Executors’ absolute and unfettered discretion

Moorsman

The names below are fictional. The figure of £x00,000 is a stated number.

My mother passed away recently. She left a will, prepared in 2007.  I, “MOORS MAN” am an executor and Trustee of her estate. My sister “JOSEPHINE JONES” is the only other executor and Trustee, who has decided to reserve powers.  My father passed away some time ago.

The will includes this clause which I need to interpret.  I’d welcome any expert opinions please.

“3) I DIRECT as follows:

a) I bequeath to my trustees my husband [named but deceased] my daughter JOSEPHINE JONES and my son MOORS MAN or any trustee appointed in terms of this clause or by deed of appointment (hereinafter referred to as my "Legacy Trustees") a legacy free of inheritance tax in the sum of XXX Hundred Thousand Pounds (£X00,000.00) or any other asset or assets of like value. As to whether or not the legacy shall be paid to my Legacy Trustees shall be in the absolute and unfettered discretion of my executors and Trustees.”

I understand that this text was intended to give the executors and Trustees the option, but not the obligation to create a discretionary trust which at the time, may have shielded some of my mother’s estate from care home fees and possibly from inheritance tax, in the event that my father had survived her.

The remainder of clause 3 sets out the intended beneficiaries of the trust (simply my deceased father, sister and I and our offspring), and the discretion of the Legacy Trustees over use of the trust funds.

Clause 4 goes on to set out the provisions for the residue of the estate in excess of the £x00,000, which fall to my sister and I in equal shares.

The sentence I’d welcome views on please is this one - included within the above text.

“As to whether or not the legacy shall be paid to my Legacy Trustees shall be in the absolute and unfettered discretion of my executors and Trustees.”

I take this to mean that, if, having given proper consideration to the matter, the executors and Trustees (my sister and I) decide NOT to pay the £x00,000, or any part of that sum to the Legacy Trustees (also my sister and I), then no discretionary trust would be formed, and the entire estate would then fall to be dealt with under the residue provisions of clause 4.

A reputable UK legal firm we have approached has said that they have not seen this drafting before, and because of this, are not willing to rely on it, and therefore that in their view a Trust of the £x00,000 has to be, or ALREADY has been formed, and should now be administered by the Legacy Trustees in accordance with the other provisions of Clause 3.  This interpretation could have an impact on qualification for the residence nil rate band and transferable RNRB, and bring about an IHT liability.

Have others seen drafting like this before, and if so, is there any problem with the interpretation I have proposed?

Is there some legal issue or case law precedent with this drafting or my interpretation that I have not appreciated?

There is no dispute between any of the family members on this interpretation.

Thanks in anticipation.

Keep_pedalling

I have not come across wording like that before, but I agree with you, I can’t see that a trust is already created and `I can’t see that you have any obligation to complicate your lives by making one now. I’m interested to see other’s opinions on this one.

poseidon1

Moorsman said:

The names below are fictional. The figure of £x00,000 is a stated number.

My mother passed away recently. She left a will, prepared in 2007.  I, “MOORS MAN” am an executor and Trustee of her estate. My sister “JOSEPHINE JONES” is the only other executor and Trustee, who has decided to reserve powers.  My father passed away some time ago.

The will includes this clause which I need to interpret.  I’d welcome any expert opinions please.

“3) I DIRECT as follows:

a) I bequeath to my trustees my husband [named but deceased] my daughter JOSEPHINE JONES and my son MOORS MAN or any trustee appointed in terms of this clause or by deed of appointment (hereinafter referred to as my "Legacy Trustees") a legacy free of inheritance tax in the sum of XXX Hundred Thousand Pounds (£X00,000.00) or any other asset or assets of like value. As to whether or not the legacy shall be paid to my Legacy Trustees shall be in the absolute and unfettered discretion of my executors and Trustees.”

I understand that this text was intended to give the executors and Trustees the option, but not the obligation to create a discretionary trust which at the time, may have shielded some of my mother’s estate from care home fees and possibly from inheritance tax, in the event that my father had survived her.

The remainder of clause 3 sets out the intended beneficiaries of the trust (simply my deceased father, sister and I and our offspring), and the discretion of the Legacy Trustees over use of the trust funds.

Clause 4 goes on to set out the provisions for the residue of the estate in excess of the £x00,000, which fall to my sister and I in equal shares.

The sentence I’d welcome views on please is this one - included within the above text.

“As to whether or not the legacy shall be paid to my Legacy Trustees shall be in the absolute and unfettered discretion of my executors and Trustees.”

I take this to mean that, if, having given proper consideration to the matter, the executors and Trustees (my sister and I) decide NOT to pay the £x00,000, or any part of that sum to the Legacy Trustees (also my sister and I), then no discretionary trust would be formed, and the entire estate would then fall to be dealt with under the residue provisions of clause 4.

A reputable UK legal firm we have approached has said that they have not seen this drafting before, and because of this, are not willing to rely on it, and therefore that in their view a Trust of the £x00,000 has to be, or ALREADY has been formed, and should now be administered by the Legacy Trustees in accordance with the other provisions of Clause 3.  This interpretation could have an impact on qualification for the residence nil rate band and transferable RNRB, and bring about an IHT liability.

Have others seen drafting like this before, and if so, is there any problem with the interpretation I have proposed?

Is there some legal issue or case law precedent with this drafting or my interpretation that I have not appreciated?

There is no dispute between any of the family members on this interpretation.

Thanks in anticipation.

You state will was drafted in 2007. Legislation introducing the transferable nil rate was October 2007.

If the will predates the introduction of this legislation, then this type of drafting was not uncommon in order to utilise NRBs on 1st death ( they were wasted otherwise). In this regard was the quoted amount of the Legacy £285k or £300k? These were the NRBs either side of 6 April 2007. How does this compare with the actual value of  your mother's estate on death?


As for the legal advice you have received from the law firm, do you know whether the lawyer was STEP qualified? Even if they were, may make sense to get a second opinion from another STEP firm. 

I certainly agree the discretionary trust is a nuisance, since if your mother does not have cash or other liquid assets equal to or in excess of the Legacy,  the residence nil rate band is at risk if the house is 'forced'into the trust.

 However both £325k NRBs of father and mother should be available assuming your father left his entire estate to your mother on 1st death.

Moorsman

Thanks @poseidon1 for your consideration and your comments.  They’re much appreciated, as they’ve helped me to make some sense of the will drafting.

My mother and father’s wills were signed in November 2007 but drafted around September 2007 or earlier.  The wills were mirrors.  From your comments, I believe that the intention was, under the NRB arrangements prior to October 2007, for the *residue* of the estate of the first to pass away to fall within the nil rate band of the survivor, and that this calculation was what determined the £x00,000 of the legacy.

My father’s will contained the same drafting.  When he passed away, based on lawyer’s advice at the time, the interpretation I have proposed (executors can decide not to form a trust) was applied, no trust was created, and the whole estate passed to my mother under the residue provisions, so no NRB was used at that time. Unfortunately that advice was not obtained in writing.

The latest lawyers’ stance has taken me very much by surprise, as she/we have assumed the same position would apply to my mothers estate, and struggle to understand the lawyers’ reluctance to interpret my mother’s will as a plain English reading would suggest.  Do you have any view on the legitimacy or otherwise of the interpretation I outlined? Can you shed any light on the reason for their reluctance please?

poseidon1

Moorsman said:

Thanks @poseidon1 for your consideration and your comments.  They’re much appreciated, as they’ve helped me to make some sense of the will drafting.

My mother and father’s wills were signed in November 2007 but drafted around September 2007 or earlier.  The wills were mirrors.  From your comments, I believe that the intention was, under the NRB arrangements prior to October 2007, for the *residue* of the estate of the first to pass away to fall within the nil rate band of the survivor, and that this calculation was what determined the £x00,000 of the legacy.

My father’s will contained the same drafting.  When he passed away, based on lawyer’s advice at the time, the interpretation I have proposed (executors can decide not to form a trust) was applied, no trust was created, and the whole estate passed to my mother under the residue provisions, so no NRB was used at that time. Unfortunately that advice was not obtained in writing.

The latest lawyers’ stance has taken me very much by surprise, as she/we have assumed the same position would apply to my mothers estate, and struggle to understand the lawyers’ reluctance to interpret my mother’s will as a plain English reading would suggest.  Do you have any view on the legitimacy or otherwise of the interpretation I outlined? Can you shed any light on the reason for their reluctance please?

I would have needed to see the will in its entirety  rather than the extracted clause to get a sense of   the  Lawyer's concerns  that the trust ( on balance ) is obligatory. Certainly, from the small extract supplied  and on its face, it would appear the executor/trustees have discretion whether or not to implement the Legacy Trust. 

 However, we are straying into aspects of trust and estate law and to what extent conflicts arise in the testatrix's instructions to the Executors.

Certainly there is a clear intent that a trust should be created, but this is then contradicted by giving the Executors ( acting in that capacity) power to withold the transfer of assets to the Legacy Trustees.  In this regard the last sentence  of clause 3 almost reads as an afterthought  and it is also unhelpful that the Executors and Trustees are one and the same. 

I do wonder whether the Lawyers who advised on your father's will were responsible for the original drafting and therefore on his death interpreted it in a manner consistent with the intention  (when they drafted it) that there would always be a choice to abandon the trust from outset should it be advantageous to do so. 

Returning to my original query, am I to understand that there are insufficient liquid  assets to satisfy the Legacy Trust without recourse to the home? If there is a sufficiency of such assets, the estate retains full access to £1 million in various nil rate bands, whilst the trust can be wound up and fully  distributed within 2 years of death  without adverse trust tax consequences.

Moorsman

Thanks again @poseidon1.

Yes, your understanding is correct. The liquid assets could satisfy about 2/3 of the trust legacy if it were paid in full, with roughly 1/3 of the home being needed to fulfill the remainder.

Moorsman

@poseidon1 I should add that the same law firm that drafted the will advised me on my fathers death that the trust was optional. However due to passage of time, it was not the same person that had prepared the will.

poseidon1

Moorsman said:

Thanks again @poseidon1.

Yes, your understanding is correct. The liquid assets could satisfy about 2/3 of the trust legacy if it were paid in full, with roughly 1/3 of the home being needed to fulfill the remainder.

I see the difficulty.

However based on the proportions you state, the liquid assets are around £216k and  the house £325k, given a total gross estate of around £540k comfortably within the £650k nil rate bands for father and mother. 

 Surely notwithstanding the inconvenience of the trust there is no actual IHT exposure unless the lawyer is also querying the availability of your father's transferable nil rate band in these circumstances? If that be the case, I would certainly be seeking a 2nd opinion elsewhere.