Mrs T settles capital into a J Rothschild (now SJP) “Variable Trust” in April 1997. The entire settlement is invested into a single premium offshore investment bond, where it remains today. Mrs T is still alive.
The default beneficiaries are her four grandchildren in equal shares and the trust has not been varied since 6 October 2008. The discretionary beneficiaries are widely drafted and include Mrs T’s children, H & B.
All four grandchildren are adults, and the trustees (including Mrs T and the parents of the grandchildren) now wish to fully assign the investment bond to H, effectively ending the trust.
SJP has confirmed that the trust is “a pre 2006 variable trust which is a type of interest in possession trust”. It has confirmed that varying the default beneficiaries from grandchildren to H would be a CLT and bring the trust into the relevant property regime.
Is the assignment a PET from the grandchildren to H?
As they are adults, do the trustees need to seek permission from the grandchildren to make the assignment, given the potential consequences on their own IHT positions?
I am nervous about replying without a clear sight of the document. It seems that the grandchildren have absolute interests though I am not entirely clear what was done in 2008. However if they do have such interests there is no need to ascertain if they have QIIPs.
These interests are apparently subject to defeasance by exercise of a trustee power of appointment in favour, as mooted, of H an object of it. The exercise only needs consent if the trust so provides but the trustees must exercise their powers properly by considering all the interests of all objects and default beneficiaries and any letter of wishes left by the settlor. I can think of several scenarios in which an appointment of the entire trust fund to a single object might be theoretically open to challenge by anyone thereby disappointed, especially if the sole appointee is pressurising the trustees.
Those default beneficiaries whose interests are fully extinguished, as seems planned, will indeed make PETs and suffer a loss of NRB in whole or part for 7 years affecting their own estates if they do not survive. This kind of trust is common with a bond but this outcome is a routine occurrence where an IPDI precedes outright remainders and is terminated by exercise of a trustee power. A consent requirement is more common in that case.
An assignment not for value will not cause a chargeable event gain to arise but a later such event will eventually and may be more expensive if taxed on H than on the default beneficiaries.
Our frustration/confusion arises from SJP repeatedly telling us that a change in IIP beneficiary to H is a CLT. Despite our unchanging response that we are not changing the IIP, but instead appointing capital to a discretionary beneficiary,
I will advise that the beneficiaries should be placed into an informed position regarding the PETs they will be deemed to make.
A continuing advantage of such a trust is that a TOV into it is a PET! It is not prevented from being so because the default beneficiaries’ outright interests are vested but subject to defeasance but they must of course be immediate and not reversionary.
A bond is a user-friendly trust asset as it avoids Income tax on normal income and CGT. However if and while a default beneficiary is a minor they can only make a privileged will and while their right to make a valid inter vivos disposition of their interest is not ruled out, at least once they are close to majority, it is always risky and must always benefit from independent advice.