The s.144 appointment seems to me the optimum route. The trustees, especially of a DT, can probably pragmatically rely on the remoteness of any future challenge but should in principle cogitate on the lawfulness of an exhaustive appointment to the surviving spouse (SS), absolutely or on an IPDI with remainder that will be closely inherited to preserve any RNRBs. They are strictly under no obligation to consider as such the tax consequences save as follow from the proposed appointment itself but they must properly consider all the circumstances of the appointee (e.g. possibility of remarriage of SS and a later divorce, or bankruptcy of SS, and of any such eventuality as regards other beneficiaries disappointed by their appointment). See heading 2 below.
- Excessive execution.
I assume that SS is an eligible Beneficiary of the pilot trust. So there should be no question of fraud on a power as long as the trustees have no reasonable grounds for suspecting that trust property would be channeled by the appointee to a non-beneficiary e.g the “milkman” paranoia.
- Inadequate deliberation
Trustees must not act irrationally or capriciously. They must not only consider the suitability of an appointment to the SS but whether by its being exhaustive it would be unfair on the other eligible beneficiaries, whose claims they should not ignore but actively consider, and if so judged, dismiss for good reason.
Two things may assist this on the facts:
a. This arrangement has often been deliberately chosen by the testator for a tax purpose and may well have been followed after advice. Pilot trusts are not usually a spontaneous or divine revelation to a lay person especially as issues can arise if they are “mucked about” after the Will is executed and before death.
The first death NRB has been largely overtaken by the advent of transferable NRBs and the inclusion of an SS as an eligible beneficiary was precisely to retain access for him-her to the trust funds, including by a debt/equitable charge rather than an appointment. Is this a case for retention? Are the trust beneficiaries of the same family as those of the SS’s will? Is there a need to prevent bunching in the survivor’s future estate as regards future NRBs or transferables, not least the risk of RNRB taper?
Is there a Letter of Wishes with the trust or the settlor’s will? Is there any other evidence of their reasons for adopting their chosen strategy?
b. What do the potentially disappointed trust beneficiaries think?
It could be prudent for those who are adults to approve in writing to set up an estoppel.
- Form of appointment.
An IPDI for the SS may be better for 1 and 2 above because an exhaustive absolute appointment is more of a risk to disappointed beneficiaries hoping to benefit in due time from the SS’s testamentary freedom.
An IPDI can be useful as care fee proofing and some ingenuity must be employed as to drafting the remainder if a share in the main residence is appropriated as regards RNRBs on termination of the IPDI. There will be flexibility if liquid assets are appropriated for an IHT-free distribution to the SS or a lifetime PET or CLT within NRB on such termination. S.144 will secure spouse exemption but the lack of CGT reading back must be watched unless the trustees take as legatees or PPRR applies to the asset appropriated and then appointed.
It will be a matter for the trustees as to whether they need separate advice. That it is the incontrovertible though sanctimonious counsel of perfection is often convenient cover for referring work, as is a genuine conflict of interest. Or so sceptical lay clients may suspect. This is highly fact-dependent but is usually risk-assessed by reference to the identifiable prospective claimants, present and future, and the likely merits of any claim, especially if some are demonstrably fully-paid up members of the awkward squad (see Law Reports passim), and not forgetting those to whom they may be married or cohabit with as “significant others” who are not eligible beneficiaries but function as if they were.
Jack Harper