The Pitfalls of Drafting IPDI Trusts Over Real Property and How to Avoid Administrative Problems
Paul Saunders accepts no responsibility or liability for the application of the views expressed in this contribution to any specific scenario and readers should take their own legal advice on the appropriateness of any comments to their specific situation.
There are many different will precedents dealing with the occupation of property. In this article we look at some of the more common aspects that should be considered, with examples of the types of issues that should inform the draftsman as to which precedent (if any) would be best suited to the situation under consideration.
There are a growing number of people entering into a new living arrangements (Cohabitees), whether they are in a civil partnership, marriage, or just “living together”, who already have children and, perhaps, remoter issue. Younger Cohabitees might look to pool their assets. However, older Cohabitees may want to ring-fence some, if not all, of their wealth so that on the death of the survivor of them and their “new” life partner a substantial inheritance passes to their own issue.
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Ring-fencing may entail setting up a trust to, amongst other aspects, enable the survivor to remain in the “family home”.
Such arrangements may often also be used to protect the interests of the survivor of a long term relationship, where most of the other assets are passed down the generations, both for tax reasons and because they may have a greater need.
Whatever the background to the testator’s decision, careful consideration needs to be given to how the gift of occupation of the family home is set out in the will. This includes not just the terms of occupancy, but what is given.
What is given?
Most often, the will creates an immediate post death interest (IPDI), explicitly giving the survivor the right of occupation of the property. In others, the property might be given to the testator’s children with a “wish” that they allow the survivor to remain in occupation. Does this create an IPDI, or is the survivor merely a licensee? The probability is the survivor would be a mere licensee, although if the will goes on to direct the application of sale proceeds for the purchase of a replacement home for the survivor, this is more akin to a trust and could therefore create an IPDI.
In any event, whatever the nature of the gift, the will often seeks to impose upon the survivor, whether a life tenant or licensee (the Occupier), responsibility for repairs, maintenance and insurance. There may also be provisions for the termination of the interest upon the occurrence of certain events, some of which may be difficult to determine. Whilst termination on re-marriage is easy to identify, what does “cohabiting” really mean, and when might, say, a lodger become a cohabitee (if at all)?
Where the Occupier is responsible for repair and maintenance, what is the starting point of their obligation? Whilst there is settled law that a trustee has no duty to improve trust property, is the Occupier required only to maintain it in the same condition as it was when their interest first arose or, if not in good tenantable condition, are they required to bring it up to, and maintain it in, a good state of repair?
Unless the right of occupation is given as a part of the residuary gift, rarely are other assets of the estate directed to be retained by the trustees to enable them to preserve the property should the Occupier not have the means, or inclination, to maintain it. Whilst, in the latter case, the trustees could seek the assistance of the courts in enforcing the Occupier’s obligations (or to terminate the IPDI), that also requires money. In the absence of a “maintenance fund”, how do trustees finance an application? Also, if there are professional trustees, how are their fees to be satisfied? Would they be willing to wait until the termination of the trust, or an earlier sale of the property (by which time, any fees outstanding for more than 6 years might not be recoverable under the statute of limitations).
Does the obligation of the Occupier under the will to insure the trust property, create an insurable interest in the property? If not, then any policy in their name covering the building could be invalid. Similarly, if the will does not impose any requirement to insure, can the Occupier have an insurable interest? In the absence of an insurable interest, the will should provide for the insurance to be held by the trustees with the Occupier reimbursing the premium. Even if the Occupier has an insurable interest in the trust property, whilst there may be administrative benefits in the policy being maintained by the Occupier, there is a risk that they will not apply any proceeds of a claim to reinstate damage. The trustees may not be aware of any unutilised surplus proceeds of a claim, which will likely be capital of the trust fund, to which the Occupier will have no, or no automatic, entitlement.
The will may provide for the proceeds of sale of the trust property to be used to purchase a replacement home for the Occupier. Often, there may be no specific provision dealing with any surplus of the sale proceeds over the cost of the purchase. In such cases, it is necessary to try and identify the intention of the testator, initially looking to the words of the gift. If merely given a right of occupation, that right might only attach to the replacement property and not any realised surplus. In that case, the surplus might vest in the remaindermen. If, however, the Occupier is given a life interest in the property (and its proceeds of sale?), the surplus would remain within the IPDI. A relatively minor difference in the wording can have a significant effect on the outcome.
Future IHT liabilities?
The termination of an IPDI may also raise an interesting issue, especially if the property is to remain in trust – how is any IHT liability to be funded? In the absence of a separate maintenance fund, or other pool of realisable assets, the trustees could try and obtain a loan using the property as security. However, the trust instrument would need to permit this, and any incoming life tenant agree to meet the interest charges. The difficulty though, whether any financial institution would grant an interest only loan, especially in these circumstances. If the interest was unpaid for any reason, what would the trustees need to do to protect the trust property?
There will be situations where animosity between the life tenant and the other beneficiaries under the will is well known when the will instructions are given, and the will tailored accordingly. In many cases the relationships may appear “sound”, and it is only after the testator’s death that issues between the beneficiaries surface (and the trustees wished the will draftsman had had a more efficient crystal ball). When drafting an IPDI over real property, it might be prudent to provide both for the trustees to retain a maintenance fund and, subject to general guidance within the will, for the trustees to determine the terms upon which the Occupier assumes occupation. These terms might the be set out in a formal license to occupy, in order to try and avoid future disputes.
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