IHTM35047 | Who should make the instrument?: examples where the interests of persons not party to the instrument are affected

Example 1

By Will, Thomas who dies in October 2013 settles the whole of his estate on trust

• for his widow, Winnie, for life, and

• on her death the capital to her son, Stuart, absolutely if he is then living, but

• if he is then dead, the capital to his children.

Stuart and Winnie make an instrument of variation (IoV) attempting to bring the trust to an end in part in order to vest £325,000 in Stuart absolutely and to assign Stuart’s interest in the remainder to Ben.

If wholly valid this would deprive any existing or future children of Stuart of their interests in the trust capital contingent upon Stuart predeceasing Winnie. Even if Stuart had children of full age who were parties to the instrument, it might be possible for Stuart to have more children, whose interests would be prejudiced, but see IHTM35048.

Nonetheless it does not follow that such an instrument is necessarily without effect either so far as general law is concerned or for IHT purposes. It is perfectly feasible for adult beneficiaries to vary the trusts as between themselves to the extent that such variations do not impinge upon the interests of other beneficiaries who are not parties to the instrument.

Accordingly, in the above example, you can regard

• Winnie as having validly assigned her life interest in £325,000 to Stuart, who will receive the income from

• that capital during his life, and

• Stuart as having validly assigned to Ben his defeasible interest in the residue of the trust fund after Winnie’s death if he survives her.

However Stuart cannot take any capital until the death of Winnie because of the possibility that he may predecease her, and his children in being or as yet unborn would then be entitled to the whole of the trust fund on Winnie’s death.

The result is that the IoV can be treated as partially effective on execution because Winnie’s life interest in £325,000 has been redirected. The spouse exemption on Thomas’s death is reduced accordingly.

What further effect the IoV has depends on whether Stuart survives Winnie

• if he does, the instrument becomes fully effective on Winnie’s death and

• the fund representing the £325,000 then vests in Stuart absolutely, and

• Ben takes the residue

• but if Stuart dies in Winnie’s lifetime leaving children

• Ben’s interest is defeated

• Stuart’s estate continues to receive the income on the £325,000 fund during Winnie’s lifetime, and

• on Winnie’s death that income interest in Stuart’s estate ceases and his children take the whole of the capital under the unvaried provisions of Thomas’s Will.

Example 2

Thomas’s Will Trusts are the same as in Example 1.

By IoV Winnie and Stuart attempt to bring the trust to an end by Stuart assigning his interest to Winnie in order that Winnie should take the trust capital absolutely.

Assuming that he is of full capacity Stuart can deal with his interest in that way, but he cannot dispose of his children’s contingent interests. The effect of such an instrument is that Winnie now has her original life interest together with a defeasible interest in the trust capital, which cannot vest in her outright until her death survived by Stuart.