Badly drafted right to reside

#1

Apologies in advance if there is an obvious answer to this…

I am advising the trustees in respect of a right to reside clause which is poorly drafted. The pertinent bits are:

I GIVE to my Trustees my freehold house [address] (the Property)…to hold upon the following trusts:-

(1) during the lifetime of my wife to allow her to live free of rent but subject to the payment of outgoings etc…

(2) my Trustees may at the request of my wife sell the Property and apply the proceeds of sale towards the purchase of another residence for occupation by her thereupon the new property shall be held upon the trusts of this gift

(3) after the death of my wife my Trustees shall hold such property upon trust for [remaindermen] etc…

The trustees have agreed with the wife to sell, and purchase a new property (for her to live in).

The new property is less valuable than the current one and there will be surplus proceeds.

What happens to the surplus proceeds?

Your thoughts are very welcome!

Roger Cork
ALS

(Carmen Cottingham) #2

Hi Roger,

This sounds like a life interest trust. Does the Will pride direction as to income and capital?

Generally there are clauses that do not authorise access to capital for the life tenant but does for income.

Would be interesting to know if these are present.

Carmen Cottingham
Cottingham Legal Wills and Probate Limited

(alexander.learmonth) #3

It seems to me that, literally read, the wife has only a right to reside, and that applies and can only apply to the house or the replacement property. But if ‘such property’ in sub-clause (3) then applies only to the new house, then surplus proceeds (or at least the income from them) would be undisposed of and could fall into residue. I say “(or at least the income from them)” because arguably the wife could in the future ask for a further replacement property using some of the surplus proceeds from the first house, and if so the trustees would not be free to distribute the capital. Are the residuary beneficiaries the same as the remaindermen?

Alexander Learmonth
New Square Chambers

#4

Thank you both for your thoughts and comments.

I set out the clause in full below:-

I GIVE to my Trustees my freehold house know as__________ (“the Property”) or such other property as may be owned by me at the date of my death as my main residence to hold upon the following trusts:-

  1. During the lifetime of my wife to allow her to live free of rent but subject to the payment of the outgoings relating to the use and occupation of the Property including the cost of insurance
  2. My Trustees may at the request of my wife sell the Property and apply the proceeds of sale towards the purchase of another residence for occupation by her and thereupon the new property shall be held upon the trusts of this gift
  3. After the death of my wife my Trustees shall hold such property upon trust for such of them my said children _______ and _______ as shall be living at the death of the survivor of me and my said wife and if more than one in equal shares PROVIDED that if any of my children shall have died before the death of the last survivor of us leaving children then living such children shall take by substitution and if more than one in equal shares the share of this gift which his her or their parent would otherwise have taken had he or she survived to attain a vested interest

I act for the executors and trustees in this matter, who are also the children referred to in sub clause 3. They are also the residuary beneficiaries. After the sale of the original property, some funds will be released. It appears from the wording as though those funds are not then subject to the trusts of this gift (2 above), and therefore can either be given straight to the remaindermen or residuary beneficiaries (who are luckily the same people) or, if they were being prudent, the trustees could hold those funds and pay the income to the remaindermen on the off chance those capital funds are necessary to house the wife in future. I suspect my clients will prefer the first option!

Do you think we would be safe to just distribute them outright?

Roger Cork
ALS

(Richard Bishop) #5

Hi Roger,

I assume you have an ‘immediate post death interest’ (IPDI), which is very common, an Interest in possession created by will and is exempt from the usual IHT burdens of an IIP. Entry, exit - 10 year charges.

The omission of any clause to advance income or capital can be overcome using TA 1925 s.31 s.32. In your case [s.32] (http://www.legislation.gov.uk/ukpga/Geo5/15-16/19/section/32) will fit your purpose.

Assume £500,000 home, sold for same, new property bought for £400,000 = £100,000 excess, the Trustees can distribute the £100,000 to the beneficiaries using TA 1925 s.32

It should be noted, for IHT purposes for ‘mom’ the £100,000 is deemed to remain in her estate on her death (as would the £400,000 new property) - the client ought not to think she has created a PET etc and when she dies the full value of the IPDI will vets in her estate regardless of the early distribution.

I think that’s right :0)

Richard Bishop
PFEP