I have been handed a document purporting to be a “discretionary trust.” It was prepared by a settlor during their lifetime using a financial organisation’s standard template. The class of potential beneficiaries are the settlor’s children, remoter issue etc. The default clause passes the trust fund to such charities as the trustees decide. The settlor has died without issue. Putting aside whether the settlor was mistaken (or if there’s a claim against the IFA who completed the trust deed with the settlor knowing they had no children), what is the treatment of the trust? I should add that there is no power to add to the class. Does the trust revert to the settlor’s estate as we now know there can be no object/s to pass the trust funds to (following the settlor’s death). Or must the trustees wait until the end of the 125 year perpetuity period in order to pass the funds to charity. A long shot but could the trustees specify which charities should benefit under the default clause then the charities call on the trustees to be end under Saunders V Vautier (if appointed/nominated) as they are now the only beneficiaries who can, or could, benefit from the trust) - I am assuming the answer to this suggestion is no!
Why does the death of the settlor affect the duration of his lifetime DT? This would be most unusual. The normal provision is that the trustees’ discretion to appoint among the class would endure for the perpetuity period. What is the one that applies here?
Without sight of the trust deed, there’s an element of speculation here. I’ve seen a number of different ways to structure a default gift, but I think it would be quite unusual to oblige the trustees to hold onto the fund for the duration of the trust period. Normally, there would be either a discretionary trust in the old fashioned sense of an obligation to select on or before the expiry of the trust period, or at the least a power to appoint before then.
I think the question is being missed. If it is a standard template and we assume all the usual powers are present during the perp period (other than power to add beneficiaries it seems), then the question is: if there are no members of the class of primary beneficiaries (no children or issue) to appoint out to, does the default provision kick in meaning that the Trustees can appoint out to charities straight away. The default clause usually applies “subject to the previous clauses” and so the fact that there are no persons able to benefit, and no persons who can have income or capital appointed out to them - does the default clause then apply.
I have always assumed so which is why the power to add, or the inclusion of “such charities as the trustees choose” is always something I include to avoid this and give the trustees the ability to add in substitute beneficiaries.
So I think the trustees in this situation can sign a trustee resolution selecting the charities and signing a deed of appointment and paying out to them.
Thank you. I was going down a bit of rabbit hole thinking a) we had no objects at inception and now it is impossible as Settlor died, so is the fund held on resulting trust back to Settlor’s estate (and IHT is payable)? or b) it doesn’t revert back as we have default clause (even though we have no one who fulfils the class). If B then do the trustees have to wait until end of perp period (which seems absurd) or can they choose charities and appoint to them “early” which seems far more sensible (although not what the Settlor intended) . So thank you for your reply! I have also found Jack’s response on another TDF thread (default clause to charities at trustees’ discretion) https://trustsdiscussionforum.co.uk/t/discretionary-beneficiary-at-present/19557/3:
“…but where there are none [who fall within a class], and none likely to qualify in future, the trustees have a non-discretionary duty (not a power) to select as beneficiaries a charity (or several) plus a discretionary power to select by name which one(s) to include. So it seems highly appropriate to distribute everything to it or them once they have made them eligible. The trust would thereby become a charitable trust so distributions should be tax exempt.”
I agree with Emma. The wide default clause for charities is a desperate last resort designed specifically to cover this very situation. Without it there would be a reverter to settlor and if deceased to those who benefit under his/her Will or intestacy. As all his chosen trust objects have presumably died out there is a real likelihood of bona vacantia. There may or may not be evidence of the deceased wishes, as settlor or testator but the default clause indicates that this result was to be avoided at all costs. One hopes that this was done advisedly and that no one at all has been unintentionally missed out by a narrow drafting of the class of objects.
While the trustees have the power for the entire perp period they are under a duty to exercise it with proper consideration and reasonably promptly. That was also the position before the settlor’s death and, unless all the objects predeceased the settlor or died shortly afterwards, there may be a cause of action against the trustees on the part of the disappointed descendants who would have benefited from an earlier appointment, certainly those of the last surviving object.
Thank you everyone. The settlor made the trust in her 60s and never had children but very close nieces (whom she did want to benefit). This part of the standard form was never completed. The whole point was IHT planning as her estate has no TNRB and, of course, no RNRB. Very poor drafting/advice and the trustee/IFA tried to pay proceeds to the nieces despite the fact they are not within a class! Thank you for highlighting the potential action by a disappointed/last surviving descendant. It does not apply here as we never had any objects but good to know if this situation arises in future.
This sounds like there may be a claim for rectification of the deed then, if it plainly does not do what the settlor intended.
I would also comment that it is not uncommon to have a default clause expressed only to come into force at the end of the trust period, in which case the literal interpretation would leave the trust fund undisposed of until that time and so held on a resulting trust for the estate (if not rectified).
Alexander Learmonth KC
Hello, I used to work as an in-house lawyer and used to deal with life and pension policy trusts extremely frequently. The standard draft trusts we made available always had a two year period after death during which appointments could be made (essentially to ‘fit in’ with will variations), so I was a bit surprised to see such a long appointment period. But presumably until any such appointment is made the trust will continue to exist in limbo.