Apologies in advance if there is an obvious answer to this…
I am advising the trustees in respect of a right to reside clause which is poorly drafted. The pertinent bits are:
I GIVE to my Trustees my freehold house [address] (the Property)…to hold upon the following trusts:-
(1) during the lifetime of my wife to allow her to live free of rent but subject to the payment of outgoings etc…
(2) my Trustees may at the request of my wife sell the Property and apply the proceeds of sale towards the purchase of another residence for occupation by her thereupon the new property shall be held upon the trusts of this gift
(3) after the death of my wife my Trustees shall hold such property upon trust for [remaindermen] etc…
The trustees have agreed with the wife to sell, and purchase a new property (for her to live in).
The new property is less valuable than the current one and there will be surplus proceeds.
What happens to the surplus proceeds?
Your thoughts are very welcome!
This sounds like a life interest trust. Does the Will pride direction as to income and capital?
Generally there are clauses that do not authorise access to capital for the life tenant but does for income.
Would be interesting to know if these are present.
Cottingham Legal Wills and Probate Limited
It seems to me that, literally read, the wife has only a right to reside, and that applies and can only apply to the house or the replacement property. But if ‘such property’ in sub-clause (3) then applies only to the new house, then surplus proceeds (or at least the income from them) would be undisposed of and could fall into residue. I say “(or at least the income from them)” because arguably the wife could in the future ask for a further replacement property using some of the surplus proceeds from the first house, and if so the trustees would not be free to distribute the capital. Are the residuary beneficiaries the same as the remaindermen?
New Square Chambers
Thank you both for your thoughts and comments.
I set out the clause in full below:-
I GIVE to my Trustees my freehold house know as__________ (“the Property”) or such other property as may be owned by me at the date of my death as my main residence to hold upon the following trusts:-
- During the lifetime of my wife to allow her to live free of rent but subject to the payment of the outgoings relating to the use and occupation of the Property including the cost of insurance
- My Trustees may at the request of my wife sell the Property and apply the proceeds of sale towards the purchase of another residence for occupation by her and thereupon the new property shall be held upon the trusts of this gift
- After the death of my wife my Trustees shall hold such property upon trust for such of them my said children _______ and _______ as shall be living at the death of the survivor of me and my said wife and if more than one in equal shares PROVIDED that if any of my children shall have died before the death of the last survivor of us leaving children then living such children shall take by substitution and if more than one in equal shares the share of this gift which his her or their parent would otherwise have taken had he or she survived to attain a vested interest
I act for the executors and trustees in this matter, who are also the children referred to in sub clause 3. They are also the residuary beneficiaries. After the sale of the original property, some funds will be released. It appears from the wording as though those funds are not then subject to the trusts of this gift (2 above), and therefore can either be given straight to the remaindermen or residuary beneficiaries (who are luckily the same people) or, if they were being prudent, the trustees could hold those funds and pay the income to the remaindermen on the off chance those capital funds are necessary to house the wife in future. I suspect my clients will prefer the first option!
Do you think we would be safe to just distribute them outright?
I assume you have an ‘immediate post death interest’ (IPDI), which is very common, an Interest in possession created by will and is exempt from the usual IHT burdens of an IIP. Entry, exit - 10 year charges.
The omission of any clause to advance income or capital can be overcome using TA 1925 s.31 s.32. In your case [s.32] (http://www.legislation.gov.uk/ukpga/Geo5/15-16/19/section/32) will fit your purpose.
Assume £500,000 home, sold for same, new property bought for £400,000 = £100,000 excess, the Trustees can distribute the £100,000 to the beneficiaries using TA 1925 s.32
It should be noted, for IHT purposes for ‘mom’ the £100,000 is deemed to remain in her estate on her death (as would the £400,000 new property) - the client ought not to think she has created a PET etc and when she dies the full value of the IPDI will vets in her estate regardless of the early distribution.
I think that’s right :0)
What about the situation where, for example, a woman’s late partner has given her a right to reside in their jointly owned home. She wants to move downmarket. She is in dispute with the partner’s children in remainder. The clause dealing with the purchase of a new property says that the trustees may, at her request, buy another property on the same terms. She asks why she cannot simply use all of her partner’s share towards the new property, thereby retaining most of her own share. This, on the basis that the whole of the trust fund is intended to be available towards a new property, and it cannot dictate to her what she does with her own half share, so it is her own choice as to whether she decides to put in some of her own money to make up the full cost of the new property where his half share is insufficient. The children say the new property must be bought 50/50 and that they should have their share of the surplus arising.
Two things occur to me:-
- “may” imposes no obligation, but merely gives a power, so the trustees do not have to accede to the request, and can therefore dictate the terms on which they are prepared to sell/buy.
- “on the same terms” suggests that the new property must also be held in the same shares ( 50/50) .
This would mean that there will be surplus funds to give to the children. Does she have an argument?
I see that an earlier post suggests that any surplus proceeds would have to be retained in case a further property purchase is required which requires more of the original trust share. The clause in question here does allow for “a subsequent replacement property” . If those surplus funds could be needed later surely this tends to support her argument for the whole of the fund to be used on the first purchase? Perhaps a better investment of the fund anyway, rather than holding it in an account somewhere?
An interesting point is made about the tax effect of a termination of a right to reside. I have always understood that to be an early termination of an IPDI and therefore a PET. Am I wrong?
In considering the request to invest in a new property for the partner’s occupation, the trustees need to consider their duties of investment, which includes the duty to diversify (whilst being mindful of the purpose of the trust). The use of “may” means the trustees are not bound to accede to the beneficiary’s “instruction”.
However, is there a power to but property jointly with another? If not, I am not entirely convinced that the existing joint ownership in itself supports a decision to jointly purchase any replacement property.
When a joint purchase is made, the value of each party’s interest is immediately devalued due to the lack of control inherent in joint ownership. Unless specifically authorised, a joint purchase could represent a breach of trust.
With regard to “on the same terms”, I have generally seen this as applying to the terms of occupation, rather than the terms of ownership. However, the meaning will be subject to the context so it could support the trustees’ contention.
Mindful also of the question regarding any surplus from the sale, perhaps those advising the partner should consider taking counsel’s advice on all issues, in the hope that this could reduce the potential for an ongoing and costly disagreement with the trustees.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals