Dear Members
Happy New Year !
My client’s mother died last year and my client wishes to vary her mother’s will.
Alongside a few cash gifts she wishes to invest a large sum into a discretionary trust. Her financial advisor is St James Place and I can use one of their Trust Deeds or one of my own. I’m just wondering who the settlor would be here. I don’t want to undo the Deed of Variation.
Thanks
Collette
If the client wishes to vary the dispositions of her mother’s estate (she cannot vary her mother’s will – only a court of competent jurisdiction can do that) and include a gift into a discretionary trust, the mother will be the settlor for IHT purposes, and the client the settlor for CGT and income tax purposes.
There is no reason the client cannot create the trust herself and the variation direct a cash sum into that that trust, so long as the trust is sufficiently identified within the variation.
If you try creating a substituted will, you will give yourself no end of problems in drafting it. Consideration should be given merely to purporting to inset an additional clause into the will ahead of the gift to the client (if a residuary gift) or the new gifts made out of the legacy to the client (if a non-residuary gift).
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
The instrument of variation, whether it contains the new trust or directs property into a trust created by a separate document, should state specifically that it is varying the dispositions of the Will so as to track s.142(1)(a) IHTA and s.62(6) TCGA and put beyond doubt what is intended.
I very much endorse Paul’s comment that the Will itself is not being varied. To provide that it is might later invite the challenge that the variation is of no legal effect, which might not become apparent until it was too late to remedy. Particularly obtuse is for the variation to purport to insert an additional clause in the Will or to provide that its provisions are to be altered or interpreted “as if”.
If there is some content of the Will that needs to be reflected in the variation set it out de novo and not by reference.
If you are varying the effect of an equitable joint tenancy’s right of survivorship resist the temptation to purport to sever it retrospectively as that is a legal nonsense. The variation should vary the disposition of the relevant property that has actually occurred by the operation of that right.
In all these cases one should bear in mind that the variation only has effect for tax purposes. The actual destination of the subject-matter will only be altered if the variation has the consent of the original donee to that : they are a necessary party to the variation for tax purposes but they should also clearly agree to any desired property law consequences which might not obviously follow.
If an original legatee has already sold the asset he has agreed should devolve on someone else, it should be spelt out that he should also cough up the sale proceeds. Likewise with an equitable joint tenancy: the right of survivorship will have already vested the entire equitable interest in the asset at the moment of death in the surviving co-owner(s) so their consent to creating a different equitable ownership post variation should be spelt out. You do not wish to be met by the argument that their agreement was only as to the tax consequences.
Often the variation will purport to make a change of ownership that will be effected by the variation itself but if the asset has already changed its character or ceased to exist the vital substitutionary measures must be formally agreed. While the tax rules, when reading back is chosen, will change ownership of the asset for tax purposes as of the date of death, that is a fiction and it is not clear, like all deeming provisions, how far the fiction extends. As far as I know it has never been settled that reading back for tax purposes itself automatically effects whatever property ownership changes might arguably follow logically. Can a person who agrees to reading back keep the sale proceeds of an asset he never owned for tax purposes or keep an asset in which the deceased in lifetime owned a share but could not leave by Will or, if dying intestate, would not have been part of his estate? As ever it is better to draft precisely what the parties intend to minimise the risk of misunderstandings.
Jack Harper
Please pardon my ignorance but I am a little confused here.
“If you are varying the effect of an equitable joint tenancy’s right of survivorship resist the temptation to purport to sever it retrospectively as that is a legal nonsense”.
If this is the case how can one vary the disposition of something if the will has no power over that asset?
You vary the destination of the half share for fictional tax purposes but in the real world the surviving joint tenant will own the entire asset. It is a question for the parties whether the survivor will also transfer a half share to the donee fictionally substituted for tax purposes by the DOV. Presumably if reading back is elected for IHT or CGT or both it must follow that such a transfer would then have no effect for the relevant tax purposes.
Words are important, particularly if they do not do the job intended or only do so after a judge has been prepared to hold that, as a matter of construction and on admissible evidence, they do or they don’t but can be rectified. The latter to me seems an expensive gamble worth avoiding.
The co-owner who has not survived is by definition unable to vary so only his PRs can be the necessary party to the DOV (together with the surviving co- owner). If the DOV just says “the PRs hereby sever the the deceased’s joint equitable interest in Blackacre” such wording literally must run the gauntlet of the case law.
I have not searched exhaustively but my understanding is that it is now settled that severance cannot be effected by Will (although it may be that where mutual wills are executed the agreement might bind the will makers on the first death but that is not severance in lifetime unless the agreement can be construed as a notice, another interpretation nightmare. A fortiori, the idea that PRs can sever is absurd as the entire property will have vested in the survivor: it is too late.
The main problem here is that, as usual, fiscal legislation has bulldozed over property jurisprudence and its deeming rules are at odds with its real world operation. A masterful analysis of joint ownership is “Plural Ownership” by Roger J. Smith, who spends 180 pages dealing with land and 20 with personal property, as ever the Cinderella of the law reports. It remains obscure how s.36 LPA 1925 applies to it, given the s.205(1)(xx) definition of “property” which does not figure in s.36.
The first tax fiction is s.4 (1) IHTA. The deeming of the TOV’s occurrence immediately before death allows the value of the deceased’s severable share to be charged. The second fiction is in s.142 and apparently (this ought to have been made clearer) allows a variation of the severable share charged under s4(1) as a “disposition…..or otherwise”. That variation must be made by the survivor as in the real world he owns the entirety. The DOV should say”X hereby varies the disposition made to him by operation of law of the share in Blackacre vested in him on the death of Y”. X should not purport to sever anything because he could only do so in the lifetime of Y and even then could only have severed his OWN share not that of the deceased, although of course that would have been the corresponding outcome if there was one other co-owner.
CGT is even murkier. In the real world it is strongly arguable that the deceased per s.62(1) TCGA was not competent to dispose at his death of his formerly severable share and there is no explicit timing fiction as for IHT. Presumably it must be inferred. Only then does s.62(1)(a) deem a relevant asset to be acquired by his PRs, plainly a fiction.
Other real world controversies concern whether there has been already a lifetime severance by conduct, whether a purported notice has already been given, and whether a lifetime transfer by a joint equitable owner that does cause severance of his own share affects the other shares where there is more than one surviving equitable joint owner. Fortunately tax law here seems to follow the real world property law, at least when the appropriate analysis of that has emerged definitively from the prevailing uncertainty of the law, let alone its application to the particular facts.
Jack Harper