I have recently been approached by a Trustee who wishes to retire and has “confessed” that she has never filed a tax return for the Trust. The Trust was set up in her mother’s Will, with the following wording:
Clause 4(b): “To hold the residue for my son XYC for life”.
Clause 6 provides: “Any monies requiring investments may be laid out in or upon the acquisition or security of any property of whatsoever nature including insurance policies on the life of any beneficiary or any other person and any house or flat as a residence for any beneficiary to the intent that my Trustees shall have the same full and unrestricted power of investing in all respects as if they were absolutely entitled thereto beneficially…”
Clause 7 goes further: “My Trustees may in their absolute discretion at anytime or times raise and pay capital for the benefit of my son XYZ for his sole use and benefit as to the whole or any part of the capital of my residuary estate”
It is clear the intention was to create a discretionary Trust over the residue and as far as capital is concerned I think that is quite unambiguous. However, my doubts lie with the income. Clause 7 only talks about discretion as to capital advancement. To date, income has been accrued with capital.
My question is whether the discretionary element only applies to capital (as per wording of Will) or whether it can be read to imply that it extends to income? Clause 6 seems to “favour” this interpretation referring as it does to Trustees unrestricted freedom. Alternatively is it the case (as per clause 5) that income must be paid to XYZ for life without any discretion?
I will be confirming with client to ensure criteria are met, but it is assumed that XYZ is vulnerable person under HMRC criteria.
Any thoughts on the payment of income position would be most welcomed!
Arguably, the will gives XYC (or XYZ?) an interest in possession (i.e. the right to the income as it artioses) and the trustee(s) power to advance capital to them. In that case, it is not a discretionary trust.
Whilst not stated, I anticipate the will disposes of the trust fund upon the death of XYC. If the will fails to do so, I believe XYC would be absolutely entitled to the corpus of the trust fund, and not just the life interest.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thank you Paul, the Will indeed states that upon XYZ’s death the residue passes to the siblings of XYZ.
The residue is drafted in usual wording of net proceeds of sale, calling in etc. “upon following Trust”…
5(b) - as above
5(c) - after death of XYZ for ABCDE
Interestingly I note you say “arguably”, so suggesting / reinforcing the view that this is ambiguous. My understanding is that it was always the intention that XYZ would not be given an absolute gift. Perhaps I will need to advise clients to see if the old Will file still exists to evidence this, in case HMRC argue the discretionary element.
I’d be fairly confident in calling clause 4(b) an interest in possession as (absent other very clear wording) I can’t see any other meaning of “for…XYC for life”
You say the intention was to create a discretionary trust. Does that come from attendance notes or other parts of the will? The only quote not immediately compatible with an interest possession is the words “as a residence for any beneficiary” but I could see that fitting in some contexts (depending on the other provisions) or could be a mistake.
The Will drafting appears to me to be completely contradictory with “to hold residue for … for life” and then citing “any” beneficiary and the Trustee complete discretion on capital advancement.
I think we may need to seek the original Will file / attendance notes to establish intention and / or mistake here.
Noted. I should just mention that clause 7 (capital advances) sounds perfectly compatible with a life interest trust - the same or very similar wording appears in numerous precedents for life interest trusts.