I am training two legal execs and I am trying to explain how we can come out of either a discretionary trust in a Will or a life interest trust.
Does anyone have any guidelines to help me explain as I found myself being confused too between a Deed of Appointment to appoint funds out of a DT and a Deed of Variation (Saunders v Vautier where all agree or when to get an Actuary involved).
Thank you ever so much for any help.
There’s a lot to unpack here. What follows is an oversimplification (especially the tax), and I hope nobody throws a copy of McCutcheon through my window.
We start with a discretionary will trust and how the trustees might bring that to an end. A discretionary trust in the modern sense gives the trustees dispositive powers over the fund. Those powers can be exercised to transfer property out of the trust using what is normally called a deed of appointment. Sometimes property can be advanced from a trust to beneficiaries using something known as a deed of advancement. In each case the trustees will be exercising their powers as trustees using the mechanism of the trust itself. For inheritance tax purposes distributions made from a trust within two years of death are treated under s. 144 IHTA as having been made under the will itself.
A discretionary trust as considered above may have no interests in possession. In that case trustees are simply appointing property from the trust.
Some will trusts are subject to interests in possession, which include life interests. In such a case the trustees must exercise an overriding power (if they have one). The effect of executing a suitably drafted instrument is to bring the life interest to an end and to appoint property out of the trust. Again that is an exercise of the trustees’ powers under the trust itself.
A deed of variation is something different. A deed of variation is a transfer made by a beneficiary under a will. Such a deed transfers all or parts of that beneficiary’s interest under a will or intestacy to someone else. That person may be another beneficiary or may be a stranger to the will or intestacy.
Trustees (or intended trustees) may execute a deed of variation to redirect the property that would otherwise have vested in them as trustees. Trustees who divert property away from themselves must be clear about whether they have the power to do so and whether they are exercising that power for a proper purpose.
A deed of variation may comply with s. 142 of IHTA, in which case the dispositions it makes are treated for tax purposes as having been made under the will or intestacy. As a matter of property law, the deed gives effect to a gift made by the beneficiary who would otherwise be entitled.
The difference between a deed of variation and a deed of appointment or advancement is that a deed of appointment or advancement uses the mechanism of the trust to vest property in some new person. A deed of variation on the other hand essentially prevents the trust from arising in the first place, although there are technical/academic/barrister questions about whether that is correct, since on another view, the right to due administration of the estate vests in the trustees and is sufficient to constitute the trust.
The rule in Saunders v. Vautier is something different again. If all beneficiaries under a trust are of full age and capacity, they may join together and require the trustees to convey the trust property to the beneficiaries. The requirement that all beneficiaries join together means that in many discretionary trusts it is not possible to rely on the rule in Saunders v. Vautier because some beneficiaries will be unborn or unascertained and so cannot give their consent to the exercise of the beneficiaries’ rights. In contrast to the previous methods of bringing a trust to an end, the rule in Saunders v. Vautier depends on the beneficiaries exercising their own rights and not on the trustees exercising their powers.
Actuaries are of little relevance in the ordinary run of cases. Actuaries may be asked to value a life interest, normally by reference to the life expectancy of the life tenant and the likely performance of the fund.
The reason that actuaries are of limited relevance is that for inheritance tax purposes, there is an essentially binary treatment of interests in possession such as life interests. Either the life interest is a qualifying interest in possession in which case the life tenant is treated as beneficial owner of the entire fund, or the trust is a relevant property trust in which case the life tenant is not treated as owning an interest in the fund at all. The value for tax purposes is therefore everything or nothing.
Thus it is only where some commercial motive requires it that an actuary’s input will be valuable. One example is where a life tenant and remainderman want to divide a fund fairly between them; deciding who gets what depends on the value of the life interest.
Josh Lewison
Radcliffe Chambers