In case of need
When we learn all about trust deeds and the powers, duties and obligations given to or imposed upon trustees, it might be reasonable to assume that, certainly in the case of fixed interest (non-discretionary) trusts, no statute could overrule their provisions: ‘If that is what the settlor wants, then that is what they should get!’
However, 90 years ago, or thereabouts, the authors of the Trustee Act 1925 (England and Wales) clearly decided situations may arise that would put beneficiaries in an unfortunate or even precarious position unless statutory relief were available. Possibly one of the main arguments against fixed interest trusts is that, having set the terms of the trust in stone, with no possible flexibility for the trustees, events may occur after the death of the settlor which were neither anticipated nor provided for.
A life interest trust described as being ‘upon trust for A’ (who is now a minor) implies that A will receive nothing until they reach their majority. Alternatively, ‘upon trust for B upon their becoming a full member of STEP’ gives a pretty cast-iron condition that no benefit shall accrue to B under such a contingent interest trust until they become one of those elite 19,000 or so individuals working in our industry.
But what if a 16-year-old in the first example is orphaned and has a desperate need for financial support? Or, in the second example, what if the hard-working student badly needs some income or even capital from the trust to pay for their continuing education in order that they may have some hope of achieving the contingency? In both cases, the law comes to their rescue (unless the settlor has specifically excluded the provisions of these ‘room for wriggle clauses’ in the governing law or amended them in some other way).
Section 31 relates to the ‘power to apply income for maintenance and to accumulate surplus income during a minority’. It states: ‘Where any property is held by trustees… for any person… [whose interest is] vested or contingent, then, subject to any prior interests [e.g. a life tenancy]… during the infancy of any such person… the trustees may, at their sole discretion, pay to his parent or guardian… [income for] his maintenance, education, or benefit… as may, in all the circumstances, be reasonable.’
When a beneficiary with no contingency (therefore having a vested interest) reaches the age of 18, all the accumulated income not so far given to them must be paid to them in a lump sum. After that, they will continue to receive all of the income for the rest of their life.
If such person on attaining the age of 18 has not a vested interest (i.e. has not reached a contingency), the trustees must transfer to capital all undistributed income and must thenceforth pay the income to the beneficiary, until they either attain a vested interest therein or die.
Section 32 deals with the ‘power of advancement’, which simply means that trustees have the power to distribute capital to a beneficiary who may not, under the strict terms of the trust, be entitled to capital at that time. There are, however, some limitations:
- In most jurisdictions, the money so paid shall not exceed one-half of the presumptive or vested share or interest of that person. So, for example, if there is USD1 million of trust capital and two equally entitled beneficiaries, the presumptive share of each is USD250,000.
- If that person is or becomes absolutely and indefeasibly entitled to a share in the trust property, the money so paid or applied shall be brought into account at the final reckoning when the trust is brought to an end.
- If another person has a prior life or other interest, whether vested or contingent, they must consent to the advancement, as their own interest in the form of income or otherwise may, as a result, be diminished.
In practice, life interest trusts (and the matters referred to in this article) are found more commonly onshore (but not exclusively). In the offshore environment, the fully discretionary trust prevails. There are often substantial differences in the tax treatment of the two types of trust, so there is no substitute for taking professional tax advice in all cases.
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