We act for the trustees of a Discounted Gift Trust created in May 2005. Subject to Isle of Man law. Trust property is a collective redemption bond (NB not payable to trustees on death of settlor).
Settlor (S) died in January this year and the bond has not yet been redeemed. Our queries relate to the IHT status of the trust, and also the beneficial and tax position of S’s daughter-in-law, W.
The trust document defines two funds initially held by the trustees: A “Settlor’s fund” for the absolute benefit of S (from which S withdrew 5% of the initial investment each year), and a “Residual fund” which is effectively a flexible life interest trust.
Subject to the trustees’ overriding powers, the income of the Residual fund must be paid to specified “Default beneficiaries” absolutely in specified shares. S defined those beneficiaries as her two sons, T and C, each being entitled to a 50% share. Our queries arise from the fact that C died in November 2014, and so predeceased S. He named his widow, W, as his sole executor and residuary legatee.
The trustees have discretionary powers of appointment, advancement, or resettlement over the Residual fund. Relevant Discretionary beneficiaries are defined as the children and descendants of S, the spouses and former spouses of those individuals (but no mention of their widows or widowers), the widower of S, the Default beneficiaries, and any individual accepted by the trustees after nomination by two other beneficiaries.
We believe the current situation to be as follows, but would be grateful for any views – confirmatory or otherwise.
- Although the value of the Residual Fund could not be ascertained until after S’s death, it nevertheless existed as a trust fund which was subject to an IIP, in favour of T and C as life tenants in equal shares.
- On C’s death, as the residuary legatee specified in his Will, W inherited C’s income interest in the Residual fund.
- We believe this created a transitional serial interest, so that this fund is still outside the Relevant Property regime.
- S’s death enabled the value of the Residual fund to be ascertained, but did not change the IHT status of the trust which comprises it.
The issues on which we are more uncertain arise from the fact that the trustees are minded to distribute the fund between T, W, and certain of S’s grandchildren. That raises the following questions:
- Is W, as C’s residuary legatee, a discretionary beneficiary, having “inherited” the role of “Default beneficiary”? Or should she be nominated by other beneficiaries?
- To the extent that W receives less than a 50% share of the trust capital, is she deemed to have made a PET?
Any comments or suggestions gratefully received.