A has a Will which gives his wife, B, a life interest over his estate, and on the death of B, the estate passes into a discretionary trust for the benefit of B, their children and grandchildren. There is a LOW accompanying the Will stating that B should be taken care of financially, but that ultimately if B survived A, A’s wishes are that assets are appointed to B (presumably by her giving up her life interest and then appointing assets from the disc trust to her) and the LOW specifically states B could take advantage of the appointment from the discretionary trust by making PETs to the children and grandchildren to avoid paying IHT (the estate is to the order of £5m +) using the 7 year gifting rule.
My question is can you do this? Why they didn’t just give everything to B (wife) in the event A died before her, and made her a Will of her own is beyond me as the family are all very straightforward.
For full information, the grandchildren are all over 18. But the Disc Trust refers to “wife, children and descendants” as the beneficiaries so presumably a Deed of Variation is not possible, or if it were we would need to close the class to afford for permission to be made by all of the beneficiaries of the Disc Trust? Would a Deed of Variation be possible in these circumstances to remove all of the trusts and simplify the Will by gifting everything outright to the wife?
Assuming a DOV is not possible, would you (1) surrender the IPDI using a Deed of Appointment to allow the trust assets to go into the Disc Trust, and then (2) do another Deed of Appointment appointing all of the trust assets to the wife (B) using the administrative powers, and then (3) do a Deed of Gift where she then gifts the excess assets away under the 7 year rule.
It just seems like a lot of Deeds of Appointment and I am slightly weary that this process is against some form of legislation preventing the PET being made by B. Though I also cannot see why it would not be allowed. It just all feels very overly complex for what seems to have been very basic initial wishes.
The discretionary trust is only active when the wife passes away. Therefore, assuming the Will allows, the trustees could exercise their overriding powers and appoint all assets to the beneficiaries now (from the FLIT) which would be treated as PET made by the widow.
This sounds like what is often referred to as a “flexible life interest trust”. What can be done will turn on the precise wording of the Will. However, what I expect is that there is a life interest for B and (a) an overriding power of appointment, by which the trustees may appoint any of the trust fund to any of the beneficiaries (including B, but also any of the beneficiaries) and (b) a power to pay or apply any of the capital of the trust fund either to B or to “any of the beneficiaries”.
So, most likely, the trustees can appoint/advance the capital to B directly, using either of those powers. Alternatively, if an immediate onward gift is intended, the trustees can use either of those powers (in the case of (b), assuming that the power may be exercised in favour of any beneficiary) to make a distribution direct to the other beneficiary, without having to pay to B first. These distributions would be deemed PETs.
One reason to have this arrangement in the first instance is in case B has lost capacity by the time A dies, or if there is some other reason why it would be preferable for the life interest to remain in place (eg for B’s protection, or to preserve the capital for the descendants).
Another reason is that, again, if B has lost capacity, trustees of trusts like this are typically able to make the onward gifts to other beneficiaries for inheritance tax planning reasons - something which B’s attorneys could not do if B had received the inheritance outright, but lacked capacity. B’s attorney would have to apply to the court for authorisation to make gifts of this sort, but the trustees would not have to.
Thank you. What you’ve written makes absolute sense as there are powers to appoint the assets out to the Benes under the Will.
In this case then, presumably once it is decided whom should receive what, we complete a Deed of Appointment of those assets, gifting them to those beneficiaries My question is, usually if you appoint assets to a beneficiary from a normal discretionary trust, that asset would be treated as having gone to them directly for IHT purposes if completed within 2 years. How do we differentiate that the asset is going to the beneficiaries via mum, and not to them directly? Would it just be taken as a given due to the flexible life interest that this is the way it operated, or presumably we maybe add this to the recitals in the Deed of Appointment?
I am concerned that the HMRC might view it that the appointment was in favour directly of a beneficiary, rather than by way of the wife, causing the estate to incur IHT. But perhaps I am just being over cautious.
I am sure that HMRC will attack it if you do it that way… The idea is that the Appointment needs to be made to Mum only. The concept is that she needs to be free to do what she likes with the money and the executors must hope that she gifts it to the children as a PET. She will not be making a gift at all if she is passed the money only on condition that she pays it to the children, .and would not receive it beneficially from the estate.either.
I agree with both Pauls. If the children/grandchildren are potential beneficiaries of the flexible overriding power of appointment then, provided the trustees have properly taken into account all the relevant considerations (needs of the life tenant etc) then there is no reason they couldn’t execute a simple deed of appointment to appoint assets directly to the next generations.
There would be no writing back for IHT as a result of s.144 and it would be treated as a PET by the life tenant. The trustees should be cautious of the possible IHT arising if the life tenant does not survive 7 years.