Splitting pre-2006 IIP settlement

I’m sure this question must have been asked before but I cannot find an answer to it.The background is that a now-deceased settlor established a pre FA 2006 discounted gift trust, the income beneficiaries being two grandchildren in equal shares.

The relevant trust clause reads: “Subject to and in default of the overriding powers below the Trustees shall pay or apply the income of the Trust Fund to or for the benefit of X and Y during their lifetimes in equal shares.”

The original interests in possession remain unchanged to date.

Following death of the settlor the trustees now wish to begin making benefits available to X and Y. They wish to manage the trust in future as two funds, one for each of X and Y and their respective families, because they envisage different investment strategies, and different timings and natures of benefits paid.

We are concerned about this exercise partially terminating the current interests in possession.

If the trustees appoint say “Fund 1” for X and his family exclusively and “Fund 2” for Y and his family exclusively, it appears at first sight that this will terminate Y’s IIP in his former half-share of Fund 1 and will similarly terminate X’s IIP in his former half-share of Fund 2.

Alternatively the existing IIPs could be allowed to subsist in each fund, which would result in deemed PETs from X or Y if benefits are further appointed out from either fund to other beneficiaries but would avoid the funds being of mixed nature for IHT purposes.

The ideal solution (if achievable) would be if X’s IIP in half of the trust fund can be satisfied by a declaration that X has an IIP in the entirety of Fund 1 - and similarly for Y in regard to Fund 2- without terminating the existing IIPs or creating new ones. If it can be done, I suspect the drafting of the appointments would be a tricky exercise!

Guidance would be appreciated.

Adrian Sacco
Felicitas Group