My client has been given a life interest in her late husband’s estate under his will. She would now like to dissolve the trust and essentially bring forward the residuary beneficiaries’ entitlement to the capital.
The will contains a power which allows the trustees to distribute any part of the trust fund to the life tenant, but there is no equivalent power allowing the trustees to distribute capital to the residuary beneficiaries (who are her two step-children). There is no overriding power of appointment in the will to assist us here.
I suspect that we are looking at some kind of dissolution of the trust under Saunders v Vautier by which my client and her step-children effectively agree to dissolve the trust on such terms as they think fit. I should say that both of the step-children are over 18.
In doing so, I am wondering whether there may be some element of gift if either my client does not receive a sum equivalent to the overall interest entitlement, or the step-children take less than they would otherwise have taken.
I was just wondering if anyone has any experience of dissolving a trust in this way, and whether the gift issue was considered (and, if so, how was it resolved).
Do the step children need to survive the life tenant, or only need to survive the testator, for them to benefit?
If they only need to survive the testator, the life tenant could release her life interest. This would be a PET by her and the trustees would be liable to CGT under s.71 TCGA 1992 (and IHT if the life tenant dies within 7 years).
If the step children need to survive the life tenant, it may only be possible to assign to them the life interest with the expectation that capital will pass to them when the life tenant eventually dies. Whilst there would be no CGT on the change, it would then be within the IHT relevant property regime and subject to 10 yearly and exit charges.
If the step children only needed to survive the testator, it would also be open to them and the life tenant to partition the trust fund between them. This would still result in a CGT charge under s.71 TCGA 1992, and a PET to the extent of the value passing to the step children.
If it is still within 2 years of the testator’s death, the possibility of a variation effective under s.142 IHTA 1984 should not be overlooked.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thanks for your thoughts, Paul. That’s really helpful and I agree a s.142 variation is probably the best way forward. Fortunately, we are still within the two years.