The Beneficiary under a Will was in receipt of means-tested benefits, so the Executors executed a Deed of Variation to create a Discretionary Trust. The DWP has now rejected the Trust on the basis that it is Deliberate Deprivation. My understanding is that this approach has been commonplace in the past and has been successful, but am I wrong or has there been a change of approach recently?
Clive Barwell
Wren Sterling
It is a commonly held misconception that this would work for DWP purposes. The reality is that the deed of variation creates a legal fiction for inheritance tax and capital gains tax purposes only – for all other purposes it is a gift and carries with it the usual issues.
Lee Young
A DoV is in fact a gift made by the beneficiary of property which has been accepted and, as a consequence, diminishes the assets of the beneficiary in the real world. The fact that for IHT and CGT the gift may be treated differently is irrelevant in ascertaining if deliberate deprivation of assets has occurred for, say, means tested benefits or care home fees.
But what of a disclaimer?
A disclaimer constitutes a refusal to accept a gift. There is I believe no rule under common law which provides that a recipient can be forced to accept a gift [Thompson v Leach (1690)].
Malcolm Finney
It is obviously deliberate deprivation with the intention of obtaining a benefit that would otherwise be lost.
Iain Cameron
Acer Legal
If the discretionary trust was created by the will, there would be no deprivation. However, before you can do a variation, you have to have accepted the gift hence the DWP considering what has been done a “deliberate deprivation”. Even if the beneficiary had disclaimed their entitlement, this would have been treated as deprivation.
If the gift under the will was an absolute gift to the beneficiary, I wonder what power was available to the executor to redirect the entitlement into a discretionary trust without the beneficiary’s consent.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
The situation has not changed re DOV and care.
Clive Ponder
Countrywide Tax & Trust Corporation Ltd
Hi Paul,
Have you encountered a secret trust in this situation? If I leave all my assets to ABC Solitors and leave instructions that they ought to benefit Mr.A who receives benefits let’s say.
Or if he inherited would lose benefits does ABC need to inform the local authority?
Richard Bishop
PFEP
With a secret trust, it will depend upon the terms of that trust. If entirely discretionary, then it should be treated the same as any other discretionary trust of which Mr A is an object of the discretion. If it is a bare trust for Mr A, then Mr A’s entitlement should be treated the same as any other entitlement under a bare trust.
When in receipt of benefits, whether from DWP or a local authority, I believe that one of the terms of payment is that the recipient must inform the benefit provider of any relevant change in circumstances, which will include becoming entitled to an inheritance, or becoming a beneficiary or object of a trust.
It will be for the claimant to inform the DWP or local authority. However, if, say, a solicitor is managing Mr A’s entitlement and knows that Mr A has not disclosed his entitlement (or has no intention of doing so) does that solicitor have any obligation to notify the appropriate authority that Mr A continues to receive a benefit to which he is not entitled? It would be interesting to understand the professional’s position if (s)he turns a blind eye and perhaps other contributors to the Forum might be willing to share their own thoughts on this aspect.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Presumably if one of the executors was also a legatee then that executor qua legatee could execute a DoV. However, for that executor qua legatee, deprivation of capital would have occurred.
Otherwise, as Paul indicates above, it is difficult to understand how the executors qua executors are able to execute a DoV whether it is another person who has inherited absolutely.
X (testator) leaves property absolutely to legatee Y on the understanding Y holds as trustee for Z and has agreed to pass the inheritance on to Z. Z is not named in X’s will so that Z’s inheritance is “hidden” thus, the argument runs, Z does not lose any means tested benefits.
I do not believe there is any obligation on the part of Y to inform the authorities of Z’s inheritance. However, if Z fails to disclose the inheritance no doubt this would constitute fraud.
For IHT, IHTA 1984 s 143 may apply. But if Y was required to settle s143 will probably not apply.
Malcolm Finney
One person’s blind eye may be another’s (and also that of the CPS) conspiracy to defraud
Jack Harper
I have a scenario arising where the prospective client is 72 has a medical condition (which is manageable with medication) and has within the last 2 years inherited the residue of her husband’s estate which includes one half of a home worth £800K held as TinC.
It looks as if a DoV to re-direct the half inherited to carve our residence nil-rate band - might appear to be a tax driven transaction (e.g. upon legal advice). Whereas perhaps a variation of the remainder of the half of the property inherited to resettle upon an IPDI trust might be pushing things a little too far in terms of “deliberate deprivation”. Alternatively perhaps even carving our the RNRB which is effectively a gift is also the same, however the client does not face the prospect of residential care in the foreseeable future, and objectively there seems to be tax driven motive. Just wondered what people think?
Also I am intrigued by the idea of disclaiming a gift, which I suppose if the gift is residue could be limited to the property asset itself, and if so the residuary beneficiaries (the children) would inherit, and if they happened to do a re-direction of the part that does not qualify for RNRB upon a life interest trust for mum, then if a disclaimer and DoV can be combined, then that could work? Again perhaps a bit too creative?
I understand that a gift of residue in this case to the surviving spouse constitutes a single gift which, if correct, means that it must be disclaimed in its entirety (passing on intestacy) ie it is not possible to simply disclaim a part only of the residue. However, this is subject to the will providing otherwise (eg providing for a disclaimer of a part of the gift).
Malcolm Finney
Hi Malcolm
Thanks for your reply. If the surviving spouse disclaims the residue entirely 1 year and 10 months from the date of death, would that pose any legal problems?
Also if a client has disclaimed under a will but the next in line beneficiaries (i.e. children) entirely of their own volition vary their inheritance under s.142 so that the original beneficiary benefits albeit in a different way through a life interest, could you see any issues with that?
Thanks
If the possibility of a variation is discussed before the disclaimer, HMRC might hold that meant there was consideration for the disclaimer, which would cause it to be void.
If it is considered certain that the client will not need to go into care, I would be inclined to advise her to make a variation, rather than go through a disclaimer and subsequent variation, as the more steps there are the more risk of there being a “tripping stone”. I would also suggest that the adviser go thought the financials and the situation regarding the client’s health issues with a view to placing on file the thought process underpinning the belief that the transactions are not such that they could be held to be intentional deprivation for the purposes of claiming care fees at a later date. I am aware that some view such reports as a hostage to fortune, but if, despite the case being clear now, is it not safer to be able to demonstrate the matter was properly considered if the question should ever arise?
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Commenting upon your last post Graham:
A disclaimer should not give rise to any problems assuming that, inter alia, within that 1 year and 10 months the surviving spouse (as sole residuary beneficiary) has not accepted any benefit whatsoever from the property comprised in the residue. Presumably the surviving spouse owns the other 50% of the home and the fact she continues to live there should not mean she has somehow accepted/enjoyed the gift of residue which contains the other 50% owned by the deceased.
Although it is not possible for the same property to be subject to more than one DoV this is not the case re disclaimers (ie more than one disclaimer of the same property is possible).
It is also possible for a DoV and a disclaimer to be effected with respect to the same property. Thus, the surviving spouse could disclaim her interest in residue which causes the children to take who may then execute a DoV under which they redirect residue to the surviving spouse absolutely or qua life interest.
Malcolm Finney