Ending a Life Interest Trust Early

Trusts Discussion
1

We are acting in relation to a Life Interest Will Trust, a partner of the firm is one Trustee and a family member is the second Trustee. The life tenant is the widower of the deceased and the remaindermen are various other family members including our co-Trustee (all of age and all have capacity).

The Life Tenant wishes to bring the trust to an end as he does not want the value of the trust to aggregate with his estate upon his death. He is hoping to end the trust now and survive the 7 years so that it does not form part of his estate.

  1. Do the Trustees have to end the trust early?

  2. The Trustees’ concern is that if the Life Tenant dies within 7 years, IHT could become payable on the failed PET. My understanding is that the Trustees are responsible to pay the trust’s apportionment of the IHT and that it is advisable to keep a retention for the possible IHT. We were going to suggest keeping a retention of 50% of the trust fund to allow for 40% IHT and costs etc. – has anyone dealt with this before? What is advised in terms of keeping the funds, can we just keep it on client account and distribute the client account interest on an annual basis for the beneficiaries to declare as their personal income? The trust has come to an end so are we holding the funds on bare trust for them even though it is a retention?

  3. Is there anything that the Life Tenant could sign or agree to which would confirm that any IHT payable as a result of the failed PET has to be paid for from his estate rather than from the trust?

  4. Is there an alternative that I haven’t considered?

Rachel

2
  1. No, the trustees don’t have to exercise a power, but they are obliged to consider a request and take a decision based on relevant factors. Alternatively, the life tenant could unilaterally assign his life interest to the residuary beneficiaries.
  2. The trustees are entitled to retain funds for potential liability under their lien. 50% sounds high - any calculation should be based on an IHT calculation taking into account the available nil rate band and may reduce over time if taper relief applies. Their duty to invest remains so the form of that retention will depend on the sums involved. They would not be thanked if they keep £500k in cash for 7 years.
  3. No, the trustees’ primary liability is statutory. The LT could provide an indemnity but that would not shift the trustees’ liability to HMRC and may have IHT implications.
  4. The trustees could (a) rely on indemnities from the residuary beneficiaries (b) take out an insurance policy to cover the deemed PET (c) retire in favour of family trustees who are willing to take the decision and accept the risk of IHT on the basis of indemnities.
3

Depending on the life tenant’s age and health, how about a seven-year term policy, written in trust, to cover the IHT exposure?

Michael Cutler

4

I never understand why so many people opt for life interest trusts instead of discretionary and IIP if assets over the IHT thresholds.

5

Thanks Andrew - this is really helpful.

If the Professional Trustee retires in favour of family trustees could they be looked on unfavourably by the beneficiaries if a problem presents itself with the IHT issue further down the line?

6

Thanks Michael - yes we can look into this, the Life Tenant is in his 80s with quite a few health issues so it will all come down to the cost of such a policy

7

Oh dear, maybe not a runner in these circumstances, but I thought it was worth mentioning.

8

Beneficiaries can always be upset if they close their eyes to a risk but I don’t think they would have any claim against the professional trustee provided the family trustees appeared competent, were taking advice and the position was explained to them. You should ensure they take/receive proper advice on any distribution and, belt and braces, you might consider:

  • the new trustees obtaining advice from an independent source; and
  • making sure the beneficiaries all understand that there could be a (substantial) liability under any indemnity they may sign.