Deferring a minor’s entitlement to capital – Wright v Gater [2011] EWHC 2881

 In Trusts

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When a child may, by virtue of a Will trust or intestacy, become entitled to capital at 18 it may be necessary to consider a deferral of the date on which he might become entitled to that capital and in the case of Wright v Gater [2011] EWHC 2881 Mr Justice Norris summarised the approach to applications made under the VTA 1958.

An application to Court can be made under s.57 Trustee Act 1925 to basically extend the powers of a trust or under the Variation of Trusts Act 1958 (VTA 1958) to vary the beneficial trusts as well as to increase the trustees’ administrative powers; (the Court has power to alter the terms of a settlement also under the Matrimonial Causes Act 1973 and the Inheritance (Provision for Family & Dependents) Act 1975).

The facts

Two intestacies, of grandfather and father, resulted in grandson Rory inheriting the joint estate of his father (Kieran) and grandfather (Edward) when he was aged only three years old. As a result the combined estates were held on Rory’s behalf on the statutory trusts contained in s.47 Administration of Estates Act 1925.

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This meant that the trust is contingent on Rory attaining 18 or marrying under that age for the capital to vest absolutely in him and meanwhile s.31 Trustee Act 1925 applies to the administration of the income of the trust allowing it to be used for his education, maintenance or benefit but otherwise to be accumulated. The statutory power of advancement is limited to the extent that s.32 Trustee Act 1925 allows. If Rory fails to attain the age of 18 the trust fund would pass to the class of Kieran’s Uncles & Aunts.

Edward’s net estate was worth £514,600 and would have passed to Kieran IHT free because it benefitted from both Edward’s nil rate band (NRB) and a transferable NRB. Kieran’s own net estate was only worth £6,000 as most of his assets were jointly owned with his unmarried partner Ellen who acquired them by survivorship. As a result the total joint estate on Kieran’s death was subject to IHT of £89,000. If Rory had taken Edward’s estate directly instead of via his father’s estate all IHT would be avoided.

Ellen (Rory’s mother) and Kieran’s Uncle Michael are the administrators of Kieran’s estate and therefore trustees of Rory’s fund. Ellen quite reasonably felt that for Rory to inherit all the capital and become entitled to income at 18 was too young and, despite the tax consequences of the relevant property regime and the higher income tax rates payable on trusts where income can be accumulated, it would be better for Rory only to be able to access capital at 30 or possibly 25. To make the switch in the terms of the trust for Rory resulted in the application under the VTA 1958 to alter Edward’s estate.

The application sought to alter within two years of Edward’s death the terms of the trust:

  • For the capital to be held for Rory contingently until he reached the age of 30
  • With an unrestricted power to accumulate income until the age of 30
  • A power to apply any income to or for the benefit of Rory until he reaches 30
  • An enlarged power of advancement under s.32
  • Otherwise for the benefit of any widow or civil partner of Rory at Rory’s death and any children of Rory in such shares as the trustees may appoint within six months of Rory’s death
  • With an ultimate trust in favour of Kieran’s Uncles and Aunts along with Ellen and the issue of a deceased aunt, with a power to appoint within the class and in default of appointment to be divided equally between them.

The court was asked to give its approval to the variation on behalf of Rory on a paper application without a hearing.

The decision

Mr Justice Norris indicated that an approval of a variation such as this, no matter how straightforward, should be considered at a hearing where a proper argument and evidence are presented which the judge can test on behalf of those for whom he is asked to give his consent.

Interestingly, the judge did not approve of the application being made by Ellen (as one of Kieran’s personal representatives) when she was also Rory’s litigation friend since it placed her in the position of being both the advocate of the arrangement and the one who scrutinises it from Rory’s perspective.

Counsel acting in the case drafted the arrangement and gave his ‘independent’ opinion in support of it on behalf of Rory. In other words, there was no-one involved who was looking at the proposal from a different perspective and subjected it to contrary argument.

Unsurprisingly, Norris J believed it essential to have as litigation friend a family friend or professional who had instructed separate Counsel to scrutinise the application and the arguments made on behalf of the PRs entirely from Rory’s viewpoint.

He also noted there was no-one appointed to consider as ‘watchdog’ the interests of the Uncles and Aunts who would benefit should Rory die before attaining the age of 18. Kieran’s uncle Michael, who acted as PR with Ellen of Kieran’s estate and Mr Gater, who acted in Edward’s, did not consider this as part of their role which he found unsatisfactory and as a result Norris J initially declined to approve the arrangement; approving a substantially altered arrangement later.

The law

s.1(1) VTA 1958 empowers the court to approve (on behalf of any person having an interest, whether vested or contingent, under a trust, who by reason of infancy is incapable of assenting) an arrangement which varies or revokes the trusts in whole or in part. However, the proviso goes on to say that the court shall not approve an arrangement on behalf of any person unless the carrying out of it would be for the benefit of that person.

In other words, unless the arrangements proposed were for Rory’s benefit the Judge had no power or discretion to approve them.

Mr Justice Norris applied the following principles:

  • He approached the task with a ‘fair cautious and enquiring mind’ as directed in Re Wallace’s Settlements [1968] 1 WLR 711
  • He was not redistributing property according to some wise scheme but rather giving Rory’s consent on his behalf –  Re T’s settlement Trusts [1964] Ch 158 & Re S [2006] WTLR 1461. Therefore, the question to be answered was “Should Rory consent to this arrangement?” The answer had to be ‘only if the judge is satisfied that it is for his benefit’.
  • “Benefit” is generally financial but need not be. Is it a bargain which if the person on whose behalf consent is given were themselves competent it is one that they would choose? If the outcome is not certain then the Court needs to be prepared to take the decision to accept the arrangement only if the risk is one that an adult would be prepared to take.
  • When the ‘benefit’ is not financial or the non-financial benefits are weighed against financial disadvantages it is not possible just to take a business-like approach, although the recognition of risk will still be important. It is essential to avoid the trap of adopting the judge’s own perceptions and preferences by asking the question: “Would a prudent adult, motivated by intelligent self-interest, and after sustained consideration of the proposed trusts and powers and the circumstances in which they may fall to be implemented, be likely to accept the proposal?”

Applying the above principles to the facts of this case, Norris J concluded that:

  1. The financial benefit is the achievement of an immediate saving of £89,000 of IHT which falls to be weighed against the significant financial disadvantage which Rory will suffer over time through being deprived of his right to income for 12 years and by the application of a disadvantageous tax regime which would then apply.
  2. Arguably there is moral benefit in preventing Rory having absolute control of the income and capital until he is 30 and this may cancel out the financial disadvantage.
  3. The cases showed that the deferment of vesting is capable of constituting ‘benefit’ under VTA 1958. However, the factors to be taken into account on the particular facts of any individual case include:
    1. Any proven personal characteristics of the beneficiary that make it appropriate
    2. The size of the fund
    3. The circumstances in life of the beneficiary
    4. The family context in which the existing trusts will be implemented

Adopting this approach Norris J felt the first scheme suggested was dangerously close to a re-settlement and not a variation to the extent that nothing remained of the statutory trust.

There was nothing in the character of a three year old toddler to suggest there was a real risk that he would be incapable of dealing with any income or capital inherited from his grandfather without supervision before he attained 30. He considered Rory had the right to his independence and autonomy as a young adult which may cause tension between himself and his family so it was wrong to establish a long-term trust with only close family members as trustees.

The outcome was a trust which had the following terms:

  1. The trustees were to be Ellen, Uncle Michael and Mr Gater (a solicitor)
  2. Rory will become absolutely entitled to income on attaining 18 but not on any earlier marriage
  3. Rory becomes entitled to 10% of the fund (including any accumulations but without taking into account any previous advances) contingently on attaining 21
  4. Rory becomes entitled to the balance of the fund contingently on his attaining 25
  5. If Rory fails to attain 18 then the fund will be held for the Uncles and Aunts
  6. If Rory attains 18 but dies before reaching 25 then the fund is held for any widow or civil partner of Rory and any issue of his in such shares as the trustees appoint or in default equally
  7. There is a default trust in favour of the Uncles, Aunts, Ellen and the issue of the deceased aunt with Rory having a power to appoint within the class and the trustees having a time limited power which in default of its exercise would be divided on stirpital lines
  8. The usual enlarged powers to apply income and advance capital were included

The above terms were said to be a variation not a re-settlement. If the statutory trusts applied Ellen’s strong views about postponement of any entitlement for Rory for as long as possible were likely to be adopted by the original trustees and by the exercise of the statutory power of advancement, particularly if the original trust wording was adopted which extended the statutory power to the whole trust fund, such that the power of advancement could be used to effect a re-settlement and further postponement.

By only allowing Rory access to 10% of the capital at 21 the risks of allowing a young person who will have been brought up in a family not accustomed to significant wealth and without a father to be minimised. If the statutory trusts were allowed to apply, and assuming an accumulation rate of 2.5%, Rory would otherwise have access to a fund worth £750,000 at his 18th birthday which no reasonable person would regard as being without risk.

The practical effect of the revised arrangement (based on s.71D IHTA 1984) will be to introduce Rory gradually to the control of his wealth and allow those who care for him to come back to court if he shows signs of going off the rails.

 Practice points

  1. Practitioners must remember in intestacy cases not to leave things too long before considering Deeds of Variation given the recommended approach here which necessitates the involvement of independent persons in the litigation process when there is only a two year window from date of death to effect a tax efficient Variation;
  2. The costs likely to be incurred in a personally attended hearing, with potentially more than one counsel appearing, will be that much higher than simply relying on a paper application based on witness statements alone and this needs to be factored into any proposals to vary and not re-settle;
  3. Utilising the Aged 18 – 25 trust approach (i.e. a gradual approach to the receipt of money) as a substitute for the statutory trusts on intestacy or otherwise is more likely to find favour with the court on behalf of a young beneficiary who has not shown any signs of being poor with money or badly behaved than adopting a severe postponement of any entitlement to capital and income
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