Immediate Post Death Interest for Surviving Spouse

Trusts Discussion
1

I am advising a widow whose recently deceased husband’s will leaves his 50% share of the marital home on what I believe to be a ‘Trust For Sale’. The Trustees have the power to postpone the sale and allow my client to reside free of charge in the property as long as she wishes and the property can’t be sold during that period without the consent of the beneficiary.

Is this sufficient to give the widow a Life Interest and make this Trust an IPDI? My initial conclusion is that it is but confirmation would be welcome.

The terms of the Trust then go on to say that the beneficiary can request the Trustees to sell the property and invest the proceeds in another property of her choice however, on the first sale a sum of £60,000 is to be paid to his daughter (my client’s step daughter). In addition, if the whole of the proceeds of sale are not reinvested into the new property they are to pass into residue.

On my client’s death, remarriage or if she decided that she no longer wishes to reside in the property, the Trustees must sell and the proceeds pass to a second Trust created to receive his residuary Estate and of which my client is given a Life Interest. I am satisfied that this is an IPDI.

If I am correct in treating the first Trust as an IPDI then I think that if my client chose to sell the property the £60,000 gift to her stepdaughter would be a PET by my client - does anyone have a differing view?

Any comments or different interpretations gratefully received.

Nicola

2
  1. Yes, the initial trust is an IPDI
  2. Yes, I agree that the £60,000 diverted to the stepdaughter would be a deemed PET under s.52
  3. The provisions passing the proceeds of sale into a further IIP trust of residue are messy. While your client retains an unbroken IIP (right to use followed by right to income), I’m not certain that any funds passing into the trust of residue as a result of a sale do not become relevant property. Any funds in residue from death would clearly be an IPDI, my only doubt is those deriving from a sale of the property which is originally held on a separate IPDI.
3

On Andrew’s point 3 in my view the life interest is not an IPDI. It does not fulfil s.49A(3). It does not arise on the death of the deceased albeit under their Will. It is successive, reversionary and contingent. If it became operative it would create an RPT.

4

I have deep reservations about these rights of residence. At least we have some inkling of the HMRC approach in IHTM16131-9.

They are to my mind what the client, who has no technical understanding, literally wants. But we have a duty to at least explain to a such client what the deficiencies and pitfalls are.

It is far superior technically to confer a life interest in the house or even the entire residue with a remainder that permits the daughter to benefit; with the particular detailed wishes in a LOW and the usual overriding trustee powers to carry them out.

This is plainly an IPDI and allows appointments/advancements to create PETs for remaindermen. It gets over the determination of cesser of residence and its consequences as the trustees are in charge of these with the testator’s guidance. The trustees can be guided to take out term life assurance of any PET and can even be given a specific admin power for avoidance of doubt.

Restricting the IPDI to a residence is often wanted where cohabitants are involved or children of a single parent (RNRB effective) and comprehensive rights of residence are really hard to draft given the multiple permutations of possible future outcomes. Appointing trustworthy trustees and putting them in charge together with the salutary non-binding but ominous evidentiary coercion of a LOW is far better for, if a harder sell, to the lay client.

Jack Harper

5

I totally agree Jack. A life interest is better and clearer.

Simon Northcott

6

Thank you - this is very useful.

The second Trust will exist from the date of death as it receives the residue of the Estate and gives my client a Life Interest. I think at that point it is an IPDI. If the house is sold at a later date during my client’s lifetime and it receives surplus proceeds would that then mean that the Trust is part IPDI and part Relevant Property? And if this is the case has my client made a Chargeable Lifetime Transfer of the surplus proceeds at that point?

7

I have accused myself of not voicing an unstated assumption. As the OP indicates, the IIP in residue for the ROO owner arises only when that terminates, so someone else must be entitled during the ROO to the income from residue.

Some advance thought might well be given to the effect of the ROO termination on the residue. It may already be subject to a RPT but if it is subject to an IPDI, which would include an absolute interest in income subject to defeasance, there will be a QIIP termination event when the ROO ends and possibly earlier through an unrelated event affecting residue only.

Where the ROO attracts s.18 exemption the parallel trust of residue will often be a NRB DT.

A QIIP followed by a successive NQIIP, in the same or a separate trust fund, is not clearly dealt with by s.50 and the worst view is that it’s a termination event at the time of the succession.

What if the client insists on giving the ROO owner a life interest on its termination being an income interest only then in all or part of the house sale proceeds and/or another will trust fund?

The first is easily dealt with by conferring a life interest in the house ab initio with a split remainder and termination charge on the part eventually advanced away from the LT: PET or CLT.

The second is not easy to achieve; you either have a parallel RPT from the outset with the LT eligible to benefit after the ROO ends or one arising only when the IIP kicks in. (An initial RPT could start either as a DT or another NQIIP trust).

If it starts as a QIIP trust and the house LT is have only part of the income at a future date it is better to make them instead a capital remainderman of a fixed part (non-taxable asset while in remainder) and granting only an income interest via a power of advancement à la Pilkington or subject to a trustee power of appointment so the trustees fix the part. The remainder could be a reversion to the original fund.

(The power of advancement will need to be wider than s.32 TA so the QIIP owner does not have to consent and custom
drafted so that no theological issues arise over the meaning of “benefit” or “advancement” where a capital beneficiary is advanced only an income interest).

To create a PET on the termination of a QIIP capital could be instead revocably advanced to the house LT remainderman subject to their agreeing to buy an annuity (if that is value for money), or a non-qualifying policy with limited maximum part surrender rights e.g. only 5% or other % pa withdrawals, so making it irrevocable on the purchase and avoiding ongoing admin of a life interest trust. This should come within s.3A(2)(b)-certainly at no time is anyone other than the appointee entitled to the appointed sum.

If a policy is used the final taxable profit net of tax can belong to the appointee, just as would the fruits of any investment of their net income. But they can give it away if they wish.

Jack Harper

8

I thought the ROO owner only obtained a vested income interest in the second trust of residue when the ROO ended. If that is so the income interest certainly arises under the Will but it is not an IPDI per s.49A (3) and (5) as until it vests in possession surely someone else is entitled to the income actually or notionally arising or there is a partial intestacy. The IIP is not “immediate” so when it vests it is not an IPDI but a NQIIP. It is a future contingent interest, as I understand it.

Jack Harper

9

Hi Jack just to be clear, the will contains two separate Trusts. The one for the property which I think we all agree is an IPDI and a second Trust of Residue which also gives the widow an IIP. If the property is sold then this Trust will take any of the proceeds which are not reinvested in a new property but it will exist prior to that. So my thoughts are that the part of the fund which exists from the date of death would be an IPDI but, should the property be sold, any excess proceeds would not.

10

The very first post indicated the total opposite: that the trust over residue was NOT one in which the widow had an original IPDI.

If the consequence of the termination of the ROO is that the sale proceeds of the house fall into residue (apart from a fixed sum for the daughter) there might well be a strong, even conclusive, argument that the residue IPDI subsisted in both the house and the other assets comprising the residue.

The ROO, if granted to A N Other, because itself treated for IHT as a QIIP, would scupper that argument: the ROO owner and the widow could not possibly have the same QIIP in the same asset at the same time. The widow’s IIP in the house must needs be postponed.

But if your analysis is that the ROO owner and the widow are one and the same under the Will from the date of death then she has a single IPDI over both house and residue. It terminates in part, the house, when residence ceases, in respect of the money going to the daughter out of the sale proceeds—a PET.

But that result, which I advocated as a superior alternative to my understanding of the position, and which Simon Northcott endorsed, is in fact in substance a life interest over residue including the house.

If that is right the particular Quixotic drafting of a separate ROO for the same LT in one asset comprised in residue (with the daughter entitled on a postponed basis to a fixed sum out of it) is what is technically known in the trade as a “Bugger’s Muddle” and so counterintuitive that I am not surprised it did not occur to me and should have been made super abundantly clear in the OP.

It is to be hoped that forum members will have been edified to some degree by esoteric discussion of the counterfactual I.e. that there were two separate will trust funds with an IPDI of the widow in the house and with someone else initially entitled to the income of the other pro tem while the widow resided in the house.

Of course even now I might still be barking up the wrong tree!

Jack Harper