Trustbusters


Author: Helena Luckhurst


This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK

Most English trusts these days specify a ‘Trust Period’ of no more than 125 years. In practice, this means that someone must have a vested interest in the trust assets (whether that’s vested in possession (i.e. an immediate right to ‘current enjoyment’) or vested in interest (an immediate right to ‘future enjoyment’)) within 125 years.

Sometimes trusts outstay their welcome, though. If you have a client desperate to find a way to end a trust, don’t assume there is nothing that can be done. It is sometimes possible to end a trust without needing the agreement of the trustees (which may not be forthcoming). Here’s how.

The questions to ask yourself are whether all the potential beneficiaries of the trust are adults, of full capacity and are their interests in the trust indefeasible? If the trust is discretionary, is the class of potential beneficiaries closed and does it include any minors? If it’s a life interest trust, are the life tenant and all those interested in the trust after the life tenant’s death (the remaindermen) adults with vested interests in the trust assets? Do the remaindermen only take if they satisfy some contingency (e.g. being alive at the life tenant’s death)? (No good.) Or it could be the case that a remainderman’s estate is going to take their share of the trust capital on the life tenant’s death come what may (that’s good). Some trusts can be tricky to construe, so if in doubt ask a trust lawyer.

If the only people who can ever benefit from the trust are adult, of full capacity and have vested interests, there is the potential to bust the trust. All that is required is the agreement of all the beneficiaries as to how the trust assets should be divided up (partitioned). If they can agree, the case of Saunders v Vautier confirms that the trust can be busted – hence these trustbusting exercises are sometimes called a Saunders v Vautier variation. The trust assets can be divided up as required. For example, in the case of a life interest trust where Mum is the life tenant and her two stepchildren are the remaindermen, is the agreement that all the trust assets pass to Mum, or none to Mum and all to the two stepchildren equally, or to Mum and the two stepchildren equally? Or, rather than bust the trust apart, all the beneficiaries could agree that the trust should be held on different terms instead. It’s down to those beneficiaries to negotiate an agreement but the trustees have no say in the matter. Once an agreement has been reached, they must abide by and act on it, unless to do so would put them in breach of an obligation to a third party.

The agreement is best recorded in a deed as the agreement will be for no consideration but everyone will want the certainty of knowing that it binds all concerned.

Remember that these exercises are likely to have tax consequences, not just personally for those involved but also for the trust itself. Don’t sign on the dotted line without taking tax advice first.

I have seen Saunders v Vautier variations used to great effect in situations where a parent has died leaving an old will setting up will trusts. The reasons for including the will trusts had long since fallen away but the will had not been updated before death and the family thought they were stuck with them. All the beneficiaries (often the surviving parent and all adult children only) were happy for the surviving parent to receive the assets which were due to the will trust. Because the issue was explored by the family before the second anniversary of the death (though not raised by the solicitor dealing with the estate administration, sadly), the agreement could also contain the tax statements more usually found in deeds of variation, so that the unwinding of the will trusts had no adverse tax effects for anyone. Including the tax statements meant that, for Inheritance Tax and Capital Gains Tax purposes, it was as though the will had left the will trust assets to the surviving parent all along. A happy outcome all round.

Helena Luckhurst, Partner, Fladgate LLP (hluckhurst@fladgate.com)

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