Type of Trust to be used for RNRB to minors?

Trusts Discussion
1

I am aware that discretionary trusts are not permitted to be used with the residential nil rate band.

I am preparing mirror wills for a married couple. They have two minor children of the marriage, no other children nor dependants.

They wanted to use have family members who will be the guardians to also be the trustees of a trust for the RNRB in the event one does not survive the other (with the NRNB going into a trust only on the death of the survivor (or of both of them). I cannot understand why discretionary trusts would not be permitted in relation to the RNRB. So, I understand the right to the funds is absolute, but by way of example, do the funds simply go to the children when they all have turned 18 (or whatever age between 18 and 25) and there is no discretion for trustees during their period of minority to make payment for education, welfare etc.? What type of trust should be then used?

Is this an 18-25 trust? If so, is there discretion for trustees to distribute funds for education, health etc., in such a trust.

Kevin Burke

2

I am not exactly clear what your clients wish to do here, but I take it they want to leave everything outright to one another and then pass their estate to their children and also want to secure the RNRB (and the ordinary NRB). If that is the case, they then have a number of choices for the gift on the second death:

· Bereaved Minors’ Trust (s71A)

· 18-25 trust (s 71D)

· IPDI

· Disabled person’s trust (s 89)

(Most people would leave only part of the estate to a nil rate band trust on the first death to reduce the aggregate value of the estate on the second death, and therefore prevent the estate going into the ‘taper zone’ or losing the RNRB altogether.)

If the property is settled property immediately before the second death (and let us assume that it is a FLIT or simple life interest trust) then the gift to the children has to be absolute and indefeasible in order to secure the RNRB. That at least is what most commentators I have come across think is meant in the legislation when it says that the children must become ‘beneficially entitled to [the property]’ when the second parent (the life tenant) dies. (See s 8J(5).)

If you are having any kind of trust, I would avoid putting the identical people in charge of the money as are in charge of the children. That way temptation – and possible financial abuse – lies.

Jill MacMahon
Thackray Williams LLP

3

I take note of Ms MacMahon’s point as to the possibility of financial abuse.

The value of the joint estate is under 1.2 million, and it is in the first instance left to the surviving spouse. I have not prepared a NRB trust. It is of course on the death of the surviving spouse that the RNRB (and everything else) would be left to the minor children in what I now understand needs to be an 18-25 trust.

I have drafted language which I believe constitutes an 18-25 trust (s 71D) in their draft wills. I normally use Thomson Reuters’ Express Wills product but it does not provide anywhere any language for a draft 18-25 trust. I have therefore drafted the following keeeoing in mind that it is the remainder we are addressing and that we want the children/direct descendants to each have a share of the one relevant residence:

  1. /// _Distribution to the surviving spouse_

  2. Further Gift of Residue

a I give my Residuary Estate to the Fund Trustees as defined below upon trust to pay the income thereof to my children in equal shares until the distribution date as hereinafter defined and on which date said children shall become absolutely entitled to both capital and income.

b. Any residence, or interest in a residence, is to be shared equally among my children.

c. In this clause the “Fund Trustees” means ________________ and _______________.

d The use of Section 31 of the Trustees Act 1925 is not excluded nor varied / excluded / varied/ or ______________.

e. The Fund Trustees shall have the power of advancement in section 32 of the Trustee Act 1925, and such power is extended to apply to the whole of the trust capital (section 71D(7), IHTA 1984). Any application of capital during the lifetime of the beneficiaries must be for the benefit of the beneficiaries. The Trustees have a responsibility to see that any advance is used for the purpose stated. Section 32 Trustee Act 1925 is limited to circumstances where the beneficiaries receive a benefit during their lifetime (or other relevant period).

f. The distribution date shall be the earliest of the following:-

(1) upon the last of my children turning 24 years of age. ;
(2) the date when my children in equal shares surrender relinquish or compound the entitlement herein either wholly or partly and if partly then the distribution date shall only apply to that part of the Trust Fund so exonerated from this trust;
(3) the date of any other event which terminates such entitlement.

g. On and upon the distribution date to pay the Trust Fund to any further children born to me subject to each living at the end of the trust and attaining 24 years of age which shall be held in equal shares and if any of those beneficiaries shall fail to obtain a vested interest leaving issue living at the end of the trust and reach the age of 24 years then such issue shall take by substitution such failed share and if there shall be more than one of such issue they shall take in equal shares per stirpes but so that no issue shall take whose parent is alive and so capable of taking.

I believe this language will suffice but am still looking for models of same.

Regards,

Kevin Burke

4

What I do is to say:

“I give my Residuary Estate to such of my children as shall survive me and reach the age of [insert an age between 21 and 25] years and if more than one in equal shares absolutely.”

You have to make sure that your administrative powers are included in a form and used in a manner which complies with s 71D conditions, which are:

  •      The trust is in the clause of a parent/step parent/person with parental responsibility for the child (meaning of parent extended by s 71H)

  •      The beneficiary must become entitled to all the capital and any accumulated income at the latest at 25

  •      Any capital applied must be applied for the benefit of the beneficiary

  •      The beneficiary must be entitled to all of the income arising or it must not be capable of being used for the benefit of anyone else

Jill MacMahon
Thackray Williams LLP