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CURRENT WILL DRAFTING PROBLEMS

by

Professor Lesley King

Email lesley.king888@gmail.com

These notes are intended as an aid to stimulate debate: delegates must take expert advice before taking or refraining from any action on the basis of these notes and the speaker can accept no responsibility or liability for any action or omission taken by delegates based on the information in these notes or the lectures

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Contents I WILL DRAFTING AND EU SUCCESSION REGULATION II WILL DRAFTING IMPLICATIONS OF THE RESIDENCE NIL RATE BAND III DEALING WITH LOSS OF CAPACITY

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WILL DRAFTING AND EU SUCCESSION REGULATION

1. Historical Background

Different EU states have different Private International Law rules on how to deal with estates where there are links to other jurisdictions. In UK law movable assets are governed by the law of domicile but immovable property is governed by lex situs, France works on the basis of habitual residence and other states work on the basis of nationality.

If a person dies domiciled in England and Wales with a house in France, the French will consider that the succession is governed by the law of habitual residence. We will apply lex situs to the land and send it back to France (the renvoi). Succession to the land will then be governed by French law.

Different succession laws are a barrier to the EU ideal of free movement of goods and people. Hence the EU has had to find some way to make life easier for people moving between member states.

On 4 July 2012 the EU adopted the Succession Regulation (EU) No 650/2012 (“the SR”) most of which did not take effect until 17 August 2015. This regulation is known as Brussels IV because it forms part of a series of regulations on conflict of laws, or private international law, issues within the EU.

The UK Government exercised its right not to opt in to the SR. Despite the UK’s opt-out, the SR is still very significant for UK private client practitioners and anyone resident in the SR Zone (all EU Member States other than Denmark, Ireland and the United Kingdom). Unfortunately there are a number of ambiguities and uncertainties although the intended purpose is clear enough.

2. How to determine what law is to govern ‘succession’

Under Article 21.1 of the SR the general rule is that the law applicable to succession is that of the habitual residence at the time of death, unless, exceptionally, the individual was ‘manifestly more closely connected with another state’1.

As an alternative, Article 22 of the SR provides that a person may choose the law of their nationality as the law to govern their succession as a whole.

Article 22: Choice of law (1) A person may choose as the law to govern his succession as a whole

the law of the State whose nationality he possesses at the time of making the choice or at the time of death.

A person possessing multiple nationalities may choose the law of any of the States whose nationality he possesses at the time of making the choice or at the time of death.

1 This obviously introduces an element of uncertainty.

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(2) The choice shall be made expressly in a declaration in the form of a disposition upon death or shall be demonstrated by the terms of such a disposition

(3) The substantive validity of the act whereby the choice of law was made shall be governed by the chosen law.”

Choosing the law of nationality allows a testator to achieve certainty if, for example, there is doubt (or may be doubt in the future) about his habitual residence, or whether he is manifestly more closely connected with another state.

The law that applies, whether by choice or by default, can be the law of a state that is not a Brussels IV state (Art 20).

Article 20: Universal application Any law specified by this Regulation shall be applied whether or not it is the law of a Member State.

Article 34 provides that states which have signed up will not accept a renvoi where a choice of national law has been made under Article 22.

However, they will accept a renvoi from third states where no choice of national law has been made. We are a third state for this purpose.

Advice produced by the European Notaries Association2 includes an example of accepting a renvoi in relation to the estate of Madame Brown, an English lady, resident in London who dies with land and other property in England, Germany and Italy and has not chosen the law of her nationality to govern her succession. German and Italian notaries would accept the renvoi and apply German and Italian law to her German and Italian land

The effect of the SR therefore seems to be that an English client resident in the UK but owning a property in a Brussels IV state, say France, can choose the law of England and Wales to apply to their succession and France will recognise that choice3. However, if no choice has been made, France will accept the renvoi. Hence, making a choice is a good idea.

The UK is made up of different jurisdictions so a Scots national would choose the law of Scotland and a Northern Irish national would choose the law of Northern Ireland. The USA is also made up of different jurisdictions.

The relevant law chosen must apply to the whole of the succession. It is not possible to have different succession laws applying to one estate.

‘Succession’ does not include property passing by survivorship or tax or administrative matters. The SR does not apply to such matters so any issues relating to tax, for example, are therefore excluded and are still governed by the existing rules.

2 Reglement [UE] 650/2012 sur les successions transfrontalieres: Livret pratique a l’usage des notaires.

3 But see 5. below on the danger of Article 35.

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3. How is a choice made?

The choice can be made expressly or impliedly.

An express choice of law is made in a disposition on death (DPD). The chosen law governs the substantive validity of the act by which the choice is made, even if that law does not allow for a choice of law in matters of succession. (Substantive validity concerns matters such as whether a testator understood and consented to what he was doing, and includes issues such as testamentary capacity, undue influence and fraud: Article 22). Thus, a testator can make a choice of English law in a will that is substantively valid under English domestic law.

The Practical Law Company has helpful Notes on EU Succession one of which contains a suitable clause for inclusion in a Will:

If the testator is a UK national:

“[I choose the law of [England and Wales] [Scotland] [Northern Ireland] to govern succession to my assets, rights and obligations as a whole, including any not disposed of by this will. I am a United Kingdom national who is most closely connected with the jurisdiction of [England and Wales] [Scotland] Northern Ireland].”

If the testator is a national of a state other than the UK:

“I choose the law of [STATE] [JURISDICTION4] to govern succession to my assets, rights and obligations as a whole, including any not disposed of by this will. I am a [STATE] national [who is most closely connected with the jurisdiction of [JURISDICTION]].”

An implied choice may be demonstrated by the terms of a DPD. For example, a choice may be implied if the DPD refers to specific provisions of the law of the state of the testator's nationality, or otherwise mentions that law. It is clearly preferable to have an express choice.

Some European practitioners are resistant to the potential effect of a choice of English law in a will covering real property in their jurisdiction because they foresee problems with probating the will and administering the assets. Given that local advice will usually be necessary on the effects of electing for the law of nationality (see below), there is an opportunity for clients to take advice on the need for a separate will.

Some practitioners take the view that because the election must affect the whole succession, only one will is permitted. This seems wrong. However, it is probably true that once the choice has been made in a will, it is inappropriate to ‘remake’ it in a second will. It is preferable to recite in the second will that an election was made in

4 If the state is a single jurisdiction, refer to the law of the state and omit the optional wording

about connection to a jurisdiction. If the state comprises more than one jurisdiction, refer to the law of the jurisdiction with which the testator is most closely connected and include the wording confirming the connection at the end of the clause.

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the earlier will and that the testator wishes that choice to continues to apply.

4. Need for local advice

Taxation of the estate

A choice of law under the SR does not determine which tax law applies, but tax consequences will flow from the distribution of the estate in accordance with the chosen law. For example, a foreign jurisdiction may tax assets that pass to the testator's children at a lower rate than assets that pass to other relatives or to non-relatives. This may lead to a higher tax burden if forced heirship provisions are displaced by the chosen law.

Way in which property held may make election ineffective

The SR does not override matrimonial regimes so, if a couple holds assets in a country under a ‘community of goods’ regime, the assets pass automatically to the survivor (as with our beneficial joint tenancy) so do not form part of the ‘succession’.

It is, therefore, still advisable for clients to obtain local advice on the best way to deal with foreign property.

5. A word of warning on Article 35

This allows EU States to refuse to apply a provision of the law of another State if, and only if, it is ‘manifestly incompatible’ with the public policy of the refusing State.

It was thought that this would rarely, if ever, be appropriate. However, the guidance produced by the European Notaries referred to above gives the following example on Article 35.

EXAMPLE

An Algerian citizen resident in Algeria dies with bank accounts in France and other assets in Algeria. He is habitually resident in Algeria so Algerian law will apply to the whole of his succession. He has a son and a daughter who are resident in France. Under Sharia law the son will take twice the share of the daughter.

The guidance says that discrimination based on sex is contrary to French public policy and therefore a French notary should substitute French law for the Algerian law that would otherwise have applied.

Could avoiding forced heirship rules be regarded as manifestly incompatible with France’s public policy?

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II WILL DRAFTING IMPLICATIONS OF THE RESIDENCE NIL RATE BAND

The basic idea is now familiar.

An additional nil-rate band (“RNRB”) will be available for deaths on or after 6 April 2017 when a residence or interest in a residence is ‘closely inherited’. ‘Closely’ means that it must pass to a lineal descendant or, following an amendment at Committee stage, to a spouse/civil partner of a lineal descendant or to a surviving spouse/civil partner of a lineal descendant who predeceased the deceased provided the surviving spouse/civil partner has not remarried (IHTA 1984, s8K).

‘Inherited’ is defined in s8J as a disposition effected by will, the intestacy rules or otherwise5. Post-death variations passing a residential interest to lineal descendants will attract the RNRB (other requirements being satisfied) because there is reading back under IHTA 1984, s142 for all IHT purposes.

Events occurring after death such as a sale of the property are irrelevant.

Problems

1. Limited range of settlements attract RNRB

Where a residence or interest in a residence is left to a settlement, the RNRB will only be available if the settlement is one of the types set out in IHTA 1984, s8J(4).

The settled property must be held for the lineal descendant (‘B)’ on

IPDI trusts, or

disabled person’s trusts, or

bereaved minor or bereaved young person trusts (IHTA 1984, s 71A or s71D).

Note how few settlements qualify. A discretionary settlement is not included even if all the beneficiaries are lineal descendants. However, an appointment made within 2 years of death to the lineal descendants would be read back into the will under IHTA 1984, s144 and so trustees could retrospectively secure the RNRB for the estate.

A typical grandparental settlement, “to such of my grandchildren as reach 21” will not qualify if the grandchildren are minors at the date of the testator’s death because it is a relevant property trust.

EXAMPLE 1

T leaves the residue of the estate (which includes a house) to trustees to hold for:

5 Presumably by survivorship.

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“such of my three children as survive me, equally if more than one, but if any child predeceases me the share which he would have taken had he survived me shall pass to such of his children that reach 21 and if more than one equally”

T has three children, one of whom predeceases T leaving two minor children who are 8 and 6 at T’s death. The substitutional trust for the grandchildren does not attract the RNRB because it is not one of the permitted trusts.

If the house is worth £300,000, do we assume that £200,000 of the house goes to the children and £100,000 to the grandchildren?

If all the children predeceased T, the RNRB would be wasted. This is unfortunate considering what a standard gift this is.

A B C

D E

How to deal with the problem?

One possibility is to ignore it and draft as normal hoping that it won’t actually cause any difficulty for one of the following reasons:

The children may all survive the testator.

The children of a deceased child may already have fulfilled the age contingency when the testator dies in which case the trust disappears and they take absolutely.

The children of a deceased child may have reached the age of 18 when the testator dies. If Trustee Act 1925,s31 applies, they will acquire a right to income and will have IPDIs.6

A big enough interest in the residential property may be passing to the children to obtain a full RNRB for the estate without worrying about the grandchildren.

If all else fails, the PRs have a statutory power of advancement under Trustee Act 1925, s32 which allows them to advance assets on whatever terms they wish. Provided it’s done within 2 years of death it is read back into the will under IHTA 1984, s144. Will the PRs realise this is necessary?

6 If they reach the age of 18 within 2 years of death they will retrospectively acquire IPDIs as a result

of the reading back effect of IHTA 1984, s144.

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For those uncomfortable with hoping for the best, is there a drafting solution?

Drafting solutions

(1) Remove the age contingency to create a bare trust for the grandchildren.

(2) Leave the grandchildren’s share on flexible IPDI trusts. The trustees

can be given powers to appoint capital to the grandchildren at an appropriate age.

If doing this, it is necessary to vary Trustee Act 1925, s31 to remove its divesting effect7 which would otherwise prevent the minor having a right to income:

“During the minority of a Beneficiary Trustee Act 1925, s31 shall not apply and my Trustees may apply income for his maintenance, education and benefit at their discretion and to the extent that they do not shall retain the balance for the Beneficiary absolutely.”

(3) Leave the grandchildren’s share on discretionary trusts relying on IHTA 1984, s144 to adjust matters in the light of the circumstances at the date of death.

2. Aggregated estates and the taper threshold

When the net value of an estate exceeds the taper threshold, the RNRB (made up of the deceased’s own allowance plus anything transferred from a predeceased spouse or civil partner) is withdrawn by £1 for every £2 that the estate exceeds the taper threshold. The adjusted amount (which may be nothing) is called the ‘adjusted allowance’. The taper threshold is £2m until 2020/21. It then increases by reference to the Consumer Prices Index.

Spouses/civil partners may wish to leave assets away from the survivor to prevent the aggregated estate exceeding £2m. This could suggest the use of NRB discretionary trusts, perhaps with debt/charge provisions if the survivor wants to be able to access the joint funds.

EXAMPLE 2

Harry and Maude have both been married before and have the benefit of transferred nil rate bands from their previous spouses. They have bought a main residence. Their individual estates are £1.2m each. Maude dies in May 2017 and Harry dies in January 2018.

7 Under s31 trustees have an unfettered discretion allowing them to apply income for the

maintenance of a minor beneficiary and accumulate any surplus, even where the minor would otherwise have a right to income. If the beneficiary dies without fulfilling the contingency, the accumulated income passes with the capital of the trust fund. Hence, a minor does not have an “immediate right to immediate enjoyment” where s31 applies.

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Maude may wish to leave everything to Harry, either on a flexible life interest, remainder to her two sons or absolutely.

If she does this, no IHT is payable on her death. However, Harry’s estate will not benefit from her nil rate band and she is making no use of the one she inherited from her dead husband. They are both wasted. She does not use her RNRB but it can be transferred to Harry.

On Harry’s death his estate will be worth £2,400,000 and he will lose the whole of his RNRB and the one transferred from Maude.

What should Maude do?

From an IHT perspective she should leave the maximum she can transfer without payment of IHT to a discretionary trust and direct her PRs to claim any transferred nil rate band available to her estate8. If £650,000 is transferred to the trust, £550,000 will pass to Harry. His aggregated estate will be £1.75m. On his death, two RNRBs will be available to his estate (subject to 3 below).

“The Nil Rate Sum shall mean the maximum amount which I can pass on my death without giving rise to a charge to inheritance tax taking into account any transferred nil rate band available to my estate.”

“I REQUIRE and DECLARE that my Executors shall claim the benefit of any unused inheritance tax nil rate band to which my estate may be entitled and that the value of that unused nil rate band shall be taken into account in arriving at the Nil Rate Sum.”

In a case where the survivor’s estate would exceed the taper threshold despite the creation of a NRB discretionary trust, it may be necessary to leave an interest in a residential property to the issue.

If there is no holiday home available, this means leaving an interest in the main residence which has its own downsides9. See APPENDIX 1 for a possible clause but note how complicated it is. It is unlikely to appeal to clients. Lifetime transfers might be more appealing but, of course, the survivor may have lost capacity.

3. Flexible IPDIs

These trusts are very common especially in the case of second marriages.

It is generally possible for an estate to benefit from the RNRB despite the fact that the deceased had an IPDI (or disabled person’s interest) rather than an

8 It’s a good idea to include this direction as there were comments in Loring v Woodland Trust [2014]

EWCA Civ 1314 suggesting that where a testator places a beneficiary in a position where they have discretionary powers, to exercise, the testator may be taken to have impliedly authorised the beneficiary to exercise them in his/her own favour

9 In particular the risk of the issue being declared bankrupt or involved in divorce proceedings.

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absolute interest but only if lineal descendants become ‘beneficially entitled’ to the residential property on the second death:see s 8J(5).

EXAMPLE 3

David leaves his estate to Sam on flexible IPDI trusts, remainder to his two children from his previous marriage. The normal form of such trusts is as set out in APPENDIX 2. In summary it provides as follows:

Clause 1

(a) Subject to the trustees‘ overriding powers, the spouse is given a right to income; the trustees are given power to pay or apply capital for the benefit of the surviving spouse.

(b) Subject to the trustees’ overriding powers, the capital is left to such of the children living at the death of the [testator] [surviving spouse] with a substitutional gift to grandchildren contingent on reaching a specified age if a child dies before the [testator] [surviving spouse].

Clause 2

The overriding powers allow the trustees to modify the trusts on which the property is held as they see fit for the benefit of a discretionary class of beneficiaries.

Quite apart from the problems dealt with at 1 above where a grandchild is substituted for a deceased child, there is a further problem.

If the trustees do nothing during the life of the surviving spouse and the trust takes effect as drafted, the RNRB will not be available on the death of the surviving spouse. The children are not ‘beneficially entitled’. Under the terms of the IPDI trust on the second death, the trustees are holding on trust for the children subject to overriding powers which they have to release to make the interests of the children absolute.

To allow the estate of the survivor to benefit from the RNRB, the trustees must use their powers while the surviving spouse is alive. Once the spouse dies, the trust takes effect as a relevant property settlement10.

Drafting amendments to the standard flexible IPDI?

Consider providing that the overriding powers can be exercised only during the lifetime of the surviving spouse. This does remove useful flexibility. As an alternative consider providing that in relation to a residential interest11 the overriding powers can be exercised only during the lifetime of the surviving

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Even if the second death is within 2 years of the first, it isn’t possible to make a s144 appointment

and have it read back into the will because s144 does not apply if there has been an interest in possession.

11 Or so much of it as qualifies for the RNRB!

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spouse. This leaves flexibility over other assets.

4. Useful aspects of flexible IPDIs

Flexible life interests can be used as a way of grabbing RNRB for the estate even though the residential property is to go elsewhere.

EXAMPLE 4

Colin and Charlie are cohabiting. Colin has a son, Sean, from a previous relationship. Colin wants to leave the house to Charlie and minimise the IHT payable on his estate. He can leave Sean an IPDI in the house either on a flexible life interest12 or a fixed short term interest in possession, followed by an absolute gift to Charlie. In both cases the RNRB will be available to Colin’s estate and the termination of Charlie’s interest in possession will be a potentially exempt transfer.

5. The Downsizing Allowance and Flexible Life Interest Trusts

Finance Bill 2016 will contain new sections 8FA – 8FE to be inserted into IHTA 1984 (published in draft form in December 2015) which will apply where a person disposes of a residential property on or after 8 July 2015 either completely or by moving to a less valuable property.

The effect of the provisions is that the proportion that the ‘former residential interest’ bore to the ‘former allowance’ will be carried forward and applied to the RNRB in force at date of death. The downsizing addition is, however, capped at the value of the estate which is closely inherited.

There are some unfortunate limitations on the downsizing allowance in connection with flexible life interest trusts

• IHTA, s8H(4A): the provisions apply where a person disposes of a residential property interest and the person’s PRs nominate a dwelling house or interest in a dwelling house.

It’s difficult to see how this can apply if, as in Example 3, David leaves a house to Sam for life, remainder to children absolutely, and the trustees sell it (eg because Sam goes into care). Sam hasn’t disposed of anything.

• IHTA, s8H(4C): where a person disposes of 2 interests in a residence, the PRs must nominate one interest. Hence, in Example 3 if the house is worth £200,000 and David leaves his half interest on trust for Sam for life, remainder to the children, Sam’s estate will only benefit from £100,000 of RNRB.

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With a letter of wishes asking the trustees to terminate the IPDI in favour of Charlie absolutely.

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3. DEALING WITH LOSS OF CAPACITY

3.1 Loss of capacity by trustees/ those authorised to exercise discretions or consent to action A trustee who loses capacity can be removed and replaced under Trustee Act 1925, s36. Remember that there has to be a formal removal and appointment of a replacement. Until that happens the incapacitous trustee remains a trustee. Trustees normally have to act unanimously, so actions taken by only some of them will be invalid. Remember too that if the trustee has a beneficial entitlement, the consent of the Court of Protection is required13. A similar problem arises where there is a loss of capacity, not by a trustee, but by someone authorised under a will to exercise powers or required to consent to certain decisions. It is administratively convenient to provide for possible lack of capacity14.

“If any person in whom any power is vested (“P”), whether by this instrument or by law, is by reason of illness incapable of exercising the power and the same is confirmed to the Trustees by a qualified medical practitioner then during the period of incapacity the power shall be exercised as if P had died.”

3.2 Joint tenant who has lost capacity

A client may want to make a new will leaving property away from a spouse who has lost capacity. Remember to check how property, particularly the matrimonial home, is owned and, if necessary to sever a beneficial joint tenancy. Serving notice is a unilateral act. Notice can be served on a person who lacks capacity or on their attorney or deputy: Quigley v Masterson [2011] EWHC 2529 (Ch). If there is no attorney or deputy appointed, and the capacitous spouse is concerned that serving notice will cause distress on the incapacitous spouse, consider two possible options:

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Trustee Act 1925, s 36(9): Where a trustee lacks capacity to exercise his functions as trustee and is

also entitled in possession to some beneficial interest in the trust property, no appointment of a new trustee in his place shall be made by virtue of paragraph (b) of subsection (1) of this section unless leave to make the appointment has been given by the Court of Protection.

14 Trustee Act 1925, s36(1)(b) deals with loss of capacity by a person nominated in the instrument to

appoint new trustees. It provides that if the person nominated is not able and willing to act, then the surviving or continuing trustees or trustee for the time being, or the personal representatives of the last surviving or continuing trustee can appoint a replacement.

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(1) Notice is properly served if it complies with LPA 1925, s196. This requires only that the notice is sent by recorded delivery to the residence (or place of business) and not returned or can be shown to have been delivered in the post. It is not necessary for the other joint tenant to actually receive it.

(2) Beneficial joint tenancies can be severed in equity in three ways. Two

require agreement/mutuality which is not possible where someone has lost capacity but the third requires only an act by one joint tenant in relation to his own share indicating that he is ‘alienating’ his interest, typically by charging the share as security for a debt..

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APPENDIX 1

Gift of part interest only in residence to children to use residential nil rate band with remaining interest in residence to another ( 1.1 In this clause:

1.1.1 “the Property” means any property whether leasehold or freehold which I occupy as a residence at the date of my death and own or in which I have a beneficial interest, but if I have more than one residence at the date of my death, my Trustees shall decide which residence to select provided that if I have no residence at the date of my death then “the Property” means:

(a) any property which I occupied as a residence before my death

and own or have a beneficial interest in at the date of my death, or

(b) such cash amount as is equivalent in value to the net proceeds of sale (or its open market value with vacant possession) of the last property which was my principal residence at any time before its sale or other disposal;

1.1.2 “the Residential Nil Rate Amount” means the total amount or

allowance in respect of increased nil-rate band for inheritance tax to which my estate may be entitled at the date of my death under sections 8D to 8M Inheritance Tax Act 1984 as amended (or any re-enactment thereof at the date of my death) including any amount brought forward under section 8F and any downsizing addition under section 8FA to 8FE.

1.2 I DIRECT my personal representatives to make such claim or claims as they

see fit in order to secure the Residential Nil Rate Amount as soon as practicable after my death and in any event within the maximum statutory period as may be prescribed.

1.3 I GIVE free of tax such interest in the Property as shall be equal in value at

the date of my death to the amount of the Residential Nil Rate Amount to hold on trust for such of them my daughter [name] and my son [name] as shall be living at the date of my death and if both shall be living in equal shares provided that if either of my children shall die before attaining a vested interest leaving issue who are living at the date of my death then such issue shall take by substitution and if there shall be more than one of such issue they shall take in equal shares per stirpes the share which such child would otherwise have taken had he or she attained a vested interest but so that no issue shall take whose parent is alive and so capable of taking; and subject thereto

1.4 I GIVE the balance of my interest in the Property to my [husband] [wife] [civil

partner][parent] [etc]absolutely.

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Notes (1) This form might be used if the Testator wishes to ensure that RNRB is utilised

on his death but at the same time pass an interest in the property to his surviving spouse, partner or another relative to secure their continued occupancy. The form assumes that the value of the house will be sufficient to leave an interest for the survivor; if the RNRB is likely to exceed the value of the residence, then a limitation might be considered to restrict its value so as to leave the survivor, say, a 10% interest in the property.

(2) The reason for using RNRB on the first death of a married couple/civil

partners might be that residential nil rate band will not be available on the second death due to the taper threshold being reached as a result of aggregation. Also, if the testator already has the benefit of a carry forward allowance from a previous marriage, it might be wasted if not used on the testator’s death because the survivor, if also previously married, might already have a carry forward allowance of their own.

(3) The gift over to the grandchildren is vested to avoid the possibility that at the

date of the death of the surviving spouse the grandchildren are of such an age that a relevant property trust arises preventing the PRs claiming the RNRB.

(4) As an alternative, the house could be left to trustees with the RNRB element

being held for the children absolutely (or on one of the qualifying trusts) and the balance of the interest in the house left on an IPDI trust, for example to the testator’s widowed mother. A letter of wishes to the trustees could ask that the trustees allow exclusive occupation for mother by restricting the children’s right to occupy under ss12 and 13 Trusts of Land and Appointment of Trustees Act 1996. On the mother’s death, her equitable share could be given so as to pass to her grandchildren and so attract RNRB (together, possibly, with any carry-forward allowance from the death of her husband). However, RNRB would seemingly be lost in the event that the house is sold by the trustees prior to mother’s death, either through downsizing or because mother moves into care. This is because the downsizing provisions proposed in Finance Bill 2016 do not appear to apply to disposals of a residence by trustees on behalf of the beneficiary.

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APPENDIX 2

1 UNTIL SUBJECT to and in default of any appointment under sub-clause (2):

(a) The income of the Residuary Trust Fund shall be paid to my wife during her lifetime;15

(b) My Trustees may at any time during the Trust Period pay or apply

the whole or any part of the Residuary Trust Fund in which my wife

is then entitled to an interest in possession to her or for her

advancement or otherwise for her benefit in such manner as my

Trustees shall in their discretion think fit and in exercising the

powers conferred by this sub-clause my Trustees shall be entitled to

have regard solely to the interests of my wife and to disregard all

other interests or potential interests under my Will;16

(c) Subject thereto my Trustees shall hold the capital and income of my

Residuary Trust Fund for such of my children as shall survive me

and if more than one in equal shares PROVIDED THAT if any child

is already dead or predeceases me the share of my Residuary Trust

Fund to which such child would have been entitled if he or she had

survived me shall be held in trust for such of his or her children and

remoter issue (if any) as shall be living at [my death] [the death of

the survivor of me and my wife] and shall reach the age of twenty

one [21] years such issue to take through all degrees according to

their stocks if more than one in equal shares and so that no issue

shall take whose parent is living at my death and so capable of

taking.

(2) MY TRUSTEES shall have power to appoint the whole or any part of the capital and/or income of my Residuary Trust Fund upon trust for or for the benefit of such of the Discretionary Beneficiaries17 at such ages or times in such shares upon such trusts which may include discretionary or protective powers or trusts and in such manner generally as my Trustees shall in their discretion think fit18. Any such appointment may include such powers and provisions for the maintenance education or other benefit of the Discretionary Beneficiaries or for the accumulation of income and such administrative powers and provisions as my Trustees think fit.

15

This creates an IPDI for the surviving spouse so that the residue will benefit from the spouse exemption under IHTA 1984, s18.

16 This is a wide power to apply capital for the ‘benefit’ of the spouse: it can be exercised by means of a settled advance.

Consider giving the surviving spouse a general power of appointment to enable IPDI trusts to continue after her death. 17

See the definition below. 18

Powers of appointment were originally intended to allow trustees to modify the terms of the trusts on which property was

held. They do not allow trustees to transfer assets to other trusts freed from the original trusts unless they are drafted to

do so – as is the case with this one. If the trustees are to have power to transfer to discretionary trusts the power needs to

say so expressly – as this one does. Often powers of appointment are required to be exercised by deed. This one does

not require a deed but it is always sensible to have a document which sets out the date on which an appointment was

made as the date often has important tax consequences.

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