A Summary: Inheritance and Trustees’ Powers Bill

parliament-1Following consultation in 2009 and 2011, the Law Commission published a report entitled “Inheritance and Family Provision Claims on Death” in December 2011. This set out recommendations for reform of the law and included the draft Inheritance and Trustees’ Powers Bill.

The proposals contained in the Bill will be of significance for all residuary beneficiaries (a significant proportion of whom are often charities)

The most significant provisions of the Bill (drafted as of 23rd September 2013) makes amendments to the Administration of Estates Act 1925, the Trustee Act 1925 and the Inheritance (Provision for Family and Dependants) 1975 in the following areas:

Intestacy

The Surviving Spouses

The Bill amends the current position of a surviving spouse in an intestacy as set out in s46 of the Administration of Estates Act 1925.

Currently, if the deceased leaves no children the surviving spouse shares the estate with the deceased’s parents and siblings. The Bill if enacted as is would cut out the deceased’s parents and siblings so that the entire estate would pass to the spouse.

Where the deceased does leave children, the Bill provides the spouse will receive the statutory legacy (£250,000) and the deceased’s personal chattels (see below). In relation to the remaining estate, the spouse’s life interest is to be abolished and instead there will be an outright gift to the spouse of ½ the residue, with the other ½ still passing to the children as is the current position.

Personal Chattels

The definition of “personal chattels” under s55(1)(x) Administration of Estates Act is to be abolished and replaced with the following formulation:

“Personal chattels” means tangible movable property, other than any such property which consists of money or securities for money, or was used at the death of the intestate solely or mainly for business purposes, or was held at the death of the intestate solely as an investment:”

Clause 3(2) of the Bill provides that unless a contrary intention appears, the definition of “personal chattles” used in wills and codicils executed prior to the enactment of the Bill will be taken to refer to the old s55(1)x definition and not the new one.

There seems to be a grey area (and therefore potential for an argument) in the hinterland between “personal chattels” and assets excluded from the definition. Could a valuable stamp, picture or model car collection be properly considered an investment? There’s also a question mark over whether a professional author’s unpublished literary manuscript or a musician’s unfinished symphony amounts to a “personal chattel” or property used mainly for a business purpose.

Inheritance Act 1975 Claims

The 3 most significant amendments to the existing rules are currently contained in Schedule 2 of the Bill and relate to:

  • Jurisdiction to bring a claim
  • Who has locus as a ‘child of the family’
  • Who has locus as someone maintained by the deceased?

Jurisdiction

Currently, a 1975 Act claim cannot be mounted against estates where the deceased died domiciled abroad.

This is a significant preliminary hurdle in Inheritance Act litigation and the issue of jurisdiction is increasingly common where the deceased is a British Expat. As tax lawyers will know, domicile is a highly technical, multifaceted and complex concept which can produce some unpredictable results. Moving in the other direction to disposing of a domicile of origin; it is possible to live ones entire whole in a country, work, buy property, settle down, marry and have a family and ultimately to die all without acquiring a domicile of choice in that country.

The Bill extends the existing jurisdiction provision to allow a claim to be brought where a person dies (wherever domiciled) and is survived by an eligible person (a new list of which is also amended into the 1975 Act by the Bill) who is, at the time of the death, habitually resident in England and Wales.

There are potential practical difficulties in widening the jurisdiction ‘gateway’ in this way:

  • How easy will it be to obtain relevant evidence to support 1975 Act claims against estates principally comprised of foreign-held assets?
  • Will there be an increased potential for conflicts between courts in different jurisdictions making orders in respect of the same property?
  • Whether personal representatives based out of this jurisdiction would agree to submit to the jurisdiction of the English courts dealing with 1975 Act claims.

Child of the Family

The Bill extends the definition of those who can claim to have been maintained by the deceased.

The Bill proposes that an applicant claiming to have been treated as a child of the family by the deceased need no longer show that this treatment was in relation to a marriage or civil partnership of the deceased, but simply that the nature of the treatment was akin to that between a parent and child.

The widened definition will mean the focus will principally be on the quality of the relationship between the deceased and the child. However, the Bill also proposes that an applicant will be able to bring such a claim if in relation to any family the deceased stood in the role of loco parentis at any time“.

This ultra-wide time-frame will open estates up to claims being brought by a much greater number of individuals.

Maintained by the Deceased

Currently, an applicant for relief who claims to have been maintained by the deceased immediately before his death must prove that the deceased assumed responsibility for their maintenance and that the deceased contributed more financially to the relationship than the applicant.

The Bill makes it easier for applicants to pursue a claim based on pen-1maintenance. It will no longer be necessary for the applicant to show that the deceased contributed more to the relationship in financial terms or that the deceased assumed responsibility for their maintenance.

Instead these will now simply be factors to be taken into account by the Court in determining whether an award should be made. Clause 4 of Schedule 2A of the Bill amends s1(3) of the 1975 Act so that person will be found to be maintained:

only if the deceased was making a substantial contribution in money or money’s worth towards the reasonable needs of the applicant, other than a contribution made for full valuable consideration pursuant to an arrangement of a commercial nature.

The terms in bold are not defined, query whether disputes will arise as to whether certain arrangements fall within or without the provision. Is a carer who receives free board and lodging in return for their services ‘maintained for valuable consideration or is the free room and board a substantial contribution towards the carer’s needs, meaning that the carer could bring a claim as a person maintained by the deceased?

Trustees Powers

The Bill amends Trustee’s powers and obligations under sections 31 and 32 Trustee Act 1925.

Power to Apply Income

Clause 8 of the Bill amends the s31 power of trustees to use the income of trust funds for the maintenance, education or benefit of a beneficiary who is under 18 and has an interest in those funds.

Section 31(1)(i) of the Trustee Act 1925 provides that the power is exercisable in respect of the trust property in which the beneficiary in question has an interest, and that it extends to “the whole or such part, if any, of the income of that property as may, in all the circumstances, be reasonable”.

The Bill amends that condition to make it clear that the amount of the income used is a matter for the trustees’ discretion, and is not limited by an objective standard of reasonableness. The Bill removes the proviso to s31(1) that lists factors to which the trustees are to have regard in exercising their discretion – the beneficiary’s age and requirements, and the circumstances generally – and imposes a specific restriction on the amount of income which may be paid out. The removal of this proviso leaves trustees free to pay out as much of the income as they think fit; the requirement of the general law to consider all relevant factors before exercising their discretion is unaffected.

Power of Advancement:

Clause 9 of the Bill amends the s32 power for trustees to make payments of capital for the advancement or benefit of a beneficiary who has a requisite type of entitlement to the capital of the trust fund.

coin-2Section 32 famously limits this power of advancement to a maximum of ½ of the beneficiary’s prospective share. To maximise flexibility this is often widened to 100% in many professionally drafted trusts. In line with modern drafting practice, the Bill removes the ½ limit so that the power enables trustees to pay out up to the whole of the capital of a beneficiary’s prospective share for his or her advancement or benefit.

The Bill explicitly includes within statutory power of advancement power to pay out both cash and also to transfer or apply property in specie. This amendment codifies the effect of existing case law Re Collard’s Will Trusts [1961] Ch 293.

The Bill makes it explicit that any advancements under the power, whether in money or property, may not exceed the beneficiary’s prospective share of the capital of the trust fund. The Bill carries this provision through to s32(1)(b) to require that any non-cash assets advanced under the power are brought into account, in the same way as a cash payment, as part of the beneficiary’s share if and when they becomes absolutely entitled to it.

The explantory notes accompanying the Bill suggest the amendments to s32 that extend the power of advancement to include assets in specie apply to all trusts whenever established; for example in relation to a statutory trust which arose on the intestacy of a person who died even before the new provisions come into force.

The reforms to s31 and s32 will apply prospectively in relation to all interests under trusts and any power held in relation to a trust established or exercised after the coming into force of these provisions.

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