Can capital be released from a life interest trust where the remainder interests are contingent and there are minor substitute beneficiaries?

Trusts Discussion
1

I am dealing with a will trust under which the surviving partner has a life interest in the property.

The original trust property has been sold and the trustees now hold cash. The intention is to purchase a replacement property for the life tenant using part of the fund, leaving a substantial cash surplus.

The trustees would like to distribute the surplus capital between the life tenant and the two children. The children are adults, but both have minor children of their own.

The relevant remainder provision (anonymised) states:

UPON TRUST with the consent of the said Life Tenant during her life to sell the same (but with full power to postpone sale without being liable for any loss) and to hold the net rents and profits (if any) until sale and the net income from the proceeds of sale in trust for the said Life Tenant during her life and upon her death or if she shall have predeceased me my Trustees shall hold the said property or other house bungalow or flat for the time being held by them on the trusts of this gift or the net proceeds of sale or the investments for the time being representing the same UPON TRUST to divide the same between my Child A and my Child B upon their attaining the age of 25 years in equal shares or to the survivor of them absolutely.

PROVIDED ALWAYS that if either of my said children shall fail to survive the survivor of myself and my partner Life Tenant and attain the age of twenty five years leaving issue who shall survive me and my partner Life Tenant and attain the age of twenty five years then such issue shall stand in place of their deceased parent and take and equally between them if more than one such share of the same which their deceased parent would have taken had he or she survived me and attained a vested interest.

My colleagues and I do not believe the adult children’s remainder interests are vested and there are therefore substitute/default beneficiaries who are minors and cannot consent.

There is no overriding power of appointment.

Has anyone encountered a similar situation, and is there a recognised route to releasing surplus capital from the trust where the remainder interests are contingent and there are minor substitute beneficiaries?

2

The trustees should be able to use s.32 TA 1925. This applies to all trusts unless specifically amended or excluded. It does not matter that the remainders are contingent or that they never vest in the event after the advance has been made but the LT must agree to the exercise of the power.

Up to 100% of the presumptive share of a remainderman can be advanced if the death occurred, and so the will trust arose, on or after 14 May 2014: ss.9(3)(b) 10(4) ITPA 2014. Before that it was a maximum of 50%.

The power must be exercised for the “advancement or benefit” of the beneficiary. The former is narrow but the latter is wider. There is important case law here because, as ever, some people like to push the boundaries.

For example, it is a moot point whether the appointment of an IPDI to a surviving spouse to save IHT would “benefit” the children who were beneficiaries of a contingent class gift: it might considerably postpone the vesting in possession of their interests yet might increase their capital value by greater investment growth, unreduced by an early IHT hit and with the added filip of a later termination of the IPDI by a PET if the remainders have by then ceased to be contingent. This dilemma is unlikely to arise under s.32 but rather under a power of appointment or s.142 variation. But it illustrates the doubt attaching to a “benefit” which is significant but indirect.

It is rather easier in principle to justify an outright advance to a contingent beneficiary and even a settled advance on an IIP, especially with a power to appoint capital to the IIP owner, but not on protective or discretionary trusts unless the beneficiary is currently in need of protection from themselves or others (bankrupt, spendthrift, addict, in a dodgy actual or contemplated marriage or cohabitation).

The immediate purpose of an outright payment is also relevant—a settled advancement defers the evaluation window. It must be what a Chancery judge would approve of. So the purchase of an Everton FC season ticket would be good whereas a Liverpool FC season ticket would obviously be a breach of trust.

The power is often used to defer vesting age but pushing it past 25 might be going too far in the absence of particular justification, of the kind indicated above.

Not just the children but their own children as default beneficiaries are within the scope of the power. It may be that there are even more living persons in scope if there is an appropriate ultimate default clause, designed to avoid an intestacy.

As usual offered without sight of the actual document but in gratitude for the excerpt.

Jack Harper