I hope you are all well, I seek some advice/assistance on a Wills and Trusts matter.
I have prepared a Life Interest Trust (LIT) Mirror Will, for the benefit of the surviving client/spouse to reside in the property/family home for life.
What I would like to know, can I expressly allow for the LIT Will to allow the life tenant to receive income as well as capital and to be able to receive capital advancements the during the Life interest trust / after the property has been sold?
If this is possible what would be the tax implications of this? CGT? IHT?
Will this have an effect on RNRB available?
A final question, will this change the LIT Will to a flexible LIT Will or into another variation of the LIT will?
You are saying you want the life tenant to receive income and capital. However, Will this not affect the remaindermens entitlement to capital. Has this been discussed? Alternatively, if you leave discretion to trustees you could be compromising the RNRB as this would be a discretionary trust.
Yes you can include a right to receive any income generated and a power to pay/advance capital. It’s very common.
You shouldn’t include a discretionary power to pay income as that creates confusion as to whether the trust is an IPDI or relevant property trust. Worse, selling the property could cause it to move from one regime to the other, creating a chargeable transfer.
CGT s.71 - disposal by trustees on absolute entitlement
IHT - nothing as the trust fund of an IPDI is deemed to be beneficially owned by the life tenant anyway
Your final question is not a legal question, those are just shorthand/marketing names or a question of which template you are using. You can call it what you like.
Thank you for your response. Yes, my clients want to consider giving some capital of each other’s shares in the property to the Life Tenant whilst alive or if they voluntarily terminate the trust. The purpose of my question is so that I don’t lose the RNRB for them and I don’t want to create a Discretionary Trust either. Therefore I want to know if we expressly allow the Life Tenant to receive capital or a percentage upon termination of the trust, that the RNRB will not be lost and we don’t have any tax consequences?
So basically just a clause within the Life Interest Trust to allow the Trustees to pay Capital upon voluntary termination of trust or upon trigger events such as remarriage or co-habbitaion or ceasing to reside at the property due to needing to reside in care will terminate the trust and the Trustees can pay some capital to the life tenant.
STEP standard Provisions are included as standard at the end of the will in my administrative provisions. I realise that, the STEP provisions allow Trustees to advance capital as to the whole amount and also provide income to the remaindermen instead of the Life Tenant. Am I therefore, ok to not expressly mention in my life interest clause, capital and just explain to the clients that the Trustees can do this anyway.
Hello Becky.
Without context of what you are seeking to achieve, it’s hard to say what the best course of action is as you seem to be aiming to provide wide ranging options for the trustees.
You say that you are creating a Will which contains a LIT for each spouse.The purpose is to allow the survivor to reside in the family home, usually this includes subsequent properties given there is a possibility of a change of residence.
However you then go on to talk about selling the property and using the proceeds to advance capital. You also mention advancing shares of the property in their lifetime.
You also say that you include STEP provisions along with bespoke provisions…
Have I understood correctly ?
If so, why are you looking to advance shares of the property when the purpose of the LIT is to facilitate occupation of the property as a right, which has IHT consequences (EXCEPT between spouses of course) ?
On that basis, as the capital assets or property is intended for the remaindermen, and with a residence there isn’t usually an issue with income, you need to be clear on what trustees can do with capital. If there is a future beneficiary who feels the trustees have gone beyond their powers they are exposed to complaints.
STEP provisions 3rd edition, 4.7 application of trust capital might be worth a read.
Also, trustees can make loans to life tenants if preferable if the terms of the Will trust allow.
Sorry to be late on this thread, and I do not intend to respond fully, but Becky’s initial post mentioned “advancements”. I have always understood that “advancements” can only be made to the beneficiaries already entitled [in some way or at some time] to capital, so cannot be used to benefit an income-only beneficiary.
Obviously, it is open to testators to create a further entitlement to capital if they wish, but please ensure this is not called, or relies upon, advancement alone. Unfortunately, historically I have seen a number of wills where the drafter had obviously misunderstood this.
[NB I have yet to see the 3rd edition of the STEP provisions, so apologies in advance if these happen to address this point].
s32 TA 1925 cannot be used to make an advancement to an income-only beneficiary because it must be exercised in favour of “any person entitled to the capital of the trust property or of any share thereof, whether absolutely or contingently on his attaining any specified age or on the occurrence of any other event, or subject to a gift over on his death under any specified age or on the occurrence of any other event, and whether in possession or in remainder or reversion, and such payment, transfer or application may be made notwithstanding that the interest of such person is liable to be defeated by the exercise of a power of appointment or revocation, or to be diminished by the increase of the class to which he belongs”
Mr Kessler KC’s drafting in the Overriding Powers clause says:
"Powerof advancement
The Trustees may pay or apply any Trust Property for the advancement or benefit of any Beneficiary"; and in the definitions
“The Beneficiaries” means:
.1 My Spouse [given a life interest in income]
.2 etc [more categories]
Note also that a deed is not required for an advancement under this specific power.
There are a number of precedents out there that will achieve the aim set out in the initial post – for example, one of my clients regularly uses Lesley King’s precedent which would appear to “tick all the boxes”.
The suggestion that the STEP Provisions might be all that is required, to my mind somewhat over-stretches the scope of the provisions and I would caution against such an expectation.
I would also caution against including the STEP Provisions together with any “standard” set of administrative provisions. STEP Provision 2(2) provides that the provisions are subject to the provisions of the Principal Document, so that if there is any conflict between what the will (or trust) says and the Provisions, the will (or trust) takes precedence. When you have both the STEP Provisions and a set of administrative provisions, the executors/trustees may need to take advice on a regular basis to identify if anything they intend to do is governed by the STEP Provisions or the schedule of administrative provisions. Unless the provisions in the will are carefully crafted to ensure there is no conflict (or certain of the STEP Provisions omitted), is the drafter doing their client any favours by including both?
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals