We administer a life interest trust which has a small portfolio and a property which the life tenant occupies. The remaindermen are 8 grandchildren of the settlor.
One of the remaindermen has informed us that he has added £40k to the trust’s portfolio. The investment management firm he worked at in the 1990s/2000s managed the trust’s portfolio and apparently there was a sudden drop in value in late 1990s. There is no suggestion of mismanagement etc but he says he feels a moral obligation to make up the loss.
How should the additional funds be treated? I assume he is now a settlor and this would effectively turn it into a settlor-interested trust?
Any thoughts on tax treatment and other options for him welcome
How recently was this?
Have the trustees formally accepted this addition? Might it be effectively (& treated as) a loan rather than an actual addition?
Unless the £40,000 added was merely a loan (which seems unlikely on the information provided), yes the beneficiary is a settlor in relation to that part of the trust fund corresponding to the proportion that the £40,000 represented as at the date of introduction. This would apply for all taxes including, until recently, CGT.
I suggest the trustees and the beneficiary apprise HMRC of the situation, providing details of the trust fund, as currently constituted, and the proportion of it that relates to the £40,000 introduced, asking HMRC what they would want to do to regularise the situation. This may avoid the need to go back to when the monies were introduced and, perhaps, having to recalculate the tax position for each year impacted.
There was no intention by the remainderman to loan the £40k to the trust. He considers the payment a moral obligation to bring the fund back to where it would be if there hadn’t been the drop in value.
He has only just made the payment to the portfolio. I would prefer that the funds be paid back to him and he makes alternative arrangements to recompense the trust - perhaps by lifetime gifts to the other 7 remaindermen.
I think the easier solution is for the Settlor (grandfather) to alter and make a separate provision to the grandchild who had provided the additional sum to the trust. I would not consider that his action makes him a Settlor as it was the grandfather who has settled the trust. He could only be a lender or a donor As the grandfather has retained the life interest in the trust, the settlement is revocable allowing him to make whatever alteration he wishes so as to remedy the matter. He can simply alter each grandchild’s 12.1/2% share to include a larger % share, leaving the remaining seven to divide the remainder equally…It is ,of course simpler if the £40K could be treated as a loan.
Paul Desmond Doherty
On what basis does he consider there to be a moral obligation to restore
the trust fund?
If a valid obligation, then the amount in question will be compensation
and there is no question of him being a settlor provided that he is
responsible to compensate the trust fund.
If he has no responsibility, then it is a voluntary payment and he is a
settlor, and the implications I referee to previously apply.