I have one of those situations that make your eyes roll, and I’m wondering if anyone here has any thoughts on how this plays out?
Mrs X created:
a will
a lifetime (inter vivos) trust
Mrs X transferred her house, which is worth more than £325,000, to the trust.
The terms of the trust are:
There is a “Fund A” of £325,000 over which the trustees have a wide power of appointment, in default of which its assets are held on the terms of Fund B.
“Fund B” contains everything above that value and is held for Mrs X on bare trust absolutely.
Mrs X has died. Her will leaves her residue to the trustees of the trust.
I can see there’s a solution regarding the £325,000 in value that falls into Fund A (i.e. that the trustees can now appoint it to a beneficiary). But as for the rest - both the excess balance of the value of the house, and everything in residue - I am completely flummoxed. It appears to belong to the trust which holds it for the estate which holds it for the trust which holds it for the estate which holds it for the trust which (well, you get the idea). Does anyone own that? It doesn’t seem to be a partial intestacy, except what else can it be?
Any thoughts on how a situation like this is treated?
Fund B augmented by her residue is subject to intestacy; her Will has failed to dispose of either.
For IHT Fund A is a GROB as she was entitled to it in default of appointment. That is assuming the trust over it was legally effective; that depends on whether the power of appointment is a sham, which is likely to depend on the identity and character of the original trustees, who has the power of appointing other trustees, and whom they can appoint, which should all exclude the possibility that Mrs X has or can have the power or is or could ever be a trustee. If the trust were held to be ineffective those entitled on her intestacy could challenge Fund A appointments to anyone not so entitled under the intestacy rules, unless they do a compromise deal.
I am glad I didn’t advise her to do this, although I am confident that it would never have occurred to me to even suggest it. However her residue may contain a right of action against the culprit who did.
Subject to what is in the will drafter’s file, if rectification is not applicable (as the will accurately reflects the testator’s instructions!!!) I wonder if there might be an argument for lack of knowledge and approval, thereby seeking to “restore” the previous will (if any).
Other than in respect of rectification, the beneficiaries of the previous will (if any) might have a definable interest in the matter.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
We are not told who is prospectively entitled on intestacy or the identity of the objects of the power of appointment. There might be a chance that they are one and the same. Surely the optimum route is to explore a possible compromise variation. The estate is going to be fully in charge to IHT so a s.142 variation with reading back, if in time, is only worthwhile if such agreement might involve a diversion of any part of residue to charity.
Rectification as a process is fraught with difficulty, not least for the reason Paul mentions. One hurdle is absent here: HMRC insist on a court order because it is a discretionary remedy but here they do not have a dog in the fight as the tax position will be undisturbed. So litigation will only be necessary if any beneficiary wishes to pursue it.
A Clarke v Nugus letter might not bear fruit as the architect of the mess may well have “gone away” or not be worth suing. On the plus side it might be a case of Homer (or his supervisor) nodding at a decent firm who, or whose insurers, might meet the costs of improving the outcome, to save face and worse. The lifetime trust looks like a version of a discounted gift trust so the adviser might not have dealt with the will and the will adviser might not have put 2 and 2 together when taking instructions about the bare trust over Fund B. If he or she did not properly ascertain the client’s full net estate by a questionnaire or did but she did not respond correctly, revealing any cause of action and defendant.
I’m probably displaying my ignorance here. If the trustees appointed out the first £325,000 of the trust wouldn’t that mean that funds above this threshold would automatically drop into Fund A and the trustees could repeat the appointment.
From what we know Fund B is held on a bare trust for the (now) deceased. It forms part of her intestate estate; we are not told that the trustees have a power of appointment over Fund B. They may well wish to use the one they have over Fund A to avoid its defaulting to Fund B.
We are not told the composition of the trust assets and the trustees may have to exercise that power of appointment by advancing a notional cash sum charged on all or some of those assets. However the death may eradicate any earlier reluctance to sell them, not least that the deceased’s share will now have a market value base cost.
A lifetime trust is not like an estate. PRs are bound to distribute, selling assets if need be and a pecuniary legacy to X with residue to Y, plus a power of appropriation to X, is a routine occurrence.
Copying that kind of drafting in a lifetime trust gives rise to a construction issue. Is the deceased entitled not just to a share of them but to all the assets subject to deducting a fixed sum? If so what are the CGT implications, in particular can it be claimed that the market value adjustment thus extends to the entire trust property because those entitled only to the sum have no beneficial interest in it? Often the assets will comprise wholly or mainly a property eligible for PPRR. So this is likely to be an argument worth advancing. It may well depend on the unseen drafting.
To answer the question I doubt the trustees can “repeat” the appointment as the power is unlikely to extend to Fund B; the settlor’s intention seems likely to have been to give away a finite chunk of assets or their sale proceeds and keep the rest, and a trustee power would have been capable of defeating that unless her consent to exercise was required.
The only people who think I can read minds are females closely related to me, because they claim to possess such a power personally via chromosomes. I have given up second-guessing questions on this Forum and now work on the basis that the information provided is all that is necessary for a sensible answer. Lay clients often fail to understand the potential significance of some information, which is why they often need to be shredded in a mincing machine so that all, and I mean all, of the facts can be identified for a professional to discern their relevance. My impression was that this query came from a professional whom I would therefore expect to have done that already.
As ever thanks for your time and detailed reply. What I was driving at was that if Fund B comprised the excess of anything over £325,000 in the trust then if all £325,000 of Fund A was appointed out, then the next £325,000 in the trust would automatically belong to Fund A and so on.
I suspect that the drafting makes the 2 Funds separate, so what you suggest is about 99% unlikely. I say this because the intention behind this kind of trust is normally to carry out a “shearing” exercise with a view to avoid a GROB. The settlor usually plans to make an immediate gift of the NRB amount but retain the right to the excess, often with a view to do the same with it after 7 years. So Fund B was never given away, runs the argument. If the settlor was entitled to Fund A in default the plan did not succeed; it was a GROB from Day 1. If the power of appointment had been exercised in her lifetime in favour of someone else that would have been a PET per s102(4) FA 1986 of the amount appointed. But it was not, so the GROB remained in place at her death. It may be that the power of appointment can still be exercised, and her intestate estate entitled in default: that will depend on the drafting. It could in theory last for the perpetuity period but possibly for a shorter fixed period or only during her lifetime. My mind reader is not functioning, as usual.
As ever thanks for your time and detailed reply. What I was driving at was that if Fund B comprised the excess of anything over £325,000 in the trust then if all £325,000 of Fund A was appointed out, then the next £325,000 in the trust would automatically belong to Fund A and so on.
It would follow as presumably Fund A is held on an RPT as a lifetime trust made after 22 March 2006. I made before that date the interests could be QIIPs, or at least a QIIP as default beneficiary for the settlor, subject to defeasance by exercise of the power. It is still a GROB. If the settlor had a nil cumulation the value should remain such as long as the NRB is not reduced by Ms Reeves or a successor.
Hi. I know this is an old discussion, but we at Tax Policy Associates are currently investigating a firm that offers exactly this structure, and we’ve seen some trust deeds that are very concerning. I’d be interested to discuss in confidence (easy to find my email!).
(Hopefully this won’t upset the moderators; I am a solicitor and a practitioner, albeit a slightly unusual one these days)
|