I have had a query from a beneficiary of a will, Mrs A. She is the beneficiary of half the residue, the other half going into a discretionary trust. Mrs A’s brother is the only one who can benefit from the trust. The last clause regarding the will trust states that after the brother’s death anything remaining in the trust goes to Mrs A. She however would like any remaining assets to be divided between her and their other brother.
Does anyone know how I achieve this, given that it’s a term of the trust that the money ultimately go to Mrs A? I don’t think a deed of variation could be used but I may be wrong.
Whilst a variation cannot be used to vary the dispositions of a trust already existing at the death of an individual, it can be used to vary the dispositions of a trust arising under their will.
In the instance in question, if Mrs A is absolutely entitled to the interest I remainder subject only to the prior interest of her brother, she could make a variation. Alternatively, as an interest in remainder is within the definition of excluded property (s.48 IHTA 1984), she can gift it (any part of it) at any time before it falls into possession without any IHT consequences.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Where it is not possible for new/additional beneficiaries to be added and there is only one single beneficiary the relevant trust will not qualify as a discretionary trust. In the present case it would seem that the brother has an interest in possession with Mrs A’s interest being in remainder (excluded property for IHT).
As Paul points out, a DoV could be executed by Mrs A or simply gifted. A simple gift would be of excluded property for IHT and there would be no CGT consequences [TCGA 1992 s 76(1)].
Could there not be a power to accumulate - giving the trustee(s) a discretion over whether to distribute income (as well as, potentially, capital). Accumulations undistributed at B’s death would accrue to the reversioner.
If this is a recent death, there may not be any time limit on the power to accumulate.
My understanding (which of course may be misguided) is that where there is a sole beneficiary the key is whether or not the class of beneficiaries is closed or not.
Where the discretionary class is closed then the sole beneficiary automatically possesses an interest in possession.
Where, however, the discretionary class is not closed and there is a power to accumulate then no interest in possession arises ie the trust remains discretionary.
Believe it or not never thought to check HMRC Manuals until just now.
"IHTM42226 - The settlement: class of beneficiary
Normally the settlement deed specifies a broad class of beneficiaries and the trustees have a choice of where they can exercise their powers of appointment.
Occasionally however, the class is reduced to such an extent (often by deaths of the others) that there is only one object/beneficiary. Does that single object/beneficiary have an interest in possession (IIP)?
Re Trafford  1 AER 1108 is considered to have provided an answer of general application
if there is only one object/beneficiary and the class is open, the trust remains discretionary (there is no IIP).
if the class is closed the sole object does have an IIP. A closed class means that all potential beneficiaries have been identified and no future beneficiaries can turn up/be added".
I think there is a distinction. In Re Trafford there was no power to accumulate - just a trust to pay the income - so income had to be paid to a beneficiary and, with only one beneficiary, it was effectively an IIP.
The next paragraph of IHTM42226 says "It follows that if the class is closed, as above, then the removal of the second-last object (by death or any other event) and the trustees can no longer accumulate, means that the fund goes from discretionary to IIP.
Apologies to Mary if I misled you.
Thank you Andrew for correcting my understanding. I agree with your comments.
Thank you for your comments. The power to accumulate ends after 21 years so will at that point become an IIP.
Would a deed of variation have the usual reading back provisions for CGT and IHT?