Trustees

An adviser is reviewing estate-planning options before involving a solicitor and tax specialist.

Client profile:

• Dr Shah, 68, widowed, is financially secure and does not need income from the amount being settled.
• She holds a £420,000 balanced OEIC/GIA portfolio outside her ISA and pension.

Planning aim: She wants £150,000 set aside for four grandchildren, aged 3 to 16, and any future grandchildren, mainly for education costs or future house deposits.

Constraints:

• No grandchild should have an automatic right to capital at 18.
• Trustees should be able to vary payments depending on each grandchild’s needs.
• Income may need to be retained while beneficiaries are young.
• Dr Shah accepts extra administration if it gives greater control and flexibility.

Which trust-purpose conclusion should drive the adviser’s discussion?

• A. A bare trust is most aligned, because it is simple and gives each grandchild a clearly identifiable share of the portfolio.
• B. An interest in possession trust is most aligned, because it gives a named beneficiary an immediate right to trust income while preserving capital for others.
• C. A charitable trust is most aligned, because it can provide long-term trustee control and avoid automatic capital entitlement for family members.
• D. A discretionary trust is most aligned, because trustees can decide which beneficiaries within a class receive income or capital and when.

Best answer: D

What this tests: Trusts and Trustees

Explanation: The decisive issue is the purpose of the trust. A discretionary trust is designed for flexible provision where trustees choose how and when to distribute income or capital among a defined class of beneficiaries. That matches Dr Shah’s wish to include future grandchildren, vary support according to need, retain income, and avoid automatic entitlement at 18. A bare trust is simpler but gives beneficiaries absolute entitlement, which conflicts with the need for control. An interest in possession trust is useful where someone should have a current right to income, often with capital preserved for others, but Dr Shah has not identified a life tenant or income need. A charitable trust is for charitable purposes, not family education or house-deposit planning.

• A bare trust fails because fixed beneficial ownership and absolute entitlement are inconsistent with flexible family provision.
• An interest in possession trust answers an income-right need, not a class-based discretion need.
• A charitable trust may offer continuing trustee control, but the stated purpose is private family benefit, not charity.

The client needs flexible trustee control over a class of current and future beneficiaries, with no fixed entitlement for any grandchild.

Question 3

Topic: Trusts and Trustees

The trustees of a UK registered charitable trust receive a cash donation from an individual supporter. The supporter has signed a valid Gift Aid declaration and receives no benefit in return.

Assume the grossed-up donation falls wholly within income otherwise taxable at the donor’s 40% marginal rate. Which explanation of the Gift Aid treatment is correct?

• A. The charity can treat the gift as £10,000 gross, reclaim £2,000 from HMRC, and the donor can claim £2,000 further tax relief.
• B. The charity can reclaim £2,000 from HMRC, and the donor can claim a £4,000 refund because they paid that amount in UK tax.
• C. The charity can reclaim £1,600 from HMRC, and the donor cannot claim further relief because the tax repayment goes to the charity.
• D. Gift Aid is unavailable because the recipient is a charitable trust rather than a charitable company.

Best answer: A

What this tests: Trusts and Trustees

Explanation: Gift Aid is designed to increase the value of a qualifying cash donation to a UK charity by treating the donor as having made the gift net of basic-rate tax. With a 20% basic rate, an £8,000 cash donation is 80% of the gross gift, so the gross gift is £10,000 and the charity can reclaim £2,000 from HMRC. The donor must have paid enough UK income tax and/or CGT to cover the charity’s reclaim; here, £4,000 of UK tax paid is enough to cover the £2,000 reclaim. A higher-rate taxpayer may claim additional relief for the difference between their marginal rate and the basic rate. At 40%, the extra relief is 20% of £10,000, or £2,000.

• Calculating the charity’s reclaim as 20% of the cash paid gives £1,600, but Gift Aid grosses the cash donation up to the pre-basic-rate amount.
• The donor’s further relief is not a refund of all tax paid; it is the difference between the marginal rate and the basic rate on the gross donation.
• A registered charitable trust can receive qualifying Gift Aid donations if the other conditions, including a valid declaration and sufficient donor tax, are met.

The £8,000 cash gift is treated as 80% of the gross donation, so the charity reclaims £2,000 and the higher-rate donor claims the extra 20% relief on £10,000.

Question 4

Topic: Trusts and Trustees

A discretionary trust was created for the settlor’s adult children and grandchildren. One adult beneficiary asks for a capital advance for a house deposit. The trustees confirm that the beneficiary is within the class of beneficiaries and that they are otherwise willing to make the payment.

Trust deed extract:

Trustees may advance capital to a beneficiary. Any single capital advance exceeding 50% of the trust fund requires the protector’s prior written consent.

Current trust figures:

For this clause, the trust fund is the quoted portfolio plus trust cash. Which trust participant or document is most relevant to the additional approval issue before the trustees proceed?

• A. The protector, because the proposed advance exceeds the 50% consent threshold in the trust deed.
• B. The letter of wishes, because it determines whether capital may be advanced to a beneficiary.
• C. The settlor, because a living settlor normally authorises capital advances from a discretionary trust.
• D. The beneficiary, because an adult beneficiary can approve an advance made for their own benefit.

Best answer: A

What this tests: Trusts and Trustees

Explanation: The relevant calculation is £385,000 plus £45,000, giving a trust fund of £430,000. The deed’s 50% threshold is therefore £215,000. As the requested £220,000 advance is above that limit, the trustees’ discretion is not the only relevant step: the protector’s prior written consent is required by the trust deed. A protector’s role depends on the terms of the trust instrument and is commonly used to consent to or veto specified trustee actions. The trustees must still decide whether the advance is a proper exercise of their fiduciary powers and in the beneficiaries’ interests, but the additional approval issue arises specifically from the protector-consent clause.

• The settlor is not the normal decision-maker once the trust has been constituted unless the trust deed reserves a specific power.
• The adult beneficiary may request the advance, but beneficiary consent does not replace trustee discretion or required protector consent.
• A letter of wishes can guide trustee thinking, but it does not usually create or override legal powers in the trust deed.

The trust fund is £430,000, so the 50% threshold is £215,000 and a £220,000 advance requires the protector’s prior written consent.

Question 5

Topic: Trusts and Trustees

The trustees of a discretionary trust have received £900,000 from the sale of a family property and ask for advice on reinvestment.

Trust and beneficiaries:

• The deed gives the trustees wide investment powers, with no express ban on collective funds.
• The beneficiaries are the settlor’s grandchildren, aged 14 and 16.
• The trustees expect to make education-related distributions when each beneficiary reaches 18.

Risk and proposal:

• The trustees have agreed a medium-risk approach and want to preserve flexibility.
• One trustee proposes investing 60% of the trust fund in a geared commercial property fund.
• The fund deals quarterly, may suspend redemptions, and targets a high income yield.

What is the single best response under the trustees’ investment duties?

• A. Keep the whole fund in cash until both beneficiaries reach 18 because trustees must avoid all capital risk.
• B. Decline the proposed concentration and recommend a diversified portfolio after taking and recording proper investment advice on suitability, diversification, risk, and liquidity.
• C. Proceed because the trust deed gives wide investment powers and does not expressly prohibit collective property funds.
• D. Proceed if the trustees minute that the high target income could help fund education costs.

Best answer: B

What this tests: Trusts and Trustees

Explanation: Under the Trustee Act 2000, trustees normally have broad investment powers, but those powers are not a licence to ignore trustee duties. They must consider the standard investment criteria: suitability of investments to the trust and the need for diversification, so far as appropriate. They must also exercise the statutory duty of care and usually take proper advice unless it is unnecessary or inappropriate. Here, the proposed 60% allocation to a geared, potentially illiquid property fund conflicts with the medium-risk mandate, creates concentration risk, and may not provide the liquidity needed for expected education distributions. The fund is not automatically prohibited, but the proposed size and features make it difficult to justify without a broader suitability and diversification assessment.

• Wide powers allow trustees to consider many investments, but they do not override suitability, diversification, liquidity, and duty-of-care requirements.
• A target income yield does not justify an unsuitable concentration, especially where flexibility and education distributions are relevant.
• Trustees are not required to hold only cash; prudent investment can involve market risk when it is suitable and properly diversified.

Trustees’ wide investment powers remain constrained by the duty of care and the standard investment criteria of suitability and diversification.

Question 6

Topic: Trusts and Trustees

Trustees of a will trust are considering a major portfolio change at their next meeting.

Trust facts:

• The trust deed gives the trustees the general power of investment under the Trustee Act 2000 and contains no express power to favour one beneficiary class.
• A 72-year-old life tenant receives the trust income and has limited capacity to replace a material income fall.
• Two adult children are entitled to the capital after the life tenant’s death.
• The current £1 million portfolio is diversified across equities, investment-grade bonds, and cash.
• The children have asked the trustees to sell most of the bonds and cash and invest 70% of the fund in an AIM-focused growth portfolio to seek higher growth and possible tax advantages.
• No independent investment advice has been taken since the last annual review.

Which trust-governance issue should carry the greatest weight before the trustees make the investment decision?

• A. Obtaining written consent from the adult children, because they are ultimately entitled to the trust capital.
• B. Preserving the current income level, because the life tenant’s income needs override the remaindermen’s capital interests.
• C. Prioritising the possible tax advantages, because tax efficiency is the main governance test for trustee investment decisions.
• D. Applying the standard investment criteria, with proper advice, to assess suitability, diversification, and the balance between income and capital beneficiaries.

Best answer: D

What this tests: Trusts and Trustees

Explanation: The Trustee Act 2000 gives trustees broad investment powers, but those powers must be exercised through a proper governance process. Trustees must consider the standard investment criteria: suitability and diversification in the circumstances of the trust. They should also obtain and consider proper advice unless it is reasonable not to do so. Here, the proposed move from a diversified portfolio into a concentrated AIM-focused growth strategy would materially alter risk, liquidity, income, and tax characteristics. The trustees cannot simply follow the remaindermen’s preference, nor can they focus only on tax advantages. Equally, the life tenant’s income needs are highly relevant but do not automatically exclude capital growth considerations. The trustees should document a balanced decision that considers both beneficiary classes and the trust’s investment purpose.

• Consent from the adult children does not remove the trustees’ duties to the life tenant or to the trust as a whole.
• Tax advantages may be relevant, but they do not replace suitability, diversification, and proper advice.
• The life tenant’s income needs matter, but trustees should balance income and capital interests unless the trust deed says otherwise.

The proposed switch materially changes concentration, risk, income, and beneficiary balance, so the trustees must evidence proper consideration of the statutory investment duties.

Question 7

Topic: Trusts and Trustees

Mrs Morgan creates a discretionary trust for family planning purposes. The trust deed states that Mrs Morgan transfers assets to Ms Lee and Mr Evans, who must hold and manage them for any of Mrs Morgan’s grandchildren as they decide.

Current trust records:

Which statement correctly identifies the trust roles and the current trust property?

• A. Ms Lee and Mr Evans are the settlors; Mrs Morgan is the trustee; the grandchildren are beneficiaries; the current trust property is £251,000.
• B. Mrs Morgan is the trustee; Ms Lee and Mr Evans are the settlors; the grandchildren are beneficiaries; the current trust property is £160,000.
• C. Mrs Morgan is the settlor; Ms Lee and Mr Evans are the trustees; the grandchildren are beneficiaries; the current trust property is £231,000.
• D. Mrs Morgan is the settlor; the grandchildren are the trustees; Ms Lee and Mr Evans are beneficiaries; the current trust property is £231,000.

Best answer: C

What this tests: Trusts and Trustees

Explanation: The settlor is the person who creates the trust by transferring property into it. The trustees are the legal owners who hold and manage that property in accordance with the trust deed. The beneficiaries are the persons or class of persons intended to benefit. Trust property includes assets currently held on trust, including investments bought with trust money and retained income left in the trust account. Here, the current trust property is £160,000 + £52,000 + £15,000 + £4,000 = £231,000. Mrs Morgan’s intended future top-up is not yet trust property because it has not been transferred to the trustees.

• Treating the grandchildren as trustees confuses the power to benefit from a trust with the duty to administer it.
• Including the intended £20,000 top-up overstates the trust property because an unmade future transfer is not yet held on trust.
• Counting only the listed shares ignores substituted trust investments, trust cash, and retained income that remain within the trust fund.

Mrs Morgan provided the trust assets, Ms Lee and Mr Evans hold them as trustees, the grandchildren can benefit, and the trust property is £160,000 + £52,000 + £15,000 + £4,000.

Question 8

Topic: Trusts and Trustees

A private client team is reviewing a discretionary family trust before recommending changes to the investment mandate.

Trust facts:

• Settlor: Mr Ahmed, alive but no longer adding funds.
• Trustees: Mr Ahmed’s sister and a professional trustee company.
• Beneficiaries: Mr Ahmed’s children and remoter descendants.
• Portfolio: £1.2 million in OEICs and short-dated gilts, currently managed for moderate growth.

Planning issue: One adult child has asked for £150,000 from trust capital to help buy a first home. The trustees want to know whether they can make the payment without prejudicing other potential beneficiaries.

Which trust participant or document should the adviser treat as the most relevant starting point for this issue?

• A. The existing investment mandate, because the portfolio is currently managed for moderate growth
• B. The trust deed, including the beneficiary class and trustees’ powers of appointment or advancement
• C. The settlor, because his current preference should determine whether capital can be paid out
• D. The adult child’s statement of need, because a beneficiary request creates the trustees’ authority to act

Best answer: B

What this tests: Trusts and Trustees

Explanation: For a trust planning issue, the adviser should first identify the governing authority. The trust deed sets out the terms of the trust, the class of beneficiaries, and the trustees’ powers, including any power to appoint or advance capital. A letter of wishes or settlor preference may help explain intentions, but it cannot override the deed. A beneficiary’s need may be relevant to the trustees’ decision-making, but it does not itself create authority. The investment mandate matters once the trustees know what distributions or liquidity needs are legally and fiduciary appropriate. Here, the immediate issue is whether a capital payment to one adult child is permitted and consistent with trustee duties, so the trust deed is the correct starting point.

• The settlor’s current preference may be informative, but trustees must act under the trust terms and their fiduciary duties.
• A beneficiary’s request can trigger consideration, but it does not confer a right to capital unless the trust terms support it.
• The investment mandate affects implementation and liquidity planning, not the legal power to make the distribution.

The trust deed is the governing document that determines who may benefit and what powers the trustees have to distribute or advance capital.

Question 9

Topic: Trusts and Trustees

Client: Mrs Patel is UK domiciled and wants to transfer £400,000 cash into a new discretionary trust for her adult children and grandchildren.

Trust facts:

• Beneficiaries will have no fixed entitlement to income or capital.
• The trust is not charitable.
• Mrs Patel has made no chargeable lifetime transfers in the previous seven years.
• She has unused IHT annual exemptions for the current and previous tax years.

Tax table facts:

• IHT nil-rate band available: £325,000.
• IHT annual exemption: £3,000 per tax year, with one year carry-forward if unused.
• Lifetime IHT on a chargeable lifetime transfer paid by the trustees: 20% on the chargeable amount above the nil-rate band.

What is the single best tax explanation before she proceeds?

• A. The transfer is a chargeable lifetime transfer; after £6,000 of annual exemptions, £394,000 is chargeable and £13,800 of lifetime IHT is due immediately.
• B. The transfer is exempt from IHT because no beneficiary has a fixed entitlement when the trust is created.
• C. The transfer is a potentially exempt transfer, so no IHT is due unless Mrs Patel dies within seven years.
• D. The transfer qualifies for charitable exemption because the trustees have discretion over who benefits.

Best answer: A

What this tests: Trusts and Trustees

Explanation: A lifetime gift into a non-charitable discretionary trust is normally a chargeable lifetime transfer for IHT purposes, not a potentially exempt transfer. The available annual exemptions reduce the transfer first: £400,000 less £6,000 leaves £394,000. With a £325,000 nil-rate band available, the amount above the nil-rate band is £69,000. At the stated lifetime rate of 20%, the immediate IHT is £13,800. A discretionary trust can also fall within the relevant property regime after creation, but the immediate issue here is the entry charge on the lifetime transfer.

• Treating the gift as a potentially exempt transfer ignores that gifts into most non-charitable discretionary trusts are chargeable lifetime transfers.
• Lack of fixed beneficiary entitlement does not create an IHT exemption; it is a feature of a discretionary trust.
• Charitable exemption depends on charitable purposes, not on trustee discretion.

A lifetime transfer into a non-charitable discretionary trust is a chargeable lifetime transfer, and the excess over the available nil-rate band is taxed at the lifetime rate.

Question 10

Topic: Trusts and Trustees

An adviser is reviewing a draft discretionary trust arrangement for a family wealth plan.

File facts:

• Priya signs the trust deed and transfers a £400,000 OEIC portfolio and £50,000 cash into the arrangement.
• Her brother Omar and her solicitor Helen agree in the deed to hold and invest the assets.
• The deed states that income and capital may be applied for Priya’s two adult children and any future grandchildren at Omar and Helen’s discretion.
• Priya will not retain an investment power under the deed.

Which statement best identifies the trust roles?

• A. Priya is the settlor; Omar and Helen are the trustees; the children and future grandchildren are beneficiaries; the OEIC portfolio and cash are trust property.
• B. Omar and Helen are the settlors because they sign the deed as asset holders; Priya is the beneficiary because the assets came from her estate; the OEIC manager is the trustee.
• C. Priya is the trustee because she provided the assets; Omar and Helen are beneficiaries because they make investment decisions; the children’s interests are trust property.
• D. The children and future grandchildren are the settlors because the trust is for their benefit; Priya is the trust property owner; Omar and Helen are investment beneficiaries.

Best answer: A

What this tests: Trusts and Trustees

Explanation: Trust roles are identified by legal function, not by family relationship or investment preference. The settlor is the person who establishes the trust and transfers property into it. The trustees are the persons who accept legal responsibility for holding and administering the trust property in accordance with the deed and their fiduciary duties. Beneficiaries are the persons or class of persons who may receive income or capital under the terms of the trust. Trust property is the asset pool held subject to the trust, here the OEIC portfolio and cash. Because Priya has not retained an investment power, the investment authority described in the facts sits with Omar and Helen as trustees, subject to the deed and general trustee duties.

• Providing the assets makes Priya the settlor, not automatically a trustee.
• Making investment decisions under the deed is a trustee function, not a beneficiary role.
• Being intended to benefit from the arrangement does not make the children or grandchildren settlors.

Priya creates and funds the trust, Omar and Helen hold and manage the assets, the named family class may benefit, and the transferred assets form the trust property.

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