My client’s mother died last year and my client wishes to vary her entitlement under her mother’s will.
Alongside a few cash gifts she wishes to invest a large sum into a discretionary trust. She wishes to be one of the trustees and a potential beneficiary .
The financial advisor has confirmed that there is no problem with this . It is unlikely that she will want any of the money herself from this trust but is there anything I need to be careful about here to ensure that the money leaves the daughter’s estate for IHT purposes .
For IHT with reading back elected the mother will be the Settlor, so her being a beneficiary of the DT will not create a GROB.
However the daughter will be the Settlor for income tax and CGT. So trust income will be taxed as hers. Capital gains will be taxed on the trustees and the main disadvantage of a CGT settlor-interested trust will be neutralised if reading back is elected: hold-over relief is only lost for a disposal on entry and not by the trustees on exit.
For trust law purposes the daughter is the settlor. She is a trustee and an eligible beneficiary. It would be a problem if she is or could ever be a sole trustee. There is a line of cases holding that in such a situation the settlor has not divested herself of equitable/beneficial ownership of the assets.
Of course, much depends on whether anyone has locus standi to challenge. An eligible beneficiary of a DT is in a weak position: but they can complain if discretion is exercised outwith the trustees’ powers and so is void as a fraud on the power (“excessive execution “) or is exercised capriciously or without proper consideration of all eligible beneficiaries (“inadequate deliberation”) with the outcome that an appointment so made would be voidable.
In a failure to divest scenario it could be those who would take under mother’s will or intestacy if the trust was held to be incipiently ineffective. Another complainant might be HMRC, arguing that the variation failed in the real world: this would be a monstrous sauce as the tax consequences of reading back are based on a fiction. It is rather a grey area whether a variation for tax can fail if the mechanics of the operation are invalid as a matter of property law.
So ideally the trust will always require 2 trustees to exercise dispositive powers.
Potential conflicts of interest are particularly potent. I am not a wholehearted fan of Provision 8 in the STEP Standard 3rd Ed. though it improved on 2nd Ed. Independent trustees costa lotta but may well have a role here. I welcome 8.4.2 but this only states the law and would protect the Settlor for trust law of a variation DT. I usually extend protection to replacement trustees if they are “related”, as defined, to the Settlor or as otherwise specified. The stupidity of the unexpurgated self-dealing rule (so 17th century) is that it prohibits a sale of trust property to a non-original trustee even at indisputable market value. Er, Doh!
So care is needed in my view about the initial choice of a second trustee (from outset or when needed) and the identity of who has the power to appoint an additional or replacement trustee (not the trust law settlor) and who can be so appointed.
It is often a Rubicon to be crossed by an entrepreneur in realising that his or her company’s money no longer belongs to them and similarly by a settlor that the trust property is no longer theirs. I worry about the cognitive grasp of the definitive commitment being made where a client wants to be both a sole trustee and an eligible beneficiary. Clear advice in writing, copy countersigned by client, partners not kept awake at night and insurers in no jeopardy (the ocean-going yacht is safe) and the outrageous premium will not become even more so at next renewal.