Does it make any difference when doing a deed of variation for IHT purposes into a discretionary trust, whether the discretionary trust is contained in the same document as the deed of variation, or in a separate trust created after death into which the deed of variation redirects the assets?
Do they need to be signed on different days? I am going round in circles. My preference is to create a separate trust and for the deed of variation to simply redirect the beneficiary’s entitlement into the new trust. The beneficiaries of the trust will be the original beneficiary, spouse and issue. I understand the position is different for CGT and IT as it’s by way of variation and not from the original Will of the deceased.
Both approaches work, but if the deed purports to redirect the inheritance to a trust contained in a separate document, I would have thought that this separate trust would need to be executed and constituted prior to the deed of variation being signed - how can you redirect a gift into a trust that does not exist at the time of signing?
Which approach you use will depend on the circumstances. A very simple trust (such as a fixed interest trust) is probably better included in the body of the deed of variation, as this will reduce the number of documents floating around. A more complex trust may be better off as a separate document, especially if the trustees anticipate receiving assets from other sources (such as on the death of the person currently executing the deed of variation), as this will allow examination of the trust document/powers without reference to the original gift.
Elliot, Bond & Banbury
A separate trust is fine, of whom the settlor for CGT and IT will be the original beneficiary, as you say. It can be dated before or the same date as the DOV.
I would be concerned that a separate trust would mean amending the will to redirect assets into a settlement that did not exist at the date of death. It may be possible (there are already oddities such as retrospective severing of joint tenancies) but essentially, under the IHT and CGT fiction, you would be reading back a provision that transferred assets into a non-existent settlement. As well as sounding odd, it could have some unforeseeable consequences.
I would have thought it much safer to set out the new trust terms in a schedule to the deed of variation so that it can all be imported into the will and read back to the date of death for IHT and CGT purposes.
Osborne Clarke LLP
I have often recommended that when a beneficiary varies their
entitlement by settling it into a trust, that the variation and trust
deed are in separate documents.
One reason for this is to maintain the confidentiality of the terms of
the trust. Does the beneficiary want the other parties completing the
variation to know who they’re benefiting?
As regards the order of execution, yes the trust deed needs to be
executed before the variation. Usually they are executed the same day
with the recitals to the variation confirming the trust deed was
executed immediately before the variation. The gift under the variation
might be to A and B, the trustees of the settlement made by X
immediately before the execution of this deed, to be held upon the
trusts of that settlement.
If the beneficiary is not the only beneficiary of the estate, you might
consider warning them that if any of the other beneficiaries also create
a settlement by deed of variation, the settlements might be "related"
for IHT purposes, with adverse implications for the calculation of
periodic and exit charges.
As far as I am aware, the ‘legal fiction’ created by the deed of variation (ie, the IHT and CGT treatment) does not require the new beneficiary (whether a trust or otherwise) to be in existence at the date of death, or the date of the execution of the will. The special status afforded to deeds of variation does not change the actual gift taking place (from the original beneficiary under the will to the new beneficiary), simply the tax treatment.
Elliot, Bond & Banbury
Taking up the point raised in Andrew Goodman’s email, there is no problem in setting up a separate settlement which did not exist at the time of the will/death.
To be clear, you can:
Set up a trust in the DoV itself
Set up a trust after the death and before the date of the DoV and redirect the gift to that trust when you sign the DoV
Redirect the gift to a trust which was in existence at the date of death (assuming it can accept additions)
Truth may be stranger than fiction, but in relation to DoVs, the fiction is pretty weird itself!
Thackray Williams LLP
This issue seems to raise its head from time to time and it seems still causes different views to be expressed.
There is no reason why a DoV cannot redirect inherited property into a trust even though that trust was not in existence at the date of death. The trust may be created either within the DoV or prior to the execution of the DoV.
The so-called “reading back” is simply a tax fiction treating the deceased as having made the gifts whereas in fact in the real world the gift is made by the person executing the DoV.
Does it make a difference to the commencement date of the Trust?
I am clear that a Trust contained within a Deed of Variation is deemed to begin on the date of death but what about one whose Deed is a separate document executed before the DoV?
Where a trust is created by deed of variation, the start date of the trust, for all reasons other than inheritance tax is the date of the deed.
Any class of beneficiary will be as at the date of the deed, and not as at the date of death. Whilst this may not often be relevant, if the variation is being used, say, in a “double death” situation - to ensure the trust accurately reflects the terms and beneficiaries applying on the second death the wording used must create the same beneficiaries, and not just repeat the wording from the later will (which could result in the class of beneficiaries including persons who have died between the 2 deaths, and excluding any who might otherwise have become beneficiaries by being, say, born or adopted between these two dates). Such a disparity could result in HMRC rejecting the application of s.142 IHTA 1984 and s.62(6) TCGA 1992.
Where a settlement is made and assets diverted to it by deed of variation, again, it is only for IHT purposes (if the appropriate declaration is made) that the trust is deemed to have commenced on the date of death. For all other purposes, it is the date of the settlement deed that is relevant.