Minor beneficiaries of FLIT and urgent variation to save TRNRB / RNRB

Trusts Discussion
1

I am trying to close a FLIT in a Will and am having some real problems. I wonder if someone knows the answer.

The Will was drafted by a Will company, along with a lifetime trust which encompassed a share in the property. We’ve closed the lifetime trust and dealt with that.

There’s a husband and wife. Husband died and his estate is £1.5m. Wife’s estate is around £1.2m. I am trying to end a FLIT in the Will so that money can be gifted by mum to only child of the family to revive the RNRB / TRNRB. Mum is in very poor health so it is urgent. However, the Will is really restrictive. It states:

6.2 I give my Residuary Estate (“the Trust Fund”) [which encompasses the whole £1.5m largely] to the Fund Trustees [who are mum and daughter] on the following trusts subject to the overriding discretionary provisions contained in this clause.

6.3 The Fund Trustees shall pay the income of the Trust Fund to my wife [wife’s name] during her life.

6.4 Subject to Clause 6.3 the Fund Trustees shall hold the capital and income of the Trust Fund upon such trusts in favour or for the benefit of all or such one or more of the Discretionary Beneficiaries exclusive of the other or others of them in such shares or proportions if more than one and with and subject to such powers and provisions for their respective maintenance education or other benefit or for the accumulation of income for any period expiring before the end of the Trust Period (including administrative powers and provisions and discretionary trusts and powers to be executed or exercised by any person or persons whether or not being or including the Fund Trustees or any of them) and so that the exercise of this power of appointment may be delegated to any extent and in such manner generally as the Fund Trustees (subject to the application (if any) of the rule against perpetuities) by any deeds of deed revocable shall appoint provided always that no exercise of this power shall invalidate any prior payment or application of all or any part of parts of the capital or income of the Trust Fund made under any other power or powers conferred by my Will or by law

6.5 Until and subject to and in default of any such appointment and subject to clause 6.3 the following provisions of this clause shall apply to the capital and income of the Trust Fund:

6.5.1 The Fund Trustees may pay or apply the income of the Trust Fund to or for the benefit of all or such one or more of the Discretionary Beneficiaries [who are “wide” and descendants" one of which is only 14] exclusive of the other or others of them as shall for the time being be in existence and in such shares if more than one and in such manner generally as the Fund Trustees shall in their absolute discretion from time to time think fit

6.5.2 The Fund Trustee may in the in their absolute discretion accumulate the income and hold such accumulations as an accretion to capital or apply the whole or any part of parts of the income accumulated as if it were income arising in the current year

6.5.3 The Fund Trustees may:

6.5.3.1 Pay or apply the whole or any part or parts of the capital of the Trust Fund to or for the benefit of all or such one or more of the Discretionary Beneficiaries exclusive of the other or others of them in such shares if more than one and in such manner generally as the Fund Trustees shall in their absolute discretion think fit

6.5.3.2 Pay or transfer any income or capital of the Trust Fund to the trustees of any other trust wherever established or existing under which all or any one or more of the Discretionary Beneficiaries is or are interested (whether or not all or such one or more of the Discretionary Beneficiaries is or are the only objects or persons interested or capable of benefitting under such other trust) if the Fund Trustees shall in their absolute discretion consider such payment or transfer to be for the benefit of all or such one or more of the Discretionary Beneficiaries

My reading of the above is that there is no power of appointment to apply the trust fund to wife and that this only occurs on her demise. In which case, all I can do, given the minor beneficiary of the disc trust element, is to disclaim as much of the estate as possible and use the power of appointment from the disc trust to appoint those assets out to the daughter?

I just really wanted a second opinion of this because I loathe FLITs

Many thanks

2

Assuming the widow is not a Discretionary Beneficiary, you could appoint a sum to daughter absolutely (inc. on bare trust if a minor) and then widow could release her life interest in that sum.

You’d want to make sure you do it the right way around to avoid a chargeable transfer.

I doubt you want to use a power of disclaimer as (if disclaiming is still possible) that could be read back and lose the husband’s estate the spouse exemption.

If the widow is a Discretionary Beneficiary, you could appoint her a reversionary interest in the capital now and she, holding both the life and reversionary interests, could call for the capital under Saunders v Vautier (or the trustees could make a s.32 advance to her as a capital beneficiary with her consent as life tenant). I don’t see any reason that you can’t exercise the power of appointment while she is alive. It just can’t revoke the life interest to which it is subject.

1 Like
3

Thank you.

The widow is a discretionary beneficiary.

I’ve never heard of using a reversionary interest.

How would the calculations work in respect of the life interest on her demise if the life interest still exists though? If the life interest was retained my concern is the value brings her estate well over £2m and loses the transferable and her RNRB.

This is a new concept to me. Do you know where I could find out more about it?

4

Her life interest would come to an end and be replaced with an absolute interest with step 2 - either (a) she calls for the asset and the trustees transfer it to her outright; or (b) the trustees advance to her under s.32.

I’m not sure the mechanics would be covered in any books but it is just a matter of exercising the power of appointment to appoint that, subject to the prior life interest, the appointed fund shall be held for W absolutely. I’m sure counsel could draft it for you.

5

Is this DT still subject to a life interest or not? " We’ve closed the lifetime trust and dealt with that".

If there is only a DT now, clauses 6.5.3.1 and .2 allow you to do anything you want to appoint to a beneficiary provide you avoid a fraud on the power e.g. by knowing they intend to benefit a non-beneficiary. It is almost impossible to think of an appointment which will not benefit a beneficiary who has a mere spes. If the widow is a beneficiary but the daughter not, an outright appointment to the widow knowing she intends to benefit her own daughter is likely to escape the fraud doctrine. Because it’s just what a judge would do if a trustee, unless the daughter is someone or in such circumstances that your settlor would not have wished the onward gift (a PET by the widow) to take place. Why was she excluded as a beneficiary; if she was? Is she only the widow’s daughter? If she is included surely an appointment direct to her is preferable.

If the widow does have a life interest is it a QIIP or not? If it is you may not wish to terminate it but clause 6.5.3.1 permits an IHT-free though not CGT-free distribution to her. You can make the daughter’s share permanent by appointing a reversion behind the life interest if she is a beneficiary but not if she isn’t. A distribution to the daughter will then be a PET by the mother and no hold-over. If the widow has a NQIIP you can make an appointment to any beneficiaries subject to any RPT IHT but with CGT hold-over if favourable.

Although some trust provisions have been quoted missing facts are the identity of Discretionary Beneficiaries, whether a life interest subsists and, if so, is it a QIIP or not.

Jack Harper