Residue
left to Pilot Trust. The £10 had never been paid to the trustees/attached to the deed, so it was not constituted at the date of the Will, or the date of death. Does the gift fail and the residue pass under the intestacy rules?
Simon
Northcott
Would Strong v Bird (1874) / Re Ralli (1964) assist?
Jane Huntley
Chadwick’s, Leyland
The £10 note is a conventional token, no more.
Is there no other property passing on the execution and delivery of the trust document to the trustees- such as, for instance, the trust deed itself? A thing of value, presumably, to the testator as he has left the residue of his estate to it.
Tim Gibbons
Whilst the trust was not constituted during the lifetime of the settlor, might it not be arguable that the gift under the will effectively constitutes the trust upon the death of the settlor, or that the terms of the trust are incorporated by reference?
I doubt many would accept the trust instrument itself was of sufficient value to constitute the trust.
Paul Saunders
If the trust is not properly constituted then I can’t see how it can receive a testamentary gift. The reason for the rules surrounding gifts to existing trusts is that otherwise the formal rules in the Wills Act 1837 would be circumvented –in which case intestacy beckons.
Is it permissible here to mention the Doctrine of the Missing Tenner? It involves two staple holes and the polite fiction that the trust’s initial capital was used (at some time whereof the memory of man runneth not to the contrary) to pay the solicitors charge for storing the trust deed. As I said previously, in itself a thing of value; in the eyes of some, even of beauty.
Tim Gibbons
Might it depend on the precise terms of the gift in the Will? For example, some precedents instruct the trustees of the Will to hold the gift on the same trusts as the lifetime settlement, with power to transfer it to the trustees of that settlement.
I raised a similar query many years ago on the old version of the tdf, but in relation to pilot trusts for pension death benefits rather than Wills, having noted that James Kessler’s precedents do not refer to an initial trust fund. I cannot now access that exchange, but recall that someone whose opinion I felt to be authoritative (possibly Chris Jarman?) agreed with me that an initial trust fund was not necessary in those circumstances, where the trust would only need to exist if and when the trustees of the pension scheme chose to exercise their discretion to pay the death benefits to it.
I appreciate that the question is different in relation to a Will, in that there must be an object of the gift for the gift to be valid, but wonder whether the gift would not still stand on the basis that it is simply a gift to some individuals (who can be identified from the trust documents) to hold on defined trusts?
**Diana Smart
**Gordons LLP
A gift to trustees to hold on the trusts previously communicated to
them, but which are not set out in the will; sounds like a half secret
trust to me. Unless the terms of the pilot trust are incorporated by
reference, as Paul has already mentioned, but that would mean the trust
deed would be admissible to probate with the will.
Michael Dew
I’ve copied below the old posting I think you mentioned:
Establishing pilot trusts- Trust Discussion Forum Nov/Dec 2008
I wonder if members could comment on an issue which has caused internal discussion at our firm, concerning nominal funding for trusts?
When a pilot trust is established, or for any other reason it is not appropriate to make an immediate transfer to trustees of the main trust assets, it is conventional to fund with a nominal £10 or £20 and we have been doing this in the traditional way, by pinning a £10 or £20 note to the original trust deed held in our strong room. The alternative would be opening a matter for the trustees, crediting the funds to a client account for that matter and dealing with the administration that might create (reflecting interest received on client account in trust accounts, trustees considering distribution of this income, etc.). Our finance director tells us, however, that client money cannot be held physically in safekeeping under the Solicitors Account Rules (although 16(1)(a) seems to permit it) and we should no longer do this. As it is defined as client money under the SARs the only proper treatment is to open a proper client account for it.
What is the practice at other firms? It would seem to solve the problem if the �10 note is released to one of the professional trustees in their personal capacity as trustee, to hold on behalf of the trustees as a body, rather than being held by the firm, but this is precisely the sort of thing the SARs should be avoiding, rather than encouraging, surely?
Bruce Hogarth-Jones
Birkett Long LLP
A practical advantage of crediting to the client account is that it documents the receipt of the £10 (there can be no dispute or query as to whether it was ever received). Any interest will be insignificant and admin will not be significant. Additionally a permanent client record is maintained.
That said the pinning to a trust deed seems to be preferred method at past firms.
Liz Jones
Last Cawthra Feather
Bruce Hogarth Jones’ problem is one that illustrates over enthusiastic application of rules. There is unfortunately no answer to his finance director than that the rules say what he or she has said and no doubt if the rules were flouted a regulator would have something to say, so I’m sure his FD is right to flag the problem.
We have reduced the amount of the initial settled fund to £1, but the principle remains - I am sure there is no de minimis exception.
We can’t close a file if we have funds on client account, so if one sets up a pilot trust in conjunction with (say) making Wills for clients the Will file could potentially remain open for years.
Solution is to use the �1 to buy postage stamps of that value and to put those with the trust deed. Of course the £1 has to pass through the client account first; the withdrawal is for an investment in stamps by the trustees so if not the firm investment instructions will be needed. At least investing in postage stamps is not (yet) regulated…
BTW I would discourage physically pinning anything to the trust deed. Could lead to queries some time in the future, on production of the trust deed for some reason.
Simon Leney
Cripps Harries Hall LLP
Surely in most cases the £10 can be applied at the initial stages towards payment of costs or other trust expenses?
Michael Jepson
M J Consultants
I believe NS&I do not allow trustees to purchase premium bonds - best stick with stamps ( excuse the pun!)
Nick Sewell
Bevirs
Controlled Trusts “disappear” next year under SRA proposals.
Tony Spiers
Withy King
I think there is also a minimum investment now of £100 for premium bonds
Ann Christian
Last Cawthra Feather
Clearly stamps must win and of course nowadays they are in practice index-linked.
ROBERT H. FOSTER
Walker Foster
There has been previous discussion on the forum as to whether or not a pilot trust actually needs an initial trust fund, with differing opinions, and I accept that it will probably depend on the circumstances - i.e. what the trust is for and what the trust fund will ultimately be.
However, I see that no-one has responded to Michael Jepson’s comment “Surely in most cases the �£0 can be applied at the initial stages towards payment of costs or other trust expenses?”.
If the initial trust fund is all spent, surely the trust ceases to be? (Although it can presumably be resurrected by the addition of further assets at a later stage.)
Diana Smart
Taylor & Emmet
Diane Smart raised this subject on 12 March 2007 and Edward Nugee commented that there was no need for the deed to include a starter gift. Indeed James Kessler in his Drafting Trusts etc. 8th Ed. does not favour including specific property in the definition of the Trust Fund but suggests that we use (i) property transferred to the Trustees to hold on the terms of the Settlement and (ii) all property representing the above.
The only thought that comes to mind is that say property is not transferred to the Trustees until say 6 months after the date of the Settlement, does the 10 yearly period commence at the date of the Settlement or at the date of the transfer?
Patrick Moroney
BWL Solicitors
My understanding is that, to be properly constituted, a trust must hold
assets (“certainty of subject matter”). If no assets or cash is
transferred to the Trustees at the time the Settlement Deed is completed
then there is no trust until the assets are transferred and, therefore,
the 10 yearly period runs from the date of transfer. Where there are
multiple Pilot Settlements, it will not be sufficient for the Deeds to
be dated differently, the initial donation to each must also be made on
different days.
Graeme Lindop
Coles Miller Solicitors LLP
Thank you for all the interesting responses on this topic. The discussion on whether the trust is properly constituted until funds are received has given me an idea that may solve the problem.
Suppose the settler, instead of handing over a �10 note, writes a promissory note for �10 payable on demand, to be kept with the trust deed? This is an asset which, in itself, is capable of ensuring the trust is properly constituted, but there is no need to open special client accounts, hold cash in the strong room, pin bank notes to deeds or wrestle with the Sirs - solution found?
Bruce Hogarth-Jones
Birkett Long LLP
An IOU written by the settlor sounds a much better solution than the �10 note, and I can’t see anything wrong with it.
Julian Cohen
Moon Beever
One aspect of this which nobody has yet commented on, is whether any of these situations sufficiently evidences that the settlor effectively established the trust on a certain date. This may be particularly important, in the case of offshore trusts, for example, where it needs to be shown that a trust was effectively established before the end of a tax year ( although of course one would probably also have had to settle in the substantive assets).
I am aware of cases from many years ago where Counsel’s opinion was required because of other defects in the establishment of a trust, e.g. as to whether there was sufficient evidence of the date the settlor had settled the trust, notwithstanding that the initial trust fund was a nominal sum received in specie by the trustee, which may have been via a third party. This can presumably be covered by documentation in some way or affidavit, but it would seem as easy to pay a small cheque into a client account, which leaves a much clearer paper trail?
Colin Le Bachelet,
RBC
RJV Adds:
Cf from Simon Northcott of Brooke-Taylors:
“In his posting on 14.10.08 Edward Nugee stated “if there is no propery vested in a person named in a settlement as a trustee, there is no subsisting trust…”. I think this must be correct, and it would take a brave person who wanted there to be a subsisting trust not to have a starter gift. Pinning a bank note to a settlement does not provide evidence of receipt by the trustees, paying into a client account in the name of the trustees does. A purchase of stamps sounds good-provided ofcourse they are used in accordance with the terms of the settlement at the end of the day!”
The purpose of Pilot Trusts is usually to ensure that settlements are not related for IHT purposes (s. 62 IHTA). Since s. 60 provides that a settlement commences when property first becomes comprised in it, it seems essential that an asset is transferred to the trustees at the time when the trust deed is executed in order to differentiate it from other settlements which may, for example, be funded on a death.
In the past we have tended to pay money into clients’ account to create the paper trail and then draw it out and store the �5/10 note with the trust deed. I think I prefer the promissory note route for the future.
David Bradley
Hewitsons LLP
X-LYRIS-Recency:
I am concerned about the suggested IOU from the settlor instead of settling
a nominal sum. I believe that this could well have serious implications.
What is the effect of an IOU? On one argument, the settlor has not paid
anything into the settlement until he (re)pays the IOU, so there is not a
“pilot trust” start date - very unfortunate if that is to be used to receive
say the nil rate band amount under a will to prevent that trust being
related with a new trust under the same will e.g. for business property. The
more serious alternative is that he has settled the money and (despite
possibly being excluded and ignoring the trustee’s obligation to call it in)
has borrowed it back interest free, in which case, there is arguably a gift
with reservation so that, again, the trust is linked with the settlor’s
estate until the IOU is repaid If the latter, then calling for repayment
could well be overlooked at the time the pilot trust is triggered and the
GWR then continues.
I still favour settling the nominal amount and then using that towards
payment on account of fees so that the pilot trust has then been established
with an initial trust fund but does not then have any actual funds as the
trust fund has then been expended in payment on account of fees. This is
better than trying to argue that payment of the trust fees by the settlor is
itself a settled amount by him.
Michael Jepson
MJ Consultants
X-LYRIS-Recency:
I don’t know what a pilot trust is, and none of the trust authorities on my
bookshelf mention it.
The contributors to this thread seem to agree that you can form such a trust
with a few postage stamps, or a tenner pinned to a trust deed. The question
is whether such an arrangement would be respected by HMRC or the courts, or
whether it would be regarded as a sham.
My view is that a trust is supposed to constitute or evidence a serious
commercial relationship, and that in order for a valid trust to come into
existence, the trust should be capitalised by the settlor or other parties
in a meaningful way, and I don’t think that this would be quite achieved
with some postage stamps. I would not proceed without initial trust capital
of at least 100 pounds, preferably more.
The promissory note suggestion, in my view, does not work. A promissory note
is evidence of an obligation to pay money. In this case, there is no
obligation, only an unfunded promise to make a future payment, given for no
consideration. I think that it’s trite law that a bare promise to make a
payment in the future is unenforceable, and would therefore be worthless as
a trust asset.
Errol Danziger
Danziger Capital Partners LLP
Michael Jepson has referred again to the settlement of an initial sum
which is then spent on startup costs.
Does this not mean that the trust then ceases to exist, because it has
no property?
If this is correct, and funds are then added at a later stage (eg on
death), what is the commencement date of the trust as it applies to the
added funds?
Diana Smart
Taylor & Emmet
As far as gift with reservation/settlor interested worries are concerned, is not a promise to pay on demand (which cannot be loaned back to the settlor unless it is paid in the first place) less of a problem than settling costs which may properly be costs of the settlor (because they are the costs of establishing the trust, rather than running it) from trust funds?
On Errol Danziger’s point, it is quite true that there is no consideration for the promise to pay so it would be unenforceable unless executed as a deed, so that is what you would have to do. If �10 makes it a sham, then I suppose the promise could be for a larger amount but since trusts funded by a nominal amount have, for a long time, been recognised as valid and constituted when the nominal amount is transferred to the trustees, that would seem sufficient.
There is an interesting analogy, here. Where a trust has been funded by a cheque, and the trustees have neglected to present the cheque for a period of time, has anyone experienced HMRC making the argument that the date of funding of the trust is only when the cheque was collected, and not when it was handed over?
Bruce Hogarth-Jones
Birkett Long LLP
When a trust is established, one of the first things that has to be done is notify HMRC in form 41G, to give the trust an HMRC reference.
The solicitors’ costs of completing and filing the form are costs of running the trust, not just establishing it, and I don’t know about my colleagues, but I would charge more than �10 for that aspect of the work. Therefore I don’t think that applying the trust money towards paying for that work to be done need cause problems, even though I would still favour the promissory note (by deed) route.
Julian Cohen
Moon Beever
This is not directly on the point of this thread, but I remember settling a draft trust instrument many years ago (early 1980), and advised that the trust should be established with a nominal sum. Feeling quite generous with my client’s money, I put the sum of �10 in the draft accordingly. The solicitor admonished me gently when telling me that, in the family in question, a nominal sum was �1,000. He amended the draft accordingly and doubtless (being nothing if not meticulous) arranged for that sum to be paid when the deed was executed. Incidentally, the case turned out all right in the end : Fitzwilliam v IRC [1993] STC 502 (HL).
Mark Herbert
5 Stone Buildings
I would be interested to hear the views of those more learned than myself, but if the Settlor is one of the original Trustees, and the Trust Deed recites the payment of the original £10 to the Original Trustees, would not the Settlor be estopped from ever denying that the original £10 had been paid (to himself qua Trustee) if it had not been evidenced in any other way?
Adrian O’Loughlin
TWM Solicitors LLP