I have a Life Interest Trust which on the death of the life tenant passes to a discretionary Trust for her children. It does not specify what happens on the death of the children. It mentions the grandchildren as potential beneficiaries IF the children predecease the Life Tenant. The Trustees do not have a specific power to add beneficiaries.
Is there any way the Trustees could add the Grandchildren as beneficiaries?
Simon
This is apparently a very inflexible DT but that feature may be an opportunity rather than a threat, especially while the LT is alive. I am going to have to assume that the only potential beneficiaries are the children and, contingently, the grandchildren of any child that predeceases the LT but that the children are NOT required to survive the LT. If that were so it would be impossible for the trustees to identify any beneficiary as being eligible until the death of the LT; that would make this trust not just odd but deranged.
If my assumption is correct, the trustees could appoint the remainder to the trust fund, to the children alone and they could then settle their respective interests on new trusts which include grandchildren as well as Uncle Tom Cobleigh if so desired.
1 IHT
The appointed remainders are excluded property so the trust fund of a new settlement (actually one per each child settlor) remains such as long as the LT lives. There is no initial TOV on making these new settlements and on the death of the LT the same consequences will follow in relation to the head trust as if nothing had been done.
Unfortunately we are not told whether the LT has a QIIP or a NQIIP. The new trusts of the remainder will be RPTs.
Is there a GROB? There is no carve out for gifts of excluded property. Of course if the gifted property is also excluded at the date of the donor’s death it will not be chargeable. The conundrum here is that on the death of the LT the settled property, the remainder, changes its nature and metamorphosises into the assets then comprised in the head trust fund. Those assets were not the subject of the gift by the children. Can it be argued that a reservation in the remainder has ceased by virtue of its disappearance by operation of law and so causes a deemed PET or is the reservation transferred to the head trust assets? With some hesitation I think para 5 Sch 20 FA 1986 can apply (almost certainly though not intentionally) to effect a substitution.
This may be manageable. If nothing were done the eligible child beneficiaries who received head trust assets on the KT’s death outright would thereafter have those assets in their free estates anyway. In order to benefit their own children (not eligible if their parent survived the LT) they would have then have to make a TOV or will. They can choose to exclude themselves from benefit (though they may include their spouse) from the remainder trust either from the outset, no GROB, or after the death of the LT, deemed PET under s.102 FA1986.
When the remainders are initially settled there is no disposal by the children nor by the trustees when they fall into possession: ss.76 and 77 TCGA. The base cost adjustment to market on the LT’s death depends on its being a QIIP.
Do the trustees of the remainder trust become absolutely entitled to the head trust assets under s.71? That depends on the drafting of the appointments to the children which following Bond v Pickford it is not difficult to prevent. If the LT had a QIIP the drafting will not matter as no chargeable gain would arise. If the LT had a NQIIP there would ordinarily be an IHT exit charge but s.81 IHTA would seem to negate that, possibly good news for IHT but no CGT hold-over relief for non-business assets; in that case the drafting may be vital to avoid a deemed disposal.
Whether the LT has a QIIP or not could be important and is not specified in the OP.
Jack Harper
Jack says:
This is apparently a very inflexible DT but that feature may be an opportunity rather than a threat, especially while the LT is alive. I am going to have to assume that the only potential beneficiaries are the children and, contingently, the grandchildren of any child that predeceases the LT but that the children are NOT required to survive the LT. If that were so it would be impossible for the trustees to identify any beneficiary as being eligible until the death of the LT; that would make this trust not just odd but deranged.
He will therefore be surprised to learn that there are many trusts that require the remaindermen to survive the life tenant in order to benefit – generally to avoid the possibility of a remainderman with a vested interest dying and theie estate passing outside of the family. The trust in question may perhaps be “inconvenient” in the circumstances, but is neither “odd” nor “deranged”.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Paul, do you agree that the consequence of such a trust, where every potentially eligible beneficiary must survive the LT in order to qualify, is that while the LT lives, it is impossible to say of any candidate that they are currently a beneficiary?
We do not know the precise drafting but if it is a reasonably standard DT the trustees will be able to benefit a “Beneficiary” as defined. Such a person named or described has only a mere spes in any event but a valid trust requires for the third certainty that the objects be certain in the minimal sense that the trustees can say of any person they plan to benefit that such person is at that time a beneficiary of the trust. If there is no such beneficiary the trust is not completely constituted until there is. There is no recognition in equity of a contingent mere spes.
It follows that s.32 TA is unavailable because even a non-contingent mere spes is not even a contingent interest. An express power of appointment, advancement and transfer to another trust are often standard form for the trustees but they cannot be exercised in favour of a person who is not a beneficiary.
It is theoretically possible to draft such powers (and others in the trust) as being exercisable in favour of a person who is not but might become a beneficiary but that would be nonsense on stilts as
it contradicts the presumed definition which requires a qualifying beneficiary to survive the living LT.
I stick by my designation. What is the point of a DT if every potential beneficiary must wait an uncertain period to qualify? It ossifies the trustees’ powers and discretions meanwhile. It prevents the creation of a Saunders v Vautier position during the LT’s lifetime, and thus a partition or variation, and if the LT surrenders their interest in lifetime it does not accelerate the DT remainder. It is a straitjacket which is the traditional apparel for……guess who?
Jack Harper
Jack
Provided that the potential beneficiaries are clearly identified, I see no issues with the 3 certainties. Whilst they might not have an immediate entitlement, that does not prevent them being “beneficiaries”. By way of example, it is not unusual for the class of remaindermen to be defined as the testator’s issue living at the death of a life tenant, per stirpes. At any time, a member of that class has a presumptive interest and may benefit from a s.32 advance.
I agree that, in the instance under discussion, none of the objects of the discretionary trust can identify their presumptive share, although I do not see that as falling foul of the three certainties.
I can see a testator wanting to adopt the arrangement discussed in the original post as it allows flexibility following the death of the life tenant AND provides the life tenant with certainty that they will retain their entitlement regardless of any undue pressure put on them by others. If the life tenant is the surviving spouse/civil partner with whom the testator’s issue do not see eye to eye, the form of trust will significantly protect the life tenant’s position.
I accept that, from the modern will drafter’s perspective, the more flexible a will “the better”. However, if the will in question meets the testator’s requirements, rather than being a “this is what we do, so this is what you get”, it must be right notwithstanding that some do not agree with the way it is drafted.
I hope the will in question predates the introduction of the IHT residence nil rate band as, on the death of the life tenant nothing can be “closely inherited”. If it post-dates the introduction of the RNRB, the drafter could have a significant issue unless the testator was told of the implications the form of the will might have and the testator wanted to proceed regardless.
I remain of the view that the form of the will is not “odd” and certainly not “deranged”. I can think of a number of family situations where the testator would have wanted a will in this form to protect their spouse’s entitlement from less generous family members.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals