We have a case where the husband died some years ago, and his will had the standard clause which left the IHT tax free amount into a Will Trust.
The balance to his wife.
His family seem not to have been aware of this and all assets were transferred to the wife.
Now she has died.
Given they had an amount on trust should we show a loan from the trust to her estate? Which is in effect what has happened even if it was not documented.
If the trustees were the same people as the executors, and the estate was distributed within 2 years, could you argue that the trust fund was advanced to the widow - attracting relief under s.144 IHTA? You would then still have the TNRB/TRNRB.
It’s not technically perfect but if the parties are all close family, it may be a simpler solution (albeit you would probably need to file an IHT100 for the distribution and potentially a claim to holdover relief).
As nothing has been done the current position cannot just be analysed as a loan although the trustees no doubt have power to now make a loan.
This is a common occurrence because many wills once executed are often not looked at again until death. In the abstract the executors have failed in their duty to administer the estate properly because they should have either have sold assets to satisfy the transfer of cash to the NRB trustees, or appropriated assets in satisfaction, or charged the wife’s assets, or made a loan to her on acceptable terms including security.
One alternative is to distribute the NRB notional trust fund to her but that rather defeats its objective and, as it is doubtless too late to do a variation or s144 distribution, the TNRB on her death will surely be nil. I suggest the best course is for the wife to be advised whether she wishes to retain the NRB DT in existence so that its trust fund, constituted properly by one or more of the most practicable of the methods in paragraph 2 above, will not be aggregated with her own estate when she dies. This will in effect preserve a double NRB for her. If she can afford it, the DT can be used, e.g. after she repays part of any loan by the trustees, to make future gifts otherwise than from her free estate, so no cumulation or 7 year survival requirement or GROB risk.
This decision therefore needs to be integrated with an overall personal estate plan of hers. If the DT is retained it will need to be registered on TRS and its own tax planning considered. There is an interesting recent discussion at https://trustsdiscussionforum.co.uk/t/life-interest-will-trusts-options-for-life-tenant/19875 as to who should advise whom about what and when, bearing in mind any possible conflict and not cutting corners to accommodate a lay client’s insistence on simplification which they later change their mind about and look for someone to sue.
A full distribution to the wife from the DT may cut out eligible beneficiaries who do not benefit from her estate either in due course. The DT trustees must at least consider their competing claims. If she is a trustee, it may not be overdoing it for an independent trustee to be appointed unless (separately advised) she and any other trustee accept the risk in full. These nasty theoretical over the top possibilities which seem so remote at the time may later be exposed to the hindsight of solicitors acting for insurers and be judged by them as having been totally foreseeable.
Jack Harper
She’s died though @jack ?
Missed that!
I shall assume that the trustees had a cause of action initially against the husband’s PRs and then against those, including the deceased wife but perhaps others also, into whose hands as volunteers assets were transferred that should have gone to the trustees and are still traceable. And that at least as far as the wife is concerned such cause of action survived her death under s1(1) LR(MP)A 1934.How iffy or not that is might affect the analysis, as might any defences including limitation.
Now the options have narrowed, as a loan or full distribution to the deceased wife is not on. The Trust seemingly has an equitable claim on her estate. This will be deductible. It is not a debt of the PRs but it is a liability imposed by law within s5(5) IHTA so is deductible in her estate. I assume that her PRs do not have an arguable defence to the claim. s175A must be watched: the PRs must meet the claim out of the estate’s assets: see IHTM28029.
I do not know whether the DT trustees are different persons to her PRs. Or whether the DT beneficiaries are the same as those entitled to her estate. But the strict legal niceties require that the trustees should notify the PRs of their claim and the PRs should accept it by a compromise settlement if there are no grounds to resist. By analogy with debts, HMRC will surely require this as evidence. How far they would wish or be entitled to challenge the compromise of the claim is a moot point but probably not unless it was plainly a subterfuge. Such a ruse would put the parties themselves at risk of a challenge from those to whom they were accountable.
The claim will then be a deduction in the estate and the PRs will need to address the best manner of meeting it. The DT becomes completely constituted with the claim becoming the trust property. The trustees can now distribute it or retain it or deal in the same way with assets received from the PRs in satisfaction of it. It is perfectly possible depending on the identity of the individuals that a distribution may be made to beneficiaries who are also legatees of the estate, avoiding the need to transfer actual assets first between PRs and trustees and then out to trust beneficiaries.
The trustees could make a loan to the estate beneficiaries, on terms which are within their powers and an appropriate use of them, as well as being acceptable to the borrowers, but this would be a very odd transaction unless the PRs can discharge the claim against them with cash or realisable assets. Or the estate beneficiaries could accept responsibility for the claim by a novation. Such a fancy dan operation may be inviting trouble under s175A. It would also have the feel of excessive elaboration, unless only temporary while assets were realised, and of kicking down the road a can which it would be overwhelmingly prudent to resolve now among all the relevant parties.
IHTM28031 describes HMRC’s attitude to deducting debts that are not owed to commercial creditors. While s175A itself places no time limit on repayment “out of the estate”, HMRC make clear that they tie a valid claim for a deduction into the duration of the administration period and that the PRs should correct any deduction initially claimed if the debt has not been repaid by the end of that period. It may still be deducted again if ultimately repaid later but HMRC warn about the 4 year time limit in s 241.
The Act refers throughout to liabilities, and their imposition by law, but I see no reason why those terms would not extend to a bona fide claim against the estate in contract or tort or restitution or as here an equitable claim against PRs and their assigns for defective administration. But without a compromise agreement it would be arguable that no liability subsisted. For my part if that comes into effect only after the death the liability under it must still be taken to have subsisted at the moment before death if the facts giving rise to it occurred ante mortem.
Jack Harper
I should have clarified.
The WIll Trust in the husband’s will gave the wife a life interest, and then once she dies it is a discretionary trust.
So in my view she would have recevied capital to which she was not entiltled. Therefore it looks like the loan agrument is the preferable one.
This is a bit like a game of battleships we used to play at school. The scenario “and his will had the standard clause which left the IHT tax free amount into a Will Trust” is so utterly far away from “The WIll Trust in the husband’s will gave the wife a life interest, and then once she dies it is a discretionary trust” that I wish I had said nothing. Is this actually a wind up?
Jack Harper