US Living Trust - is it a bare trust for UK tax purposes?

I am advising a UK domiciled client who is living and working in the USA (California). The client has substantial assets in the US (in excess of £5m) and has been advised to establish a Living Trust into which all her US assets will be transferred.

This type of trust is widely used for estate planning in the US and one of the motivators is that it avoids the need to apply for Probate in the US on death, which is costly and time consuming. The trust provides that the client is the Settlor and sole trustee but includes dispositive provisions following her death. In our world, the trust is a mix of a lifetime trust and a Will.

The question is whether or not the trust qualifies as bare trust (which it purports to be for US purposes) for UK taxation or whether it is treated as a “Settlement” and is therefore an immediate chargeable transfer. I have found helpful commentary on the subject from Ian Watson and James Kessler on the subject but was looking for any direct experience of such arrangements.

s15800 of the California Probate Code (which is akin with s603 of the American Uniform Code) appears to apply to this case - the revocable trust not give enforceable rights to any beneficiary during the lifetime of the grantor. The client is the sole trustee and only she is entitled to the income and capital during her lifetime. Therefore, for UK purposes, it would seem that there are no “rights” at all.

If the conclusion is that the trust will qualify as a bare trust for UK tax purposes, is there any reporting required to HMRC or do we simply not report it because our view is that it is not an immediate chargeable transfer?

Catriona Attride
Gateley plc

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The problem you will find is that even if the position can be taken that it is merely a bare trust, a risk remains that it may become a settlement if the settlor loses capacity and can no longer revoke. I have often advised and written on the subject, but I have never advised that an existing revocable trust be retained for this very reason. I would not advise a UK domiciled client to create a new revocable trust even if it may be viewed as a bare trust at the outset.

Ian Watson
Three Stone

Thanks Ian - the trust as drafted includes the appointment of an attorney and power is being given to that attorney to revoke the settlement if the client loses capacity but I assume this doesn’t work from a UK perspective?

Catriona Attride
Gateley plc

Well, my view is that logically it ought to be OK if an attorney can revoke on behalf of an incapacitated settlor, but in the absence of express UK authority blessing that view I would at the least be very cautious about entering into it.

I was going to say that California is one of those states whose statute refers to whether the settlor has capacity to revoke, but I see on checking the exact language of s. 15800 that it says “during the time that a trust is revocable
and the person holding the power to revoke the trust is competent” all rights belong to and the trustee’s duty runs only to “The person holding the power to revoke.” In that situation, I would say the case is much stronger that there is a bare trust for the attorney/power holder (in that capacity). There is still no settled authority, however, on the UK treatment of US revocable trusts, so I would still be cautious about entering into one and press the California advisor to quantify the perceived advantages of using a revocable trust. (It is easy for them to recommend revocable trusts in a purely domestic context, as they are fiscally transparent in the US.)

I certainly don’t want to cut off debate on one of my favourite topics by weighing in, though, and I would be glad to hear others’ views and experiences.

Ian Watson
Three Stone

Thank you for raising this question.

As a licensed attorney in Florida based in the UK, I deal with these same issues and only provide for the distribution of US situated assets in revocable trusts. The relevant language in Florida’s version of the Uniform Trust Code (UTC) is pasted below and can be found here and is a bit different.

736.0603 Settlor’s powers; powers of withdrawal.—
(1) While a trust is revocable, the duties of the trustee are owed exclusively to the settlor.
(2) During the period the power may be exercised, the holder of a power of withdrawal has the rights of a settlor of a revocable trust under this section to the extent of the property subject to the power.
History.—s. 6, ch. 2006-217.”

Further to the above, in Florida no rights are owed to beneficiaries while a trust is revocable.

I have seen powers to amend provided to successor trustees in Florida revocable trusts, but I don’t believe I have seen a trust provide for a successor trustee (or a power of attorney) to revoke a trust save for example where the value of the trust was below a certain minimum amount ($50,000 for example). Have either of you seen language providing others the right to terminate?

I note that Catriona pointed out that her client’s trust as drafted includes the appointment of an attorney and power is being given to that attorney to revoke the settlement if the client loses capacity. It appears that this comes from California’s adoption of Section 602(e) of the UTC, … “A settlor’s powers with respect to revocation, amendment, or distribution of trust property may be exercised by an agent under a power of attorney only to the extent expressly authorized by the terms of the trust or the power.” Unfortunately, it does not appear that this particular part of the UTC was adopted by the State of Florida.

I would have thought that a carefully drafted provision could be drafted so as to provide that should the trustor/settlor be deemed incompetent that the successor trustee (or holder of a POA) have the authority to revoke the trust, or alternatively provide the distributions in the trust not be made in the same way at all so as not to fall foul of becoming a UK settlement.

Kevin Burke

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The Florida version of s.603 UTC simply states “while a trust is revocable” unlike the California version which added “and the person holding the power to revoke the trust is competent”.

Shouldn’t the capacity of the settlor/trustor be irrelevant under the below circumstances?:

(1), where revocation can lawfully [under the law of the trust] be effected by another, and/or

(2) where the holder of a power of withdrawal has the rights of a settlor of the revocable trust (to the extent of the property subject to the power).

I just found at F.S. 736.0602 (5) that a power of attorney can likewise be used to give a right of revocation to the holder of a power of attorney. The language provides: “A settlor’s powers with respect to revocation, amendment, or distribution of trust property may be exercised by an agent under a power of attorney only as authorized by s. 709.2202.” Such would require that principal sign or initial next to each specific enumeration of the authority (cannot be a general power).

Thank you both for your time,

Kevin Burke

I have been consulted by a very elderly couple who made wills and set up a revocable lifetime trust with a firm of will writers in 2013. They have just re-read the trust document and do not understand it. There are ambiguities and inconsistencies within it which are likely to cause difficulties when the trustees exercise their discretion. The settlor and sole trustee is the husband, the co- trustee ( only to act as such on the death of the settlor) is the wife. The trust property is their home in which they both still live. The wife is named as a potential beneficiary.
I am assuming the trust was set up to avoid the need for a grant of probate as there is no IHT advantage because of the reservation of benefit and if the property generated an income I believe this would be treated as the income of the settlor… A collateral benefit of a reduced liability for care fees may well have been discussed .
The settlor may choose to revoke the trust. If the value of the trust property is over the IHT threshold will this trigger an exit charge and if the property has increased in value will there be a CGT charge for the trustee or will neither apply if the trust is treated as a bare trust.

Janet Calvert.
Dootsons LLP