Trust - IHT - Settlor marries life tenant - IHT on the Estate

I act for the Executors of a Settlor who died in 2014.

Settlor created Lifetime IIP trust for LT in 1992 - overriding powers available for LT ( not used to date) - remaindermen LT’s children
Settlor married LT in 1996
Trust contains standard exclusion clause re Settlor and spouse but not widow
Trust contains a property value £1,000,000 (in 2014) - never rented so no income - settlor and LT/spouse stayed at the odd weekend for theatre etc - not their PPR - they lived elsewhere

Settlors estate is exempt IHT - Trust for spouse

My question concerns potential IHT on the estate (trustees have their own advisers) - From 1996 to 2014 how is the trust treated - failed trust reverts to settlor ie chargeable on settlors estate or still valid as an old IIP trust and PET - if still valid did marriage affect the trust at all - - maybe valid now as LT is widow but did the marriage period break the trust - If trust now recommences for widow could it be relevant property (on settlor’s death and reportable) as it has now restarted but not through settlor’s will so no IPDI.

Any comments would be welcome.

Michael Micklethwait
Beviss & Beckingsale

I believe there are insufficient facts to be able to make any substantial comment.

In order to identify the position, it will be necessary to understand the various interests that arise, especially if the primary beneficiary is excluded during at least part of the trust period.

A detailed review of the trust deed would be required in order to identify who was entitled whilst the life tenant was excluded. It may be that the default clause effectively gave LT’s children life interests and these have lapsed when LT became as widow, as her life interest may have revived. In the meantime if the property was not let but used by the settlor and LT on the odd occasion, it may well be a gift with reservation. If the children of LT would have had an interest whilst LT was an exclude beneficiary, they might also have a claim against the trustees (for benefiting non-beneficiaries at their expense).

However, the starting point should be a review of the detailed provisions of the trust deed to identify the individual beneficial interests that have existed (or should have existed) since inception of the trust. Once those are ascertained, the executors will be able to properly consider their position.

Paul Saunders

As Paul Saunders rightly says, it very much depends on the precise wording of the trust instrument. In particular, the exclusion of the settlor and settlor’s spouse may only prevent the trustees from exercising a ‘power’ to the benefit of settlor/spouse: benefiting from a life interest does not involve the exercise of a power - it is a right conferred by the trust instrument (as opposed to, say, a discretionary power to pay or apply capital to or for the benefit of the life tenant).

It is a long shot, but can the actual wording of the exclusion clause be construed to refer only to the person (if any) who was the spouse of the settlor at the date of the settlement? Indeed, was he married to someone else at that time?

Was the settlor considering marrying the life tenant at the time of making the settlement? If so, could there be scope for rectification, if otherwise the life interest would terminate on the marriage.

Before trying to determine the IHT position, and whether there was any reservation of benefit, you will need to determine the position under trust law at the various times.

In relation to ‘reservation of benefit’, it is important to consider whether possession of the assets given away was ‘bona fide assumed by the donee’ - What was given to the trust? How was it then used? At what point did the settlor begin to use/enjoy any of the trust’s assets? Gifts of cash are generally not subject to the reservation of benefit rules.

Paul Davidoff
Bircham Dyson Bell LLP

I agree totally with what Paul says.

In matters like this the starting point is having someone who has the
experience & knowledge to be able to read and correctly interpret the trust

Other matters that might already be or eventually prove be relevant:
The trustees and their advisers surely have a responsibility to ensure that
the trust has been and is correctly dealt with.
Were they made aware of the marriage and odd occupation!
What advice was provided when the trust was set up to the settlor and
presumably at that time his ‘live in’ partner!
Presumably the settlor’s latest Will was drawn up after or at the time of
the marriage - Should whoever drew up the Will have known of the terms of
the trust/ been advised of its existence/terms!
Who paid the trustees expenses relating to the property!

Andrew M Mortimer