I am looking at a case where the grandparents settled a life policy on bare trust for minors a number of years ago. They are now concerned about the ability of two of the beneficiaries to manage their own finances when they get to 18 and are asking about converting the bare trust to life interest. I am only tasked with looking at the tax position, but I am wondering if this is even possible under trust law.
The trust deed is relatively simple, just stating the grandparents are holding the bond as bare trustees for the named grandchildren…it’s literally 1 page. The solicitor is looking at whether Section 32 provides a mechanism for getting to the Life interest, but I am not convinced.
Anyone have any clues? Is the horse well an truly down the street into the next county on this one?
Ss. 31 and 32 apply during minority to any trust unless specifically included. For IHT the trust is an RPT so s81 must be borne in mind if the trust is varied.
For CGT it is not settled property because each beneficiary would be absolutely entitled but for being a minor, so a variation is likely to create that.
S.32 can be used to create different trusts, even complex versions according to Pilkington v IRC, but the hurdle is that it must be for the benefit of the beneficiary. The most likely challenge will come from a beneficiary (or worse a significant other applying pressure) who disagrees with the trustee’s assessment of his or her financial competence.
A life interest would seem to equate to the current entitlement to income so the question is: whether a power of appointment of capital to the LT, which I suggest is crucial in order to justify benefit by in effect substituting the trustees’ soi-pensant superior financial judgment for that of the beneficiary, is rather dependent on predicting whether a judge would agree with the trustees about their risk assessment meriting the type of advancement.
No details are supplied about the life policy but the trustees may be concerned about the wisdom of a premature surrender and they have considerable latitude under TA 2000 to retain it or deal with it and to reinvest/distribute any surrender or maturity proceeds while they remain in office and that ability may aid their argument about benefit. If the policy is non-qualifying the chargeable event tax legislation needs to be considered.
If a settlor is alive (perhaps even a trustee), or dead but has left a letter of wishes it will be very handy, albeit not conclusive, that the trustees are acting on their understanding of what the settlor would want or would have wanted them to do. By the same token they should be wary to act contrary to what may be reasonably construed as such wishes.
Parents and grandparents exhibit the widest possible range of views about the ability of their descendants to manage their own finances in a range of potential scenarios. Not least, and in parallel with the settlor’s wishes point, the trustees had better have concrete evidence to rely on if later challenged that their risk assessment was reasonable and their action a proportionate mitigation measure. If a request for funds is made by a beneficiary after majority any refusal will probably be held to a higher standard of reasonableness given the advancement has supplied them with the power to refuse or suggest a compromise.