Life interest trust - Investing in non-income producing assets

Trusts Discussion
1

I have been approached by the trustees of a life interest trust. They are also close relatives of the life tenant who is currently in receipt of means tested benefits.

The trust deed states that the income must be accumulated for the first 21 years, which will come to an end in 2021. The trustees want to ensure that in 2021, the means tested benefits will not be affected by the beneficiary’s right to receive the income. I will advise them to check whether or not the income will actually affect the benefits as if it doesn’t, they may not have an issue.

However, to avoid the problem, they are considering investing the trust fund in non-income producing assets, e.g. an investment bond. I am not entirely comfortable with this because as trustees, they have an obligation to balance the income and capital growth and if they arrange matters in this way I think they will be acting in breach of trust. I am also concerned that the motive is to ensure that the benefits are not affected. Does anybody think this is suitable solution?

The trust deed is very simple. There is though a power to apply the income elsewhere for the beneficiary’s benefit and to appoint capital not exceeding £500 on each occasion. I can’t see that either of these points help though as the beneficiary simply doesn’t need the income, his needs are all met from his benefit payments.

Anna Howat
Chattertons Solicitors

2

Whilst the life tenant has capacity, there is no reason they cannot agree to a proposal that the trust fund be invested in low/no income investments. Should the life tenant subsequently lose capacity, their agreement will likely lapse and the trustees will need to restore a balance portfolio, which may need some careful management of the potential tax situation.

There is a risk that a waive by the life tenant(albeit a revocable waiver) could be seen as an act of deprivation, although I am not aware that this point has been taken in relation to an income entitlement.

If investing in low/no income assets, it is necessary to look at the detail, as there are a number of such investments which whilst not paying out any income, are deemed to produce an income for UK income tax purposes, or automatically re-invest any declared distributions. in the latter case, the declared distributions will be income of the trust fund.

I note the comment that the trust instrument includes “power to apply the income elsewhere for the beneficiary’s benefit” which would imply a discretion over the income, even after expiry of the accumulation period. Is it certain that any income not paid at the trustees’ discretion will pass to the life tenant? If undisposed off it might pass to the remaindermen, which would resolve the question.

Paul Saunders