Life interest trust for grandchildren


#1

Is it possible for a life interest trust to have more than one life tenant and for ‘grandchildren’ including those not yet born at the time the trust is created to have a life interest?

Anna Stephenson
Swinburne Maddison LLP


(Paul Saunders) #2

Yes, they can each have a proportionate share of the income, whether as tenants in common or as joint tenants, depending upon the wording of the trust instrument.

If the gift is being created by will, those grandchildren alive as at the date of the testator’s death will have IPDIs, whereas the interests of any later born into the class will be subject to the relevant property regime. As each new grandchild is added to the class, those who initially had an IPDI will be making an immediately chargeable transfer of value in relation to their proportionate share of the new grandchild’s entitlement.

Might it, perhaps, be more straightforward to create a discretionary trust supported by a letter of wishes identifying the wish that the income be distributed between the grandchildren living from time to time, and identifying when the capital might vest, whether in the grandchildren (at what age?) or their issue?

Paul Saunders


(andrew.goodman) #3

Yes - either in parallel (in which case they will have to have shares) or successive life interests. I presume you mean the former.

An unborn can’t have a life interest (how would you pay them - plus they are not alive!) so the analysis of what you are suggesting would really depend on the exact wording used and the rules of interpretation in the document and generally. It may be that the grandchildren alive from time to time share the income but that is pure speculation on my part.

Andrew Goodman
Osborne Clarke LLP


#4

Thank you Paul.

There is a fixed interest trust already in existence naming one grandchild as the life tenant. Another grandchild has been born since the trust was created and I cannot see a power to add a life tenant. Although the trustees have overriding powers to benefit discretionary beneficiaries and could therefore include the new grandchild but they would then have different rights to those of the life tenant and income would have to be taxed differently?

Anna Stephenson
Swinburne Maddison LLP


(Paul Saunders) #5

It will very much depend on what the trust instrument says, and what it might allow to happen. It may not be beyond the realms of possibility for the current, and any future grandchildren, to be treated identically. However, you would need detailed advice following a review of the trust deed. Much might depend on when and how the trust was created.

Paul Saunders


#6

Thank you Paul and Andrew for your helpful replies on this.

I have now had instructions to prepare a life interest trust for two grandchildren. One is not yet born although will be by the time the first payment of income is to be distributed.

Within the wording of the trust document would you advise stating that the income is to be paid to the life tenants as tenants in common or beneficial joint tenants. (depending upon the wishes of the client)

Thanks again

Anna Stephenson
Swinburne Maddison LLP


(Paul Saunders) #7

As a lifetime settlement, the trust will be subject to the relevant property regime, so that any change in entitlement between beneficiaries will not be subject to inheritance tax.

The unborn grandchild cannot yet be a beneficiary, so that if the trust is established now, before they are born, the initial beneficiary can only be the grandchild currently in existence.

In many respects, it is more straightforward for the trust to be divided into shares for each grandchild (to be re-divided if further grandchildren are to be allowed into the class?). This enables trustees to adopt an investment policy suited to the individual grandchild, and for each grandchild to have a clearly defined income pot. If they have a joint entitlement to income, a capital advance to one could create sibling discontent as the income may still need to be shared equally despite one of the grandchildren having taken out a capital sum.

Having defined shares for each grandchild may be seen to complicate the CGT position, as there will only be one settlement for that tax, but generally that is a minor distraction.

The above is based upon the trustees investing the trust fund “conventionally”. If the intention is to invest in rented property, or more exotic assets, the nature of the beneficiaries’ interests might be better considered in the light of the peculiarities of the intended investments.

Paul Saunders