Wills and Estate Planning - Trusts and Charitable Gifts

Last month’s article dealt with residuary gifts passing to adult beneficiaries where such gifts pass absolutely to named individuals or a class of persons. This month we shall examine trust situations, and charitable gifts arising under the residuary estate.

A trust situation can occur in two instances:

 

If a beneficiary has not attained 18 years (and therefore cannot give a valid receipt to the executors); the executors will be directed to hold that share of the residuary estate “upon trust” for the beneficiary until he or she attain 18 years. The executors them become Trustees (at least two individuals are required) of that share of the residuary estate and are subject to various duties and obligations, (regarding the assets underlying the share of residue subject to the trust); not least taxation and investment considerations. In law, the Trustees owe a fiduciary duty to the beneficiary effectively to properly look after the share of residue subject to the Trust – if they are lay persons acting as Trustees then they should seek proper professional advice; this is a mandatory obligation under the Trustee Investments Act 2000.

 

A well drawn Will should contain default provisions to allow for the situation should the beneficiary fail to attain 18 years; as advised last month, if the beneficiary is a child of the testator then statute (Section 33(1) Wills Act 1837) will automatically intervene unless words showing a contrary intention are included when the Will is drawn up.

 

The second situation is known as a life interest and usually provides for the surviving spouse to receive all the income arising from the residuary estate for the remainder of his/her life with the capital then passing to the testator’s children on the death of the surviving spouse-known as the Life Tenant. A well drawn Will should incorporate provision for capital to be advanced to the Life Tenant, subject to the discretion of the Trustees; a letter of wishes, (addressed to the Trustees by the testator) should provide guidance to the Trustees but cannot be binding upon them.

 

A life interest situation could cope with the situation where there may be a significant age gap (between the spouses) and the testator is concerned that his widow could remarry without leaving adequate provision for children of the first marriage. Once again – if a life interest situation arises the executors become Trustees and must fulfil their fiduciary obligations to both the Life tenant and the (longer term) capital beneficiaries. If lay trustees are so appointed, there are prime obligations placed upon them to take proper professional advice; crucially with regard to the investment of the residuary trust fund where a balance should be maintained as to the income interest of the Life tenant as against the maintenance of the underlying capital held for the children of the testator. Given that a widow could be aged say 70 years when her husband died – it is feasible she could live for a further 20-25 years before the capital then passes to the ultimate beneficiaries. In investment terms this is a significant period and Trustees, who ignore such responsibilities and obligations, do so at the peril of subsequent litigation against them by disgruntled (adult) children of the testator!

 

 

A well drawn comprehensive Will should incorporate a “long stop” provision to guard against a situation where an entire immediate family is lost through a common accident etc. Whilst, fortunately, such scenarios are rare: nevertheless a “Herald of Free Enterprise” or the recent Air France A330 disaster sadly demonstrates that such tragic losses can occur.

 

The long stop can provide for the residuary estate to pass to more distant family relatives and/or charity as so required by the testator.

 

 

It is straightforward to incorporate provision for a share (or shares) of the residuary estate to pass to registered charities. Comprehensive drafting will allow for the situation where a particular charity may have been wound up; but an alternative charity (with similar objects) is in existence and so could receive benefit.

 

Generally speaking, if charities are registered (either in the UK or within the EC) they should attract charitable relief under UK Inheritance Tax Act 1984.

 

Care is required with drafting of Wills where gifts of residue pass between both exempt parties (i.e. charities) and non exempt (i.e. children or brothers /sisters of the deceased). This is known as the incidence of how capital taxes should bear against the estate; these days charities are particularly vigilant over such issues; to ignore such drafting expertise again is to invite onerous (and expensive) litigation!

 

Next month: Divorce and Wills