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Issue 33 – November 2008  

Contents


Cases
Features
Articles
 News
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CASES

1. Carr and others v Beaven and others

Cite: [2008] All ER (D) 289 (Oct)
Court: Chancery Division
Judge: Floyd J
Hearing Date: 29 October 2008
Summary: Probate – Will – Validity – Testamentary capacity – Claimant executors seeking to admit will to probate – Defendants challenging testamentary capacity of deceased – Whether deceased having requisite capacity to execute will.

The claimants were the executors of the will of the deceased. The second claimant was the deceased’s second wife. The first to fourth defendants were the deceased’s children by his first marriage. They had enjoyed difficult relationships with their father: he had left the family home to live with the second claimant in 1971. Upon leaving the family home, he had made provision for his four children by creating a trust in their favour, into which he placed three fairly substantial properties. In September 1997, the deceased suffered a stroke while  on holiday. The stroke affected him physically, causing some slurred speech and a lack of coordination. On 5 January 1998, he executed a will (the 1998 will) by which he made specific bequests of £10,000 to each of his four children.

The trustees of the 1998 will were also directed to grant a lease of a cottage to section and his wife for a period not exceeding 60 years at a nominal rent. The deceased’s mental health began to deteriorate after 2000. A further will was executed n March 2000, albeit that the deceased’s solicitor had expressed concerns in relation to his testamentary capacity. The solicitor had suggested obtaining a medical opinion so as to remove a “question mark” over capacity. The medical practitioner diagnosed mild dementia. Those concerns notwithstanding, by the terms of the March 2000 will, the deceased removed the bequests to his children and altered the provision relating to the lease to be granted to S. Subsequently, the deceased executed a further will on 17 November 2000 (the November 2000 will), which removed completely the provision relating to the grant of the lease to S. By the instant proceedings, the claimants sought probate in respect of the November 2000 will. The defendants resisted that application.

The principal issue that fell to be determined was whether the deceased had lacked the requisite testamentary capacity to execute the November 2000 will.

The court ruled: While it was clear that the deceased’s mental condition was deteriorating from the time of his first stroke, and that by November 2000 he was suffering from mild to moderate dementia, on the evidence, he had had the necessary testamentary capacity on the occasions on which he had given his instructions for and executed the November 2000 will. It was improbable that he retained that capacity when the 2004 codicil was executed, although, in the events that had happened, it was of little significance (see [82]-[90] of the judgment).
Accordingly, the court would pronounce in favour of the November 2000 will but not the 2004 codicil.

 
2. Couwenbergh v Valkova

Cite: [2008] All ER (D) 264 (Oct)
Court: Chancery Division
Judge: Blackburne J
Hearing Date: 16 October 2008
Summary: Will – Testamentary disposition – Testamentary capacity – Proceedings challenging validity of will – Evidence

The testator died on 10 October 1991. She had made wills dated 12 September 1978, 19 October 1990 and 24 October 1990. Under the 1978 will, she appointed the claimant as her executor and, after a £500 legacy to a relative, left the remainder of her estate in equal shares to the relative’s children and to the claimant. By the second will, dated 19 October 1990, the testator gave the whole of her estate to the defendant, whom she appointed to be her executrix. The gift was conditional on the defendant surviving the testator by 28 days, failing which she gave the whole of her estate to the defendant’s younger sister.

The will was witnessed by a Mr and Mrs D. The position of Mr D’s signature troubled the solicitor who had drawn up the will. In the event, a fresh engrossment of it, in identical terms, was prepared for execution, dated 24 October 1990. That will bore the signatures of two Italian brothers, G. The claimant, as the sole executor named in the 1978 will, entered a caveat on 21 October 1991 in the testator’s estate and on 4 December 1991 entered an appearance to the defendant’s warning dated 26 November 1991. That was very shortly after he and the testator’s family were told of the existence of the 1990 wills. In February 1993, the claimant issued the writ in the action endorsed with a statement of putting the defendant to proof that the 1990 wills had been duly executed. Alternatively, he alleged that at the time the 1990 wills had been executed, the testator had lacked testamentary capacity and had not known, or approved, of their contents.

The dispute came on for trial in July 1998. The due execution of the 1990 wills was effectively conceded and the trial concentrated on the testator’s testamentary capacity and the allegation of want of knowledge and approval. The judge found in the defendant’s favour. The police subsequently conducted an investigation into the circumstances of the testator’s death. That led to the tracing of the two G brothers from whom statements were taken. Those statements came to the attention of the claimant in the course of proceedings concerning the costs of the litigation. The claimant renewed his application for permission to appeal, on the basis of fresh evidence, against the judge’s original order. The Court of Appeal subsequently set aside the judge’s order (see [2005] All ER (D) 98 (Feb)) and remitted the action for retrial.

Evidence was heard, inter alia, as to the testator’s confusion and short-term memory loss well before 1990, in addition to her increasing physical frailty and, as time had gone on, her diminishing mobility; and to the conduct of the defendant at the material time. Consideration was given, inter alia, as to whether the testator had lacked testamentary capacity.

The court ruled: It was settled law that, if someone were to be mentally capable of making a will, it was essential that the testator should understand the nature of his act and its effect; should understand the extent of the property of which he was disposing; should be able to comprehend and appreciate the claims to which he should give effect, and, with a view to the latter object, that no disorder of mind should poison his affections, pervert his sense of right, or prevent the exercise of his natural faculties, that no insane delusion should influence his will in disposing of his property and bring about a disposal of it which, if his mind had been sound, would not have been made. 
The testator should be able to recall those (whether related or not) who might be expected to be named in his will.

However, the law did not call for a perfectly balanced mind, nor was a will to be pronounced against merely because the testator was moved by capricious, frivolous, mean or even bad motives. Where a will was rational on its face, and duly executed, the court would pronounce for it, presuming that the testator was mentally competent so that the burden rested on those alleging it to adduce evidence of the testator’s unsoundness of mind. However, once there was evidence before the court which credibly called into question the testator’s capacity to make a will at the tie the will had been made, the burden shifted to those who sought to propound the will to prove affirmatively, on all of the evidence, that the testator had the required mental capacity to make it (see [245]-[247] of the judgment).

On the evidence, the testator had lacked testamentary capacity when she had made the 1990 wills. That was the clear opinion of the claimant’s witness, who was impressive and persuasive. Secondly, the testator’s mental decline had been progressive. Thirdly, while  the defendant’s evidence suggested that the testator would have been capable of fully understanding the effect and implications of the will she had made, it fell short of an opinion that the testator had possessed all of the attributes necessary to demonstrate testamentary capacity. If, as was established on the evidence, the testator had not been able to bring to mind whom her nearest relatives were, an essential element of testamentary capacity was absent even if, had she been able to bring them to mind, she might have decided not to benefit them in any way. Moreover, on the evidence, the testator had been operating under a disease of mind which had poisoned her affections towards a relative (see [276]-[280] of the judgment).

3. Jones and others v Firkin-Flood and another

Cite: [2008] All ER (D) 175 (Oct)
Court: Chancery Division
Judge: Briggs J
Hearing Date: 17 October 2008
Representation: Jeremy Cousins QC and Andrew Charman (instructed by Shammah Nicholls LLP) for the trustees. Gilead Cooper QC and Andrew Child (instructed by Reynolds Porter Chamberlain) for D and Liam Clarke (instructed by Shammah Nicholls LLP) for the minors and unborn beneficiaries
Summary: Trust and trustee – Will – Beneficial entitlement – Deceased dividing residue of estate to his three children in unequal proportions – Trustees contracting to sell entirety of share capital for aggregate consideration – Trustees unanimously resolving that capital on trust fund to be distributed in unequal shares to deceased’s children – Defendants making complaints about inadequacy of distributions and of failure of trustees to provide proper accounts – Trustees issuing proceedings – Whether equal shares agreement - Whether breaches of trust by trustees.

The deceased died in February 2001. He had known for some time that he had terminal cancer and had embarked upon a series of further wills. All of which made broadly similar and unequal provision for each of his three children, D, I and L. By his last will, made four days before he died (the will), he appointed as his executors and trustees J, his solicitor, I and two long-standing friends N and B (the trustees). The will divided his estate in trust companies and residue. He separated his estate into two parts, the first part was constituted as the Bredbury Hall Trust Fund (the trust fund), and consisted of all his shares in two companies, FHLG and FHG. The deceased left the trust fund to the trustees upon broad discretionary trusts both as to capital and income in favour of his three children and the children of I. 
 
The deceased left the residue of his estate to his three children in the proportions 50 per cent  to I, 30 per cent  to D and 10 per cent  to L. A meeting was set up on 14 March 2001, to enable a formal reading of the will. The meeting was attended by, inter alia, the three children. Clause 6.2(a) of the will provided: subject to and in default of any discretionary appointment, shares in the income of the trust fund as to 60 per cent  for I, 30 per cent  for D and 10 per cent  for L. On 31st January 2008, the trustees and the other shareholders in FHLG (the sellers) contracted to sell the entirety of its share capital to Bredbury Hall Ltd (the buyer) for an aggregate consideration in cash and assets of £17,458,763. At that date, the 801 issued shares in FHLG were owned as to 456 by the trustees, as to 71 by I, and as to 274 by FHG. Pursuant to the sale agreement the sellers, including the trustees, gave wide-ranging warranties. In January 2008, the buyer sought the insertion into the sale agreement of schedule 9. While  limiting the trustees” liability under the warranties, schedule 9 required them to undertake neither to deal with nor to distribute the part of the trust fund constituted by the cash consideration, subject to stated exceptions, within a period of seven years from completion, subject to extension in certain stated circumstances.

At a meeting on 6th February 2008, the trustees unanimously resolved that the capital of the trust fund should, subject to retention of tax, be distributed as soon as possible, as to £2.5 million net of tax to D, £1.5 million net of tax to L, and as to the balance to I (the provisional resolution). D and L, the defendants, made wide-ranging complaints, both about the inadequacy of the distributions to them, referring to an alleged agreement for the equal distribution of the deceased’s estate (the equal shares agreement), and as to the failure by the trustees to provide proper accounts and information in connection with the administration both of the estate and the trust fund.

The trustees issued a part 8 claim under CPR 64.2, SI 1998/3132, seeking the court’s determination as to, first, whether their powers under the will were restricted, limited or compromised by virtue of the alleged equal shares agreement; and second, whether the trustees might properly exercise their powers of appointment and distribution under the will trust so as to give effect or substantial effect to the provisional resolution. They contended that D and L had recently and dishonestly manufactured the claim that there was an equal shares agreement, and that the proposed distribution was a rational exercise of the trustees” discretion having regard in particular to the deceased’s wishes. I, D and L were amongst those who gave evidence at trial.

The issues raised by the instant proceedings were, inter alia: (i) whether there was an equal shares agreement between I, D and L on 14 March 2001; (ii) whether the sale agreement was valid and binding on D and L; (iii) whether there had been breaches of trust by the trustees; and (iv) whether some or all of the trustees should be removed. D and L contended, inter alia, that the restrictions undertaken by the claimants in schedule 9 of the sale agreement constituted an illegitimate, and therefore void, fetter upon their discretion as to the distribution of the trust fund thereafter; and that the claimants, by schedule 9 had promised a stranger to the trust that they would not exercise their discretionary powers to distribute the trust fund, save in accordance with very substantial restrictions.

The court ruled: (1) The close similarity between the deceased’s last will and its immediate predecessor, and the substantial similarity between that and his will made in July 2000, demonstrated that, from a time well before there could have been any issue as to the deceased’s testamentary capacity, he had formed a settled intention to provide for his three children in unequal shares, with I receiving the largest share of the estate. There was, however, no equal shares agreement and in particular no agreement at all as to the distribution of the trust fund, or as to the sharing of benefits from the continued running of the family companies. There was no more than a broad consensus as to a fair and substantially equal division of the free estate. Nothing was agreed about distribution of the trust fund. The trustees plainly had power both to give the warranties and to enter into the provisions of schedule 9 to the sale agreement for the protection of the value of those warranties to the buyer, in the exercise of their investment powers under the will. 

The giving of warranties was a common if not standard incident to the sale of shares in private companies, well within the beneficial owner power of investment conferred by a clause to the will, and it was plainly beneficial for them to do so in terms of realising best value for the shares. The effect of schedule 9 was to enable the trustees to distribute the trust fund notwithstanding giving those warranties up to the amount distributed to each of them (see paragraphs    [56], [73], [204], [213] of the judgment).

(2) The sale agreement was valid and was binding on D and L in the sense that if they had received a capital distribution from the trust fund they would have had to provide the covenant required of them by schedule 9. The trustees had not surrendered any discretion by virtue of the sale agreement to anyone else, and in all the circumstances no loss had been identified for which the trustees could be liable to the defendants (see paragraphs    [216], [217] of the judgment).

(3) In the instant case, there had not merely been a number of isolated breaches of trust by the trustees, but rather a total abdication of their duties by all of them. At the outset, they had failed to appraise themselves of the nature and extent of their duties; they had failed to prepare, or to have prepared, estate or trust accounts; and they had failed to consider whether in the interests of the beneficiaries, it was appropriate to leave the trust property as they had received it. Notwithstanding the absence of any deliberate intent, and the trustees” successful conclusion under his overall supervision of the sale of the trust properties by the end of January 2008, J had demonstrated beyond question his unfitness to be the sole professional trustee of the trust. Moreover, the evidence established that I had, by January 2008, committed substantial and serious breaches of trust both by commission and omission, mitigated in terms of blameworthiness by his ignorance of his duties, both as a director and as a trustee, and by the fact that he was entitled to expect that J would give him due and proper instruction in that regard. N’s and B’s breaches of duty had consisted entirely of omission rather than commission (see paragraphs    [239], [240], [247], [250] of the judgment).

(4) The governing criterion, consistent with the need to have regard first and foremost to the interests of the beneficiaries, was to constitute a body of trustees who would be able with, the minimum of expense and dissention, and in particular with as little as possible further assistance from the court, to restore the administration of the trust to a basis capable of commanding the confidence and respect of all its beneficiaries, and dealing impartially with their separate claims to consideration for distribution (see paragraph   [292] of the judgment). It was obvious that there had to be a change from the present body of the trustees. It was therefore inevitable that J, I and B had to be removed. However, some family connection had to be preserved and therefore N would be retained, and would be joined by new trustees (see paragraphs    [291] and [295] of the judgment).
 
4. Gomez and others v Encarnacion Gomez-Monche Vives

Cite: [2008] All ER (D) 31 (Oct)
Court: Court of Appeal, Civil Division
Judge: Jacob, Lawrence Collins LJJ and Lewison
Hearing Date: 3 October 2008
Representation: Nicholas Le Poidevin and Tony Oakley (instructed by Farrer & Co) for the claimants. Lord Goldsmith QC and Peter Rees (Debevoise & Plimpton LLP) for the defendant
Summary: Conflict of laws - Jurisdiction - Challenge to jurisdiction - Civil and commercial matters - Trusts - Claimants seeking personal and proprietary remedies against defendant for receipt of moneys allegedly paid in breach of trust - Claimants seeking defendant’s removal from position as “appointor” of trust - Whether court having jurisdiction - Whether claims brought against defendant as beneficiary and trustee of trust domiciled in England - Civil Jurisdiction and Judgments Order 2001, SI 2001/3929, schedule 1, paragraph   12(3) - Council Regulation (EC) 44/2001, article 5(6)
 
The proceedings concerned a trust, created by a written declaration in June 1984. In 1991, the settlor died intestate while  domiciled in Spain. The first defendant was his widow. She was also domiciled in Spain. The claimants were three of the settlor’s sons. The second and third defendants were the current trustees. The fourth defendant had previously been a trustee. The trust was expressed to be governed by English law. It provided, inter alia, that the “trust period” would continue from the date of the declaration until the death of the survivor of the settler or the first defendant.

At the end of the trust period, the trustees would hold the balance of the fund for such beneficiaries, and in such shares and proportions, as “the appointor” would determine within two years of the end of the trust period. Under the terms of the trust, after the death of the settler, the first defendant had the power to select the appointor. She selected herself. The claimants brought proceedings against all four defendants, although only the first defendant was served within time.

They claimed to be beneficiaries under the trust, and they made two claims against the first defendant. First, they claimed that the trustees had given the first defendant trust moneys in breach of trust, and that they had personal and proprietary remedies against the first defendant in respect of those payments. Secondly, they argued that the court should remove the first defendant from her position as appointor. The first defendant sought, inter alia, a declaration that the court did not have jurisdiction to consider the claims, pursuant to Council Regulation (EC) 44/2001 (on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters) (the Judgments Regulation).

The claimants submitted that the case fell within the court’s special jurisdiction under article 5(6) of the Judgments Regulation where the defendant was sued as a settler, trustee or beneficiary of a trust domiciled within the jurisdiction. Accordingly, the following issues fell to be determined, namely, (i) what trust or trusts identified by the claimants came within the words of article 5(6) of the Judgments Regulation which referred to “a trust created by the operation of a statute, or by a written instrument, or created orally and evidenced in writing; (ii) whether the relevant trust was domiciled in England; (iii) in relation to the first part of the claimant’s case against the first defendant, whether the first defendant was ‘sued  [...]  as beneficiary”; and (iv) in relation to the second part of the claimant’s claim against the first defendant, whether the first defendant was ‘sued  [...]  as  [...]  trustee”. The judge ruled that (i) the trust was domiciled in England for the purpose of article 5(6); (ii) the claimants were not suing the first defendant as beneficiary in their primary claim because they were contending that she was not entitled to the payments she had received: and (iii) the claimants were not suing the first defendant as trustee in their subsidiary claim, because the donee of fiduciary power was not a trustee within article 5(6). The claimants appealed.

Consideration was given to paragraph   12(3) of the Civil Jurisdiction and Judgments Order 2001, SI 2001/3929, which provided that a trust was domiciled in a part of the United Kingdom “if and only if the system of law of that part is the system of law with which the trust has its closest and most real connection”. It was common ground that, apart from the governing law, there was no connection between the trust and England. The place of residence of the trustees was not England and nor were any of the beneficiaries domiciled in England. The administration of the trust was carried out, either directly or indirectly, in Liechtenstein and the principal trust assets were shares in a company incorporated in the Caymen Islands. Moreover, consideration was given, inter alia, to the Hague Convention. Article 7 of the Convention applied where no applicable law had been chosen, in which case, the trust would be governed by the law with which it was most closely connection. In ascertaining the law with which the law was most closely connected for the purposes of article 7, reference was made to matters including the place of administration of the trust designated by the settler, the situs of the assets of the trust, the place of residence or business of the trustee and the objects of the trust where they were to be fulfilled.

The appeal would be allowed in part.

(1) The connection between a trust and its proper law was in every sense real and close. A trust was not like a commercial contract where it was only necessary to consider the content of the applicable law in exceptional circumstances. Trustees in particular had to be intimately aware of their responsibilities under the general law applicable to the trust. They might have to know whether they could lawfully accumulate income. Resort to the law governing the trust was central to their responsibilities (see paragraph   [64] of the judgment).

Although for the purposes of the 2001 Order, a choice of English law might not be conclusive, it was very difficult to see what other circumstance would be sufficient to outweigh it, so that it would be another system of law which the trust had its closest and most real connection. It was more likely that a foreign choice of law in what would otherwise be an English trust might be disregarded where it was intended to avoid some important principle of English law. What was not contemplated by paragraph   12(3) of the 2001 Order was what a multifactorial approach, or counting of contracts, to be derived from the Hague Convention, when, under that Convention, that approach was only to be adopted in the absence of choice (see paragraphs    [61] to [63] of the judgment).

While  it was true that, apart from the governing law, there was no connection between the trust and England, the judge had rightly found that the trust was domiciled in England.

Chellaram v Chellaram (No 2) [2002] 3 All ER 17 considered.

(2) The only trust relevant for the purposes of the instant case was the declaration of trust and the question was whether the first defendant was sued as beneficiary of that trust. In the circumstances, the claimants were suing the first defendant as beneficiary because it was accepted that she was a beneficiary and the claimants were suing her for sums which she had received by way of overpayment of her entitlement. The relief claimed an amount of all monies which she had received, including those to which it was conceded she was entitled, and that was a preliminary to identifying the moneys to which she was entitled. The dispute was about the extent of the first defendant’s entitlement, and not its existence. She was being sued because she had been treated as a beneficiary by the trustees and by herself, and she actually was a beneficiary. Accordingly, the first defendant was being sued as a beneficiary for the recovery of the overpayment. It followed that the judge had erred in that regard (see paragraphs    [80], [82], and [89] of the judgment).
Diplock, Re, Diplock v Wintle [1948] 2 All ER 318 considered.

(3) The interpretation of “trustee” depended upon an autonomous Regulation concept; however, since the origin of article 5(6) lay exclusively in the accommodation of the trust as known in common law countries, that autonomous interpretation had strongly had to be strongly influenced by the concept of “trustee” in those countries. In the light of the necessarily restrictive approach to the interpretation of article 5(6), there was no basis for extending article 5(6) to such powers as appointers, or protectors, or to any other person with fiduciary powers who did not come within the normal meaning of the expression “trustee”. To so interpret and extend article 5(6) would be entirely contrary to the approach which the European Court of Justice required national courts to take in the interpretation of article 5 (see paragraphs    [97] to [99] of the judgment).
The first defendant was not being sued in the second claim as “a trustee  [...]  of a trust created  [...]  by a written instrument” for the purposes of article 5(6). The judge had been right so to find.
Mettoy Pension Trustees Ltd v Evans [1991] 2 All ER 513 considered. 

Features

1. Lawyers see increase in will disputes and trustee negligence claims—part one

Gary Barber, partner in the Mills & Reeve private tax team, is seeing a surge in interest in long-term tax planning by wealthy people--despite the 2006 Budget changes which, through the Finance Act 2006, made the creation of accumulation and maintenance trusts no longer attractive. These trusts were once very popular with some of the wealthier sections of society, and there was a view that the Finance Act 2006 might have all but killed off trusts for individuals.

"I”m seeing a greater take-up of lifetime trusts now," Barber says. The ending of the old regime has concentrated the mind on the tax opportunities that are left, he believes. Many wealthy entrepreneurs are realising that they need to start planning younger if they want to pass onassets to their children in a tax-efficient controlled, flexible and protective way.

Consequently, many of his clients in the mid-40 to 60 age group are looking at setting up family trusts sooner rather than later--rather than just the 60 to 70 age category which was the traditional market for setting up lifetime trusts.

Following the Finance Act, the two most commonly used trust structures are probably life interest trusts and “discounted gift” trusts. We will examine both these structures in detail in a subsequent article. They both allow an individual to put a sum equal to the existing inheritance tax threshold (now £312,000) into a trust. There will be no inheritance tax to pay if the settlor survives at least seven years from the gift into the trust.

There may also be income tax and capital gains tax advantages in the trusts. The trusts are entitled to one half of the individual capital gains tax allowance (that is £4,800, or half of £9,600). For income tax purposes, where the beneficiaries are, for example, over 18, are at university and not working, they will have their full personal income tax allowances--now £6,035--to set against any income tax charge.

With a discounted gift trust, the settlor can continue to take an annual return of five per cent from the trust while at the same time moving the capital value and future growth out of his/her estate for inheritance tax purposes.

Barber is seeing some of his more wealthy clients starting to consider other ways of passing wealth on in the same controlled, protective and tax-effective way as trusts. Two possible alternatives to trusts are limited partnerships and family investment companies.

The family beneficiaries receive limited interests in the partnership structure or, alternatively, shares with limited rights in a family investment company. Management over the investment of underlying funds and control over distributions of income and capital can be retained through the parent/settlor’s role in the structures. The shares held by the family beneficiaries, usually the children, can be made non-transferable, preventing them from being dragged into asset valuationsin divorce proceedings if a child gets divorced.

In the next article, we will look at the precise structure of lifetime and discretionary gift trusts.
If you have any comments about this or any other news item or feature, please respond via e-mail to:news@lexisnexis.co.uk

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
 
 
2. Lawyers see increase in will disputes and trustee negligence claims — part two

After the government’s attack on trusts in the 2006 Budget, both tax experts and private individuals were rather nervous about setting up new trusts. But in the two years that have elapsed, two kinds of trust which were still permitted--lifetime trust and discounted gift trusts (DGTs)--have become popular again.

However, Gary Barber, partner in the private tax team at Mills & Reeve, says HM Revenue & Customs is acting in an illogical fashion by continuing to accept DGTS in the way that they are nearly always set up, through an insurance bond. The Prudential and other big insurance companies offer special bonds which can be used for this purpose. The bond is set up and then settled in trust. The settlor/buyer is allowed to draw a return of five per cent per annum from the trust--and the capital and future growth goes to the ultimate beneficiary. If the buyer survives seven years from the gift into trust, then the whole value will be outside of the settlor’s estate for inheritance tax purposes. Generally speaking, the maximum sum that can be settled is equivalent to the inheritance tax allowance limit (otherwise called the Nil Rate Band) which is £312,000 in the current 2008/09 tax year.

Barber says: "If you read the law and apply it, they should not work. If the Revenue’s view was correct, these arrangements would apply for all property, not just insurance based arrangements. Despite this, it looks very much like the arrangements will be permitted to continue to operate in this anomalous way because the government has no will to upset the insurance industry by the proper application of the law."

Barber says the clients have asked him to set up DGTs for them with assets other than insurance bonds but he has been unable to get HM Revenue and Customs to accept this. "If you try to do a DGT with stocks and shares or any asset other than an insurance bond it will not be accepted by the Revenue," he says. "However, there is nothing specific in the legislation that refers to insurance. It would be interesting if someone were to take a case on--but nobody is going to advise their client to incur the costs involved just to prove the point."

Despite the anomaly, the arrangements remain very popular with clients who can keep control of the underlying assets, still obtain a return from the funds and will at the same time pass the capital value and future growth on to children or other beneficiaries. Lifetime trusts also remain popular with clients who wish to make controlled, protective and flexible arrangements for the benefit of children and other beneficiaries.

An individual can establish a lifetime trust every seven years, putting in a sum equal to the inheritance tax allowance (currently £312,000). When the beneficiaries (usually children or grandchildren) reach 18, there may also be an income tax incentive in that the beneficiaries” personal income tax allowances will apply. Barber says that this type of trust is proving very useful to help out with education costs in a tax efficient way--where the alternative would be for the parent to use income (which had, perhaps, been taxed at higher rates of tax) to help support their children through university.

Barber is expecting the limitations imposed by the 2006 legislation to continue to encourage individuals to set up new lifetime trusts earlier and more frequently to maximise the tax benefits while retaining the protection and flexibility of the trust arrangements for the beneficiaries. Wealthy individuals who want to use these trusts can only put away a maximum of the inheritance tax allowance once every seven years. So if someone set up a £312,000 discounted gift trust, they would not be able to set up a lifetime trust with the tax benefits described above as well.
 
Articles

1. Who benefits

Journal Name: Business and Money
Citation: 158 NLJ 1325
Issue Date: 3 October 2008
Summary: Reports on beneficial ownership of matrimonial home and beneficial ownership of trust assets and claims under the Inheritance (Provision for Family and Dependants) Act 1975. In (1) Antony Stow (2) Richard Stow (3) Alhaji Ahmed v (1) Zoe Stow (2) Comissioners for HMRC (3) Estate of Edward Stow (4) Gareth Stow the third defendant (E) and the third claimant (K) were business colleagues. K settled assets on trust (the B Trust) and later used those funds to create a further six settlements (the N settlements). HMRC contended that the B Trust was a sham and E had provided the assets, therefore making E the settlor of the N settlement for tax purposes. HMRC issued notices of determination of tax on the trustees of the N settlement in the amount of £20m.

2. McKelvey (Personal Representative of McKElvey Deceased) v Revenue and Customs Comrs SPC 694

Journal Name: Practical Tax Newsletter
Citation: 29 PTN 20, 160(2)
Issue Date: 26 September 2008
Summary: Discusses the special commissioner decision, which allowed in part the appeal of the deceased’s executor against an HMRC determination charging inheritance tax by virtue of IHTA 1984 section 3A(4). The regulation makes a potentially exempt transfer made less than seven years before the transferor’s death, a chargeable transfer. In determining the amount of “reasonable provision” he adopted the approach taken in personal injury cases.

3. Guide to dissolution of partnerships

Journal Name: Pink News
Citation: Pink News, 22 October 22, 2008
Issue Date: 26 October 2008
Summary: Looks at considerations that should be made following the breaking up of a civil partnership. Any will is automatically revoked on registration of a civil partnership just as it is on marriage. If no will has been made civil partners automatically inherit under the intestacy rules. If a will or the intestacy rules do not make reasonable financial provision then a civil partner can bring a claim against the deceased’s estate under the Inheritance (Provision for Family and Dependants) Act 1975.

4. A bigger band

Journal Name: Taxation
Citation: Taxation, 25 September 2008
Issue Date: 25 September 2008
Summary: Considers some implications of the recently introduced transferable inheritance tax nil rate bands. The ability to transfer the unused element of the inheritance tax nil rate band came into effect on 9 October 2007 in respect of the death of a surviving spouse or civil partner on or after that date. It should be noted that this new rule, introduced by Finance Act 2008.

5. The Inheritance Act, and Baynes v Hedger

Journal Name: Butterworths Family and Child Law Bulletin
Citation: Bulletin No 121, October 2008
Issue Date: 27 October 2008
Summary: Discusses the high court judgment in Baynes v Hedger, in which Lewison J set out the complex family history—involving a same-sex couple sharing the same household, where the deceased had maintained the claimants at the time of death—and provided a detailed analysis of the applicable law.
 
Central to the claim in relation to the same-sex relationship was the issue of whether two people live together in the same household as a question of fact. Lewison J considered that it was not simply a matter of living under the same roof but of the public and private acknowledgment of their society and the mutual protection and support that bound them together. Nor did two people living in the same household necessarily cease to do so because they became physically separated.
The testatrix was a sculptress of considerable repute. She lived at Dunshay Manor in Dorset. She never married and had two children.

She left a will dated 6 July 1977 as amended by two codicils. her testamentary dispositions included a legacy of £2,500 to her goddaughter, the claimant (H), small pecuniary legacies to other friends, a specific devise of the Dunshay Manor estate to the Landmark Trust, a bequest of her residuary estate to the claimant’s mother, M for life, with the remainder to four of M’s children “but not H because she has already benefited”. H and M made claims against the estate under the Inheritance (Family and Dependants) Act 1975, on the ground that the will did not make reasonable provision for them. H, who was in severe financial trouble, claimed that the testatrix had undertaken to assist her. Held – Authority established that the test as to whether two people were “living together” in the same household was (i) whether the relationship was one which had been presented to the outside world openly and unequivocally so that society considered it to be of permanent intent; and (ii) whether the parties had a common life together, both domestically and externally.

On the facts of the instant case, M and the testatrix had had a relationship, which might have amounted to civil partnership, but there was no question but that the two had different main residences. That was the state of affairs that had prevailed since the late 1970s. It was not a temporary situation. There were two separate establishments and two separate domestic economies. M was not being maintained at the time of the testatrix’s death. It followed that her claim failed. The testatrix had been generous to H during her lifetime but had made no firm commitment of any sort. H’s financial plight was largely of her own making. The claims would be dismissed.