When trustees disagree

(Gary Parker) #1

I wonder if anyone has dealt with a situation where trustees disagree before.

My clients wife sadly passed away leaving him a life interest in 50% of their home (value circa £1m). The ultimate beneficiaries of his wifes 50% are the children of her previous marriage one of whom is the other trustee. The relationship with my client and stepchildren had been good and long lasting.

in the normal course of events he would have lived in the property for his life unfettered.

However just about a year after his wife’s passing my client remarried and the relationship between the stepchildren inc the co-trustee rather soured !

The co trustee has made life very difficult for my client to point where he has now offered to “buy out” the residuary beneficiaries. We would have to vary the will which would have to done by June sometime.

My client has offered half the current value of the house but discounted for his 20 year life expectancy to account for them getting the money now instead of 20 years time. However the co-trustee / residuary beneficiaries refuse to accept the offer. I

It is a reasonable offer but time is ticking before the two years is up.

My question - is there some system of arbitration in these cases presumably by a court /
Anyone any ideas ?

Gary Parker
Parker & Co

(Paul Saunders) #2

There are 2 trusts in this situation:

  1.       A trust of land over the property, in which the beneficiaries are the widower (50%) and the trust fund set up under the wife’s will (50%), and
  2.       The IPDI under the wife’s will in favour of the widower.

I suspect the original purpose of the trust of land was to provide a home for the husband and wife during their joint lifetime, and for the survivor. In which case it may be unlikely that the step children could force a sale of the property through the courts as the purpose of the trust will have been to provide the widower with a home for life.

If the co-trustee is being “unreasonable” it would be open for the widower to apply to court for their removal and replacement, although the question then would be whether the co-trustee’s actions are so unreasonable as to warrant his removal.

However, there is no reason why the parties could not enter into some form of ADR, which does not require the existence of proceedings. This could be mediation, early neutral evaluation (ENE), or arbitration. The underlying issue, though, would be whether the parties are willing to accept the decision of a third party, and the time it would take to settle any written agreement for the use of whichever form of ADR was to be adopted.

Although reference is made to the possibility of a variation of the disposition of the wife’s share of the property needing to take place by June (2018?), i.e. within 2 years of her death, this may only encourage the step children to come to the table if any arrangement would result in them incurring tax liabilities. The potential loss of IHT spouse relief on the termination of the IPDI could even be an incentive for them to delay any resolution until after the end of the 2 year period. A “surrender” of the IPDI would then be a PET which, if the widower died within 7 years, would absorb all or a substantial part of his IHT nil rate band.

In the absence of any willingness of the parties to agree to any form of ADR, the widower’s options may be very limited.

One option might be for the widower to execute a deed of variation by which he excludes his life interest, relying upon his 50% interest under the trust of land to remain in the property. However, this would not resolve the underlying issue and may just escalate the ill-feeling with the step children.

Paul Saunders

(andrew.goodman) #3

Is there any substance to the dispute (ie something that could actually be arbitrated) or is it just the co-trustee being difficult?

I know I am being naive when I say there shouldn’t be much to argue about - people can always find something if they really put their mind to it.

As Paul says, there is the possibility of replacing a trustee. The threshold is high but could be met if the co-trustee is being deliberately and objectively difficult and your client can compile solid evidence of that (more than just “he said, he said”). A family trustee will often forget that they are meant to be looking after the interests of the other and feel free to text/email their views. It all goes to show that the co-trustee is not acting in the best interests of the beneficiary, leading to a breakdown in trust + confidence. The threshold is much harder to meet if there is a dispute with some substance and the co-trustee’s position is at all justifiable. Removal applications carry costs implications for the loser so if the evidence is strong and a sensible replacement proposed, the co-trustee might be forced to roll over.

If they won’t sell then it isn’t possible to force them.

Andrew Goodman
Osborne Clarke LLP

(Michael Dew) #4

Shouldn’t the amount discounted be the estimated value of a half share
in the property in 20 years time, not its current value? Assuming that
the trend for property to rise at significantly more than the general
rate of inflation continues, the residuary beneficiaries can expect to
receive considerably more on the life tenant’s death than half the
current value of the property. I am not convinced that the life tenant’s
offer is as reasonable as he thinks.

On the other hand, it seems reasonable to apply some sort of discount
for the fact that the value of a half share is less than half the whole.
We don’t have enough information as to what the dispute is about or what
the co-trustee wants, but I am guessing that part of the problem may be
that there is now some uncertainty that the remaindermen will even be
able to force a sale on the life tenant’s death; on the assumption that
the life tenant will leave the other half share to his new wife and that
her life expectancy is greater than his. Balancing the interests of the
remaindermen against those of an elderly widow who had lived in the
property for 20 years would not be easy for the Court.

Michael Dew

(ianmckeever) #5

I don’t see that this a dispute in the normal sense. Your client has offered to buy the reversionary interests in the trust and the other beneficiaries have refused the offer, unless your client has some right to purchase the other interests, but that does not seem to be the case.

In the same way I can make an offer to buy your house. You can then accept my offer or not, as the case may be, but I cannot force you sell to me.

In any event it is not entirely obvious that money is the issue or at least not the only issue. The “Other Woman” (your client’s second wife) is living in their mother’s house and sleeping in their mother’s bed. This is potentially pretty emotive stuff.

Your client would appear to have three options:

  1.   Offer more money for the reversionary interests.
  2.   Offer to wind up the trust sell the house and move elsewhere.
  3.   Live with the current situation and hope the situation blows over.

Option 1 might be expensive. Option 2 might be cheaper and more trouble but could be quite attractive to the remaindermen particularly if it gives one of the children the option of buying their family home.

In any event it is wrong to assume that a trust interest has a value which is absolute and universal. A trust interest has a value to a third party purchaser which reflects the uncertainties such a purchaser faces. Another family member might place a higher value on the interest because they know what they are buying and family ties might help protect their future interests. and in all probability the value to the existing beneficiary might be higher still.

The value of a reversion depends on the ultimate outcome and when the life tenant actually dies. Life expectancy is simply an average. The ultimate outcome could be very different. Therefore any trust apportionment inevitably involves making a judgement as to what is fair to all the beneficiaries in those particular circumstances.

In these particular circumstances it seems to me that the children too are unhappy with the current situation. I would suggest that your client talk to them about how they would want to resolve things, or failing that using a neutral third party as an intermediary to start getting a dialogue going.

Being adversarial here is likely to be counterproductive as the other side can just say no.

Ian McKeever

Ian McKeever & Co Consulting Actuaries