When is a discretionary trust not a discretionary trust?

A settlor created a discretionary trust for the benefit of his children and their remoter issue, together with those the settlor or someone they had nominated in writing added to the class. At the time he had two children. One child has since died, not leaving any surviving issue. The other child has no issue and receives benefits as a result of health conditions. The default position is that the fund firstly pays to the children and remoter issue at the end of the trust period, or passes to a named child or their estate as the ultimate default.

The settlor has lost capacity and the power to add cannot be exercised.

How will the Revenue view the trust, as ultimately there is currently only one person who can benefit under the trustee’s discretion and are there any options anyone would suggest to alter the trust so that it is not viewed as belonging to that child, as this will adversely impact their benefits?

Susan Young

Is there power to accumulate for the whole of the trust period? If not, how much time is left to accumulate?

What is the value of the trust fund?

Presumably the settlor had not nominated anyone else as having the power to add beneficiaries?

Which ‘named child’ is the ultimate default beneficiary?

Jill MacMahon
Thackray Williams LLP

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My first thought, on the first para, is that even if there is no other living beneficiary (ie object of the discretion) there remains the possibility that more beneficiaries could be added - presumably the living child could have issue, or perhaps further objects could be added. That I suspect was your thinking too Susan.

Then I read the second para. However I don’t think it changes the position - the court could give direction of the exercise of the power on behalf of the settlor.

So it seems to me that currently the trust remains discretionary - there is no compulsion on trustees to pay out capital or income - and thus the fund does not form part of the living child’s estate. It would do so on expiry of the trust period of course, under the default provisions mentioned.

Simon Leney
Cripps LLP

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Most modern discretionary trusts include a power to accumulate.

If the trust in question contains such a power then, until that power ceases, the surviving child remains a discretionary object only.

If the child is still the only living beneficiary when the power to accumulate expires (assuming a 21 year term), at that time they will effectively acquire a life interest in the income until such time as he has issue (if at all).

If the accumulation period is 125 years, the surviving child will not acquire a life interest without the trustees exercising their power of appointment, whether looking at the situation from the HMRC perspective, or that of any means tested benefits.

Applying the decision in Figg v. Clarke (1996), regardless of the gender of the surviving child the class of objects cannot close before their death. If there are no issue by that time, the trustees may need to consider how the trust should be terminated if the trust period, as stated I the trust instrument has not by then expired.

Paul Saunders

Similarly to the reply I have just posted to another question it all
depends on the precise wording of the trust. Also the age of the surviving
child and gender could be relevant.

It is possible to have a trust which is still discretionary for inheritance
tax purposes but is an interest in possession for income tax purposes.

Initially at least you need to provide someone who understands trusts with
a copy of the trust deed.

Andrew M Mortimer