Does a 'will trust' / 'interest in possession trust' form part of the beneficiary's estate?

5pendthrift

My father is named as sole beneficiary of what appears to be an interest in possession trust. My step mother died recently, her estate value is approx £275k, consisting of cash and shares. With regard to the trust, my step mothers will states only the following:

 1) My father has the right to interest from the trust for life.

 2) My father can ask to draw down assets from the trust at any time and the trustees must oblige.

 3) On my fathers death the trust assets pass to my step mothers three children and four grandchildren, to be shared equally.

If he accepts this trust as a gift, does it's value (£275k) become part of his estate for IHT purposes?

As an aside, is this technically an 'interest in possession' trust, given that the beneficiary can demand draw down of assets from it at any time?

Keep_pedalling

Yes it will form part of his estate. This sounds very unusual as it does not protect her childrens inheritance. Does your father need this trust or is he financially secure with his own assets?

5pendthrift

Keep_pedalling said:

Yes it will form part of his estate. This sounds very unusual as it does not protect her childrens inheritance. Does your father need this trust or is he financially secure with his own assets?

Well over 10 years ago my father and step mother drew up 'mirror wills'. Passing on assets to their own children and grandchildren was mentioned in passing, nobody in the immediate family took much notice at the time. My step sisters are named as joint executors and trustees, they've taken some rudimentary legal advice, leading them to contact me, voicing their concerns, because as you say the wording doesn't appear to protect their and their children's inheritance. I've read my fathers will, the wording is the same in that the surviving spouse can demand assets from the fund at any time without regard to second tier beneficiaries. 

My sister and I have suggested my father decline the trust in order to pass on my step mothers estate to her direct descendants. He is financially secure, in fact the house he has owned for the last 55 years is now worth so much that the majority of the trust value would be subject to IHT (assuming it falls within his estate). However, my father believes a) the trust won't be part of his estate and b) if that's what his wife wished for in her will then that's what should be done. He's refusing to allow me to take him to a solicitor for some basic legal advice.

I (delicately) talked through a scenario with him whereby if he insisted on trust set up and then passed away a few weeks later, having had no real financial benefit from it, there could be a near six figure IHT demand against his estate from hmrc.

Marcon

5pendthrift said:

My father is named as sole beneficiary of what appears to be an interest in possession trust. My step mother died recently,

...and it sounds as if your father doesn't appreciate the focus on inheritance at a time when he is still grieving for the loss of his life partner, and doubtless very alert to his own mortality.

However, my father believes a) the trust won't be part of his estate and b) if that's what his wife wished for in her will then that's what should be done. He's refusing to allow me to take him to a solicitor for some basic legal advice.

I (delicately) talked through a scenario with him whereby if he insisted on trust set up and then passed away a few weeks later, having had no real financial benefit from it, there could be a near six figure IHT demand against his estate from hmrc.

He's couldn't have made his current thinking much clearer. You are probably going to have to simply wait (albeit with fingers crossed) for a better opportunity to raise the matter again - or risk real and possibly permanent damage to your relationship with him.

Keep_pedalling

Although the trust does form part of his estate, it is also covered by spousal exemption and does not use any of your step mother’s NRB. If he does a deed of variation in favour of her children then much of the transferable NRB will be lost so his IHT liability will not change very much, unless he was also also widowed from your mother and can claim the transferable NRB from her estate.

Who are the executors?

poseidon1

5pendthrift said:

My father is named as sole beneficiary of what appears to be an interest in possession trust. My step mother died recently, her estate value is approx £275k, consisting of cash and shares. With regard to the trust, my step mothers will states only the following:

 1) My father has the right to interest from the trust for life.

 2) My father can ask to draw down assets from the trust at any time and the trustees must oblige.

 3) On my fathers death the trust assets pass to my step mothers three children and four grandchildren, to be shared equally.

If he accepts this trust as a gift, does it's value (£275k) become part of his estate for IHT purposes?

As an aside, is this technically an 'interest in possession' trust, given that the beneficiary can demand draw down of assets from it at any time?

If you are quoting the wording verbatim it does not sound like a solicitor drafted interest in possession trust, but on the plain meaning of the words employed:

1) It is an enforceable interest in possession arrangement, so however much of it  is left on his death, that would be amalgamated with his personal estate in ascertaining the total IHT charge. For example if had drawn down £100k before death, remaining £175k would be amalgamated with the estate. 

2)  Trust fund would benefit from a proportion of his NRB on death, but then bear IHT at 40% on the difference, so not an happy outcome.

3) Father having the right to draw down capital on demand indicates as life tenant he benefits from an unfettered power to receive trust capital from the trustees, even if this means potentially exhausting the trust in its entirety. Again not brilliant for the remaindermen, but consistence with the testator's desire that the  financial well being of the life tenant be considered paramount above all else. This is not a clause one includes by accident, particularly if his own mirrored will stated the same thing if your step mother had survived him.

From what you have stated, your father would be entitled to do nothing at all and let the chips fall as they may on his eventual death, even if it means an overall increase to his estate IHT bill.
 
If he will not be budged on the matter best you can do for your step siblings is to  ultimately vary your father's estate after death to pass whatever you believe  would be fair in their favour.

5pendthrift

Thanks to all for previous input. Having no prior experience of a death in close family, the legal admin arising has demanded a steep learning curve with regard to wills, probate, trusts, IHT, etc.

Things have moved on - My father agreed to visit a local solicitor for advice a couple of weeks ago, he now acknowledges the IHT implications for his estate and is keen to agree a solution whereby the will trust never exists. My father stated he'd like to receive a lump sum of 20k from the 275k pot, the remaining 255k directed to my three step sisters and their children. He was advised this can be achieved with a 'deed of variation' on his gift. The deed will cost so many hundred to be drawn up, all interested parties sign it in agreement, funds are distributed. Sounds straight forward and the proposal was put to my step sisters.

One of my step sisters, the 'lead executor' (three step sisters are joint executors and joint trustees) has responded to say her legal advisor insists a deed of variation cannot be done in this scenario, because the gift is a trust. 

Seems both parties have received conflicting legal advice (at a cost, I must add).

Furthermore, we asked my fathers advisor whether the trust outlined in the will is an interest in possession trust or a bare trust (the will states my father has absolute claim to all interest arising and on trust capital too, yet 'remaindermen' are also mentioned) - the advisor gave a non-committal response!

My sister and I are now scratching our heads, wondering where to turn next. Is it that legal professionals interpret rules in a subjective way or has one party been poorly advised here?

poseidon1

You will appreciate that since you did not share the exact verbatim wording of the original will, and only provided your layman's understanding of its contents, I cannot directly comment as to the apparent difference of opinion between the various professionals as to its meaning.

What I can state is that an  in depth understanding of trusts requires specialist post qualification training. Not all solicitors undertake this and those that do will be members of the Society of Trust and Estate Practitioners (STEP)

If the lawyer who has advised on the deed of variation and undertaking to draft it,   is a STEP qualified lawyer and the others  who have demurred are not, then in my opinion ( and experience) all parties should be listening to the STEP lawyer, in preference to the others.

Certainly, since the immediate beneficiary of an IPDI trust  ( in this case the surviving spouse )  is the beneficiary who is happy to substantially give up their interest for a minimal capital cash sum, I see nothing in principle either in probate or trust law preventing an effective DOV in favour of the beneficiaries that would have taken the trust fund on his death ( the sisters), especially since all relevant parties ( executors,/trustees and beneficiaries) are adults and in full agreement

The only quirk here is that you say there is also an intention to benefit the children of the sisters. In that case both the life tenant and the remaindermen beneficiaries would need to be parties to the deed , since the sisters appear to be giving up their partial capital rights in remainder. Not an insurmountable obstacle, just careful drafting of the deed to ensure the correct outcome  for all concerned.

Worse case scenario however, exactly  the same outcome can be achieved by way of  a Saunders v Vautier  deed terminating the trust if it is thought a trust is already in factual exsistence, despite the estate still being within the administration period.

In summary check the credentials of the solicitors involved. A STEP qualified lawyer should carry more weight.