An old style 2 year discretionary trust which states:
“Not earlier than 3 months nor later than 2 years after my death to end these trusts by distributing the trust fund among such of my beneficiaries as my trustees think fit”
The trust fund was not so distributed. Residue went to wife.
Does the trust fail and the trust fund go to the wife-there are no express default beneficiaries, or can the trustees still exercise their power, albeit late?
Simon Northcott
Unless there’s provision to the contrary elsewhere in the will or any codicil, the legacy fails and falls into residue.
Paul Saunders
Hi Simon,
I agree with Paul, I might add that a check to ensure no IHT problem may arise (I’m assume the trust is small) - only applies if the trust was created by will. Appears to be.
IHTA 1984 s.143 Compliance with testator’s request.
The trust assets are deemed to devolve from the deceased estate, after the two years the trust assets disturbed could be a gift from the executor, depends on the trust wording :0)
Richard Bishop
PFEP
I don’t think it is possible to give a definitive answer without seeing
the whole of the trust wording. But, it seems to me, that there is a
strong argument that, if the trustees are required to take positive
steps to bring the discretionary trust to an end within the period
stipulated and they fail to do so, then it must follow that the
discretionary trust has not been brought to an end and remains
effective. In that case, I think that the trustees would still be able
to exercise whatever powers they are given to distribute the trust fund
among the class of beneficiaries; although they would be liable for any
loss to the trust fund from their failure to act within the timescale
mandated.
However, I appreciate that there will be people who think that the
argument to the contrary is equally strong or stronger.
Michael Dew
s.144 IHTA 1984 applies, hence the 2 year “cliff edge” causing the trust fund, or that part of it which at that time has not been appointed out, falling into residue.
Paul Saunders
Section144 is a tax provision. It has no effect on succession under the will.
As Michael suggests., the answer to Simon’s question all depends on construing the whole will.
I had a not dissimilar case a couple of years ago, with one of these two year trusts. They were always a misconceived way of taking advantage of s144 and I hope
nobody is putting a two year time limit in any longer.
In my case Dad had died what was then 19 years previously. A 10 year charge had been duly paid 9 years before and it was only as the trustees were planning for the next 10 year charge, and whether it was better to wind the trust up before it struck, or to
keep the trust going and pay it, that someone drew attention to the two year limitation on exercising most of the discretionary powers. Nobody had noticed this in the previous 19 years and the lawyer who was first consulted said that the trust had come to
an end two years after death.
It came to me and a colleague and we both reached the conclusion that what had actually happened was that the trustees had, by failing to exercise the discretionary
trusts within two years, but keeping everything going, actually exercised the very wide power of advancement given to them by the will (which was not time-limited). By continuing to run a discretionary trust, with the consent of all the family members, they
had applied the funds for the benefit of all the beneficiaries on the discretionary trusts, but now without a time limitation.
Fortunately everyone who might have had an interest if the trust had ended after two years was of full age and capacity so, having advised them all of their right to take independent advice, we prepared a deed for them to sign to give the trustees the comfort
that they could safely continue to treat the trust as discretionary. Otherwise, I think we would have had to apply to the court.
And, for those who are interested, the final decision was to take some assets out of the trust before the 10 year anniversary and leave others in.
Anthony Nixon
Irwin Mitchell Private Wealth
I am not sure s144 affects this. If action was taken within 2 years it would have been read back for iht. If not then no read back.
The will is very badly drafted with 3 separate wordings for what the powers of the trustee are over the distribution of trust fund. Taken together I believe the trustees only had a power to distribute amongst children and grand children rather than power
to create a trust.
The clause below says the trustees must end these trusts within 2 years, so if they do not end them perhaps they are still running?
Simon Northcott
IHTA s144 applies when there is “an event” during the relevant period which would have IHT consequences. Instead of the usual IHT treatment the event is treated as if its effects had been brought about by the testator on death. Clearly the testator in this
case intended that the trustees would take advantage of s144, but they failed to take the necessary action within the relevant period and the consequence is that there was no event to which s144 could appply.
The words quoted in Simon Northcott’s original posting are very reminiscent of a precedent for a short-term discretionary trust which appeared in Parker’s Modern Will Precedents. The trustees were directed to hold an amount defined by the available nil-rate
band on trust:
(a) To apply the income and capital of the Trust Fund for the benefit of such of my [wife/husband]/[civil partner] and any of my issue who survive me (“my Beneficiaries”) as my Trustees think fit.
(b) To add any undistributed income to the capital of the Trust Fund.
(c) To end these trusts not earlier than three months nor later than two years after my death by distributing the Trust Fund among whichever of my Beneficiaries then alive or if none whichever charity my Trustees think fit.
My argument is that if the trustees of a trust set up in this way fail to give effect to the direction in (c) then the trust fund will continue to be held on the trusts of (a) and (b) in the absence of any express contrary provision as to what is to happen.
In consequence the trustees can still apply the trust fund for the benefit of the beneficiaries under (a) notwithstanding that the period stipulated in (c) has expired. They will not, of course, get the benefit of s144.
On the other hand, I can see that it might be possible to construct an argument based on the intention of the testator that, although there is no express provision, it is
implied that the trust will end within the period allowed by s144 despite the trustees’ failure to act in accordance with the testator’s directions. However, I would have thought that the implication would be that the beneficiaries would share equally
(on the basis that equality is equity) rather than that the trust fund would accrue to residue. It would not be a case where the trust ends and the fund falls into residue because it is not otherwise disposed of. In the precedent quoted, the testator has specified
exactly what it is to happen to it, even down to providing for it to go to charity in the event that there are no surviving spouse and issue. A gift in a will does not fail simply because the trustees do not give effect to it.
As for s144, surely it is purely an IHT provision. I cannot see anything in it that could imply terms into the trust creating a “cliff edge” at the end of the two year period.
Michael Dew
That is most interesting Michael. I cannot believe this precedent was in Parker’s, which I remember looking at years ago and thinking it was rather good!
To take this a stage further-the solicitors in this case drew up a deed of variation made by the widow and children, but none of the 9 grandchildren, all of whom were potential beneficiaries. This could not be an effective gift, as the grandchildren were excluded,
presumably all minors. Was this impliedly an appointment under (a), 2 of the children being the trustees?
If it could somehow be argued it should survive as an appointment, is it valid? I say this bearing in mind it purported to create an 80 year discretionary trust, including remoter issue and spouses as well. So non beneficiaries are in the new class, which might
perhaps be ok if for the benefit of the original ones, but a trust going way beyond the 2 year period in which the trust is to be terminated?
My own reading is that © restricts the wider wording of (a) to the 2 year period, and only allowing distributions/applications for individuals, rather than creating a new trust, as was more normal with these old 2 year trusts which tended to be worded more
widely.
A further subclause goes on to say "My trustees may exercise their discretionary powers when and how they think fit…….Again I would suggest the “when” is limited to the 2 year period.
Does anyone still have a Parker’s (far from modern now!) book, as it may help shed some light on the matter?
Simon Northcott