Could someone explain the practical affect of the following clause in the administration of the trusts
It’s a Will Trust for grandchildren on attaining the age of 25. All were over 18 on the testator’s death.
The Will includes STEP 1st Edition and also the following standard clause
“I direct that the income arising from my residuary estate or any contingent gift hereunder and all accumulations of income arising and made pursuant to s31 of The Trustee Act 1925 shall be held in trust for the beneficiaries hereunder absolutely”
There are two issues which this might be intended to address.
First its effect may be that every legacy carries the intermediate income. For example, a contingent pecuniary legacy does not normally carry the intermediate income (except to testator’s children and a few other exceptions), which means that the residuary beneficiary will be entitled to the income from the legacy until the contingency is satisfied; this could produce the odd result of an IPDI (where the life tenant is the residuary beneficiary and the remainderman is the legatee) which terminates in a deemed PET by the residuary beneficiary when the legatee satisfies the contingency. Conceivably there could be a relevant property trust if the residuary estate does not vest absolutely.
The clause may also be intended to override the part of s31 which, otherwise, might prevent a contingent legacy from being an IIP where there is a minor beneficiary (s31 permits accumulations while the contingent legatee is a minor, which ultimately may pass to someone else under the terms of the Will, if the contingency is not satisfied, so it cannot be an IIP during that time). In relation to the residuary estate, it may be that the testator wanted an immediate IIP (an IPDI) to arise and s31 might otherwise have prevented that from happening.
If the contingent legatee/residuary beneficiary is entitled to the “income arising from [the] residuary estate or [a] contingent legacy” and if s31 is adjusted to require any undistributed income to be held on trust for the relevant legatee / residuary beneficiary absolutely (regardless of whether or not he later satisfies the contingency), then that would constitute an IIP and, consequently, an IPDI in each case.
My colleague would be grateful if you could confirm our understanding of how the Trust is taxed (whether as an IPDI or under the Relevant Property Regime):-
That the clause is giving minor beneficiaries a right to income, therefore each beneficiaries’ estate would be taxed for IHT purposes as if he owned the underlying trust assets if he died before attaining the contingency age as it is an IPDI and not taxed under the Relevant Property Regime.
If this clause was not in the Will then would the Trust still be an IPDI if the beneficiaries were over the age of 18 at the date of death of the testator?
If this clause was not in the Will and children were under the age of 18 when the testator died would the Trust be taxed instead under the Relevant Property Regime as they do not have an immediate right to income
Firstly, as always, one needs to look at the whole of the Will, as there are sometimes other adjustments to the statutory rules which can change how the Will works. That aside:
Yes, if a minor beneficiary has an immediate right to the income, despite only being contingently entitled to the capital, and if the trustees/executors have no power to accumulate the income so that it might go to someone else, then it is an IPDI and aggregated with the relevant beneficiary’s estate. It will not be a RPT. NB Bereaved Minor’s Trust treatment trumps IPDI treatment.
If this clause were not in the Will, it depends if we are looking at a pecuniary legacies or a residuary legacy. With a pecuniary legacy to the testator’s children (or where the testator is in loco parentis), or if otherwise the wording of the Will provides for the intermediate income to go to the legatee, or if we are talking about a contingent specific or residuary legacy, then the relevant beneficiary will become entitled to the income at the age of 18, per s31 Trustee Act 1925. But do check the precise wording of the Will, as there are many variants. Also, sometimes the age of 18 in s31 is expressly increased. Where a trust could have been an Age 18 to 25 Trust, if it had been for the testator’s children, IPDI treatment (if applicable) takes precedence over Age 18-25 treatment.
Assuming that a beneficiary gets an IIP at 18, then if they are not 18 at the date of death, then there will be no ‘immediate’ IIP at that point, so no IPDI: instead it is probably a RPT, unless it can somehow fall into the DPI categories (which is unlikely). However, if the beneficiary is already at least 16 by the date of death, then on turning 18 within 2 years of the death, s144 IHTA 1984 will operate to convert that IIP into an IPDI.
As I mentioned, for pecuniary legacies, take care about who it is who is actually entitled to the income and, consequently, has the IIP; and always read the whole of the Will…