Flexible Life Interest Trust termination query

A Flexible Life Interest was created by my client over her individual 50% share in the marital home. The trust provides her with a life interest and on her death, the trust converts to a Discretionary Trust.

My client wishes to terminate the trust and have the trust assets appointed to her outright.

Unfortunately, the trust is worded in order that she is not one of the potential beneficaries and therefore I do not believe there is power in the trust to appoint out the trust assets to her. Power is given to her as the Settlor to appoint further beneficiaries, therefore would it be possible for her to appoint herself as a potential beneficiary in order to appoint all the trust assets out to her?

Would there be any tax implications to this, bearing in mind that the trust was created after 2006 and during lifetime?

If the settlement incudes the “usual” settlor exclusion clause, the settlor cannot use the power to appoint further beneficiaries to include herself.

Was the client properly advised when she created the trust? If not, there may be a case for seeking to set it aside.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

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As ever, it is hard to answer a query about a trust document without sight of it in its in entirety, not to mention, if the Settlor is later unhappy with it, as Paul indicates, the background circumstances to its creation and advice given to her may matter, even amount to equitable mistake.

I presume that there is no “settlor exclusion clause” in the DT.

This is not the place to embark upon the general classification of powers and their extent and limitations (see Thomas on Powers) but the nature of any given power must be analysed as matter of construction.

A settlor has no power over the trustees or trust property unless the trust instrument reserves it to her. If it reserved a “general” and “non-fiduciary” power to her the trust would surely be a non-trust as not having the requisite “irreducible core” of trustee obligations; because the holder of a such a power could rewrite the trust at will. It comes close to being a trust where the settlor is the only beneficiary (a general power allows the holder to appoint to herself) which is not a trust at all.

A settlor can reserve “special” powers, the most common being the right to appoint an additional or replacement trustee or remove a trustee. The first is usually unrestricted but the latter usually prescribes limited circumstances for exercise.

Trustee powers are always fiduciary and so must be exercised in good faith and for a proper purpose and are subject to conflict of interest principles (which the trust deed may ameliorate).

The identity of the beneficiaries, even in a DT as far as their classes of eligibility if not named or individually described, is set once the trust deed is executed. If the life tenant cannot have capital appointed to her by exercise of an express power, the trustees are stuck with that. s32 TA 1925 does not apply to her. Much depends on whether the DT is a remainder after her death, as here it seems. She could not herself be an eligible beneficiary of a remainder DT, as an appointment cannot be made to a dead person, only to those benefitting from her estate if that is permitted by the DT.

Some DTs are drafted as overriding powers which will enable the life tenant to receive capital if she is an eligible beneficiary of it, with no IHT consequences if she has a QIIP. This is a post-2006 lifetime trust and so an RPT for IHT. An appointment out of an overriding DT would be a chargeable event.

For this reason modern trusts often include a power of the trustees, not the settlor, to add/remove beneficiaries, This is a fiduciary power so the trustees cannot add themselves unless specifically permitted. The power is often made subject to the Settlor’s consent and she may even have the right to nominate (not demand) a specific person. (She can probably nominate without a right unless specifically precluded). She is normally under no restrictions as to whether she consents or about whom she can nominate.

Her right is described here as a “power to appoint further beneficiaries”. This is most unusual and I have never seen it in practice. The possibility entrenches on the exercise of trustee discretions; is it relevant or not to any exercise of their powers? Can she add herself? Only if her power is to be properly construed as a general non-fiduciary power. That is not a general power apparently within s5(2) as it does not in itself allow her to dispose of non-settled property and a power to do that is no longer an asset for IHT under s47A (ironically enacted to prevent a Melville avoidance scheme: IHTM04470!).

Can she nominate herself? I would have thought she could unless specifically precluded but it might arouse suspicion that she always intended that. It puts the trustees in a very difficult position. If they add her then arguably an appointment to her of all the trust property is not void for “excessive execution” (she is now an eligible beneficiary) but the trustees must still consider whether they have taken into account all relevant considerations and ignored irrelevant ones. I have seen Counsel endorse a plenary appointment to one discretionary object who was non-domiciled and non-resident to save UK tax but he was not added and was not the settlor. The other main living objects provided their written support. Objects of a non-exhaustive DT have the minimum right to be considered by the trustees, so unborns are technically a risk, for what that right is worth and it can often be properly ignored in context.

If this trust does not have a suitable power to add, the beneficial limitations cannot be changed apart from Saunders v Vautier and VTA 1958. Many trusts state specifically that they are irrevocable but this will be implied unless a power of revocation is reserved. So a trust, unlike a contract, cannot be re-negotiated by the agreement of settlor and trustees. Flexibility if desired has to be drafted into the original trust deed. If the settlor can add further beneficiaries without the consent of the trustees or anyone else she can probably add herself, if that is not prohibited. The trustees will have the unenviable duty to consider whether it is proper to distribute to her the whole trust fund and ignore the objects of the DT. Critical will be why she wants it back.

A power of this kind must be a serious candidate for a GROB even in the absence of the life interest. So a deemed PET under s102(4) FA 1986 on an appointment out to her. Crazy stuff.

Jack Harper

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We are not told about the interaction of CGT hold-over/ PPRR on transfer in and out. The life interest without access to capital arguably breaches s169F and makes the trust settlor-interested from the outset, as “any circumstances whatsoever” include income from a theoretical letting or sale proceeds (“derived property”) despite no right to capital. A right to add herself as a beneficiary could do so of itself without the life interest and actually adding herself would constitute a clawback if an “arrangement” subsists, which includes an “understanding” that is not legally enforceable.

It seems probable that PPRR was due on transfer in and will apply if claimed on transfer out. So hold-over would not be relevant in this case.

Jack Harper

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Many thanks for both of your input. The trust has no exclusion clause and I doubt that the client was properly advised - sadly the firm she used churn out these types of trust regulary.
The trust wording is messy. It allows my client to have income for life and then income is to be added to the Trust Fund and paid out by the Trustees discretion. There is an overriding power of appointment of capital for the benefit of the ‘Beneficiaries’ which is silent on whether this is at any time during the Trust Period (125 years) or just after the death of the Life Tenant. Also, the overriding power of appointment allows capital payments to any of the ‘Beneficaries’ however my client is defined as the ‘Life Tenant’ and the remaining beneficaries of the trust as the ‘Discretionary Beneficaries.’ Therefore who can the Trustees exercise their discretionary powers to make distributions to? Is this all beneficaries including the Life Tenant or just the Discretionary Beneficaries? Any advice would be appreciated!

The issue is whether the Overriding Powers are exercisable only in favour of the “Discretionary Beneficiaries” as defined or just a “beneficiary”, which she plainly is. The Kessler precedents that create a life interest take care to make the LT a member of the defined class of “Beneficiaries” and the OPs are exercisable over capital in favour of any “Beneficiary” (not a “beneficiary”). It sounds like your OPs exclude the LT.

This is very surprising because the life interest makes the original gift a GROB and an appointment/advance to the LT would release that and be consonant with the presumptive purpose of the trust. You do not say who the trustees are but I have assumed that LT is not the sole trustee (which would be absurd) or, if she is one at all, unable to force the other trustees to benefit her. Even so, I query how effective this would be against a trustee in bankruptcy or deprivation of assets, but no doubt the Churner Outers had no opinion on that or at least expressed none.

So the only way forward would be to seek rectification in the unlikely event that the said Spivs or their appointed draftsperson failed to include her as promised among those eligible for a capital transfer, when that was clearly understood to be the basis of her agreement to proceed. That leaves you with the agreement of all the DBs if the DT is exhaustive or, if not, a VTA 1958 arrangement, involving setting aside a certain fund for the unascertained or unborn potential DBs, with the trustees indicating their expectation that they would distribute capital exhaustively on her death among those who were then living and readily identifiable.

Not only will that be expensive, with Counsel separately representing everyone in sight including the Court Ushers, but there will be a deemed PET (neutralised perhaps by an equivalent value in her free estate at death, if still within 7 years) and an IHT RPT charge, though at a maximum of 6% and much less if a full NRB is available.

You do not state the current value of the house but the costs are likely to be the main obstacle. At least these could be mitigated by instructing members of the same Chambers and no doubt a reliable fee estimate obtained from the Clerks. However if the plan is to retain possession of the house as her main residence this will perhaps hit her other resources too severely. Is there a realistic cause of action against the Scheme Emporium, if they are worth powder and shot?

Jack Harper

To state the obvious, as you have probably considered and dismissed it, the OPs or the discretionary powers integral to the DT are likely to enable the trustees to create fixed remainders following on the death of the LT, so that Saunders v Vautier could then apply. Suitable candidates among the DBs would need to be available and willing.

Offering that could also constitute a “benefit” to attract VTA consent by the Court, replacing a bird in the bush by one in the hand; a fixed entitlement to part of the residence or its proceeds on sale would enable the house to be sold and the LT to realise capital funds from the other part. The motive for the LT wanting the trust assets back are not stated but will doubt drive any acceptable plan.

Jack Harper

Many thanks for the advice Jack