A discretionary trust has very wide terms, but the class of beneficiaries is limited to “issue of X”.
The trustees enter into a Deed of Appointment whereby X’s grandson, Y, has a life interest in the trust fund. Y is given a power of appointment, exercisable by will or in lifetime, to appoint a life interest to his widow.
What is the status of this trust? Possibilities in my mind include:
a. The Deed of Appointment is itself a breach of trust, because the potential widow is not an object of the trust.
b. The Deed of Appointment is valid but if Y dies married purporting to exercise the power, that is a breach of trust and does not take effect.
c. The whole arrangement is valid on the basis that the ability to provide for his widow is a benefit to Y, who is an object of the trust.
Do forum members have any thoughts?
What is the consequence if there is a breach of trust in these circumstances?
I opt tentatively for option ‘c’. I hope fervently this is correct since I have adopted this approach myself once or twice and it is the only way to obtain spouse exemption in some cases. It seems to be supported not least by James Kessler in ‘Drafting Trusts and Will Trusts - A Modern Approach’ (13th edition - paragraph 12.13). It is worth noting Kessler’s example is with reference to the exercise of a power of advancement - however I don’t see why the considerations for the exercise of a power of appointment to benefit a beneficiary in a similar way should be fundamentally different but you should carefully consider the ambit of the power.
The House of Lords were content that s32 TA 1925 could be properly used to make a settled advance if it was for the benefit of a beneficiary, even though Lord Reid acknowledged that this was “a wide door”. I see no reason why this decision should not extend to an express power, certainly not one as succinct as Mr Kessler’s.
The trustees lost the case on the perpetuity point (it was held akin to a special power and so the period was that of the head trust). That is not a problem with Mr Kessler’s draft as the power is drafted to be exercisable only during the Trust Period of 125 years.
Am I right I thinking that spouse exemption would only be available if the widow’s interest came within s.49D IHTA 1984, i.e. Y’s interest being a qualifying life interest which existed since before 22 March 2006?
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals