STEP/ ITI JOINT SEMINAR
Will drafting and use of Trusts: a practical guide from a legal perspective
O’Connell Brennan Solicitors
8 September 2016
This lecture paper considers quite a broad subject matter, which is diverse and always topical, based around avoiding negligence in Will drafting including traps that practitioners can fall into and tips on how these can best be avoided as well as an overview of common trust types used in estate planning.
For many practitioners, the material should not be new, but in my view it is always useful to re-visit and refresh ourselves on the fundamental principles involved, and to consider the new developments in our area that can give rise to potential difficulties for practitioners, which may lead ultimately to negligence actions.
As practitioners it is important to ensure in so far as possible that in any dispute over a Will, our actions, as solicitors, do not form part of the dispute and that we can demonstrate that we have followed best practice and advised accordingly in dealing with the drafting of Wills and trusts.
Duty of Care
A solicitor’s duty of care commences from the moment a testator gives instructions to prepare his will and continues until his estate is fully administered. It is well established under both Irish and English case law that the duty of care is not only to the testator himself but also to intended beneficiaries and personal representatives of the estate.
As you may be aware there is a significant amount of case law in Ireland and in particular in the UK dealing with cases of negligence claims against firms of solicitors in relation to the drafting of wills. While I don’t propose to go into these cases in any detail, the following are some of the principles which can be distilled from the Irish and English case law.
- If a client is not executing the will in front of you as solicitor you should ensure that clear and detailed instructions are given as to execution including inserting the date on the will, how the will should be executed in compliance with the Succession Act and in relation to who cannot witness a will (Ross v Caunters and Wall v Hegarty and Callanan).
- A solicitor should act quickly on receiving instructions from the client in relation to changing a will (White v Jones).
- If a testator is elderly or is suffering from ill health, a solicitor should act as quickly as possible (Gartside v Sheffield).
- Confirm the legal title to jointly held property (joint tenancy or tenants in common) to establish whether or not the client is in a position to dispose of that property by will (Carr–Glynn v Fearsons).
As practitioners, for the most part the wills that we draft will be relatively straightforward. One of the main skills that we develop is to be alert and alive to cases and issues which may subsequently give rise to dispute. For example, I am from time to time instructed at very short notice to act for individuals who are terminally in hospital and wish to make a will. Often these instructions require action that day or over a weekend as the relevant individual may be given just days to live. In these situations, the issues of concern for me include:
- The testamentary capacity of the client - on each occasion when I meet them.
- Whether there is any issue of undue influence given that the initial request for a visit can come from a family member of the testator/testatrix who might also be a beneficiary under the will.
- I have generally not met the client before and do not know the extent of his/her assets, the nature of those assets or the persons he/she might be expected to benefit under a will.
- The fact that he/she is terminally ill means that it is important to respond promptly to his/her instructions in respect of each document.
I take the following steps to protect myself insofar as possible in relation to a possible negligence claim:
- Drawing up detailed attendances notes on each meeting and telephone calls with the client to address each of the above issues.
- Carrying out a testamentary capacity test on each occasion that I meet with the client for the purposes of signing their testamentary documents.
- Ensuring that there are no family members present at any time when I speak to/meet with the client and not discussing any aspect of his/her will with his/her family members.
- Ensuring at each step that the client understands exactly what he/she is doing and having all relevant documents signed in front of me and another independent witness.
For the purposes of this lecture I have tried to provide a set of guidelines which can be applied to all cases (even where you know the clients well) and which hopefully, if followed, will reduce any liability on foot of a negligence claim.
- Establish what estate a testator/testatrix can dispose of by Will
Section 76 of the Succession Act 1965 (the “Succession Act”) deals with what property can be disposed of by will and states that “a person may by his will executed in accordance with this Act dispose of all property which he is beneficially entitled to at the time of his death and which on his death devolves on his personal representative.”
The word property here includes both real and personal property. It does not however include joint property held under a joint tenancy, which would usually pass by survivorship. A person’s interest in property held jointly as tenants in common may pass under his will. Where property is jointly held, it is important to ask the testator to confirm whether it is held as joint tenants or as tenants in common. In particular where the client is making a specific bequest or legacy of his interest in a property, it is important to verify the details of the title to the property to check whether or not it is property which the testator can dispose of by will and to advise the testator of the position in writing. It can often be difficult to obtain details of the property and in that case I suggest advising the client in writing of the differences and how this may impact on the will and the distribution of the estate.
- Be cautious in dealing with foreign assets
Care should be taken in advising clients in relation to making a will to deal with property in another jurisdiction. It may be possible to dispose of the foreign property under an Irish will if that will would be recognised in the other jurisdiction but clients should always be advised to seek appropriate advice regarding the succession regime and the taxation regime in any foreign jurisdiction in which they hold assets. Typically, it is preferable to make a will in the relevant jurisdiction dealing with foreign assets. In the case of real property, under the international conflict of law rules, the lex situs (law of the State in which the property is situate) will govern succession to the property. In the case of moveable property, the lex domicilii (law of the State in which the testator is domiciled) will govern succession.
The EU Regulation on Succession (No 650/2012) is in force since August 2015 and is changing our approach to dealing with issues including jurisdiction and applicable law. Ireland has opted out of the Regulation (as have the UK and Denmark) but will not escape its effect when our clients and/or their assets are in more than one jurisdiction. The full effect of the Regulation is complex and outside the scope of this lecture paper. However, the relevance of the Regulation can be shown even in one particular context, which may become quite common in Wills that we draft for our clients, namely that a testator is now able to elect to choose the law of his nationality to apply to the succession of his assets in participating member states, even if Ireland is not a participating state. Provisions will be binding on the participating member state. The Regulation is now fully in force, and all of us as practitioners should be making every effort to get to grips with the potentially wide-ranging implications.
A solicitor should also check if the testator has made other wills in any other jurisdiction. A full revocation clause could automatically revoke all testamentary arrangements made by the testator. If it is the intention that the current will should only deal with the testator’s property in Ireland or in all jurisdictions apart from one, this must be expressly declared in the will in order that it doesn’t have the unintentional effect of revoking other wills. The revocation clause should clearly state that the current will is only to revoke any previous wills dealing with the testator’s property in Ireland or in accordance with the testator’s instructions. A testator will usually be relying on his solicitor for direction on this point and the solicitor should ask questions in relation to foreign properties. If a client has property in other jurisdictions, the solicitor should warn them to be careful in relation to the execution of foreign wills, to ensure that such foreign wills do not inadvertently revoke any Irish will. It is vital that a will made in the Irish jurisdiction should not inadvertently revoke a will made in a foreign jurisdiction or vice versa. The solicitor should obtain a copy and translation of any foreign wills in order to confirm this and I would suggest liaising with the foreign lawyer directly to address the issue. This increasingly arises with situations where testators own property in a number of jurisdictions.
Consider the following precedent clauses:
- Will restricted to Irish assets
“This Will is made is on [date] by me [name] of [address] revoking all wills and testamentary dispositions so far only as they relate to my property of every kind in Ireland. I declare this to be my last Will in relation to my property of every kind in Ireland.”
- Revocation with regard to worldwide assets except in relation to assets situate in a particular jurisdiction
“This Will is made is on [date] by me [name] of [address] revoking all former wills and testamentary dispositions so far as they relate to my property of every kind wherever situate except that in [place]. I declare this to be my last Will in relation to my property of every kind wherever situate except that in [place].”
- Establish testamentary capacity
Section 77 of the Succession Act provides that in order for a will to be regarded as valid, the following conditions must be satisfied:
- The testator must be at least 18 years of age or be married; and
- The testator must be of sound disposing mind.
The case of Richards v Allan (2001) WLTR concerned an elderly person, Olive Naylor who died on 31 July 1995 at the age of 84 years and who made a Will on 13 May 1994 appointing the defendant (Miss Allan) as her sole executrix and beneficiary. The claimants challenging the Will were Olive Naylor’s two sisters who would have been entitled to her estate on intestacy. The deceased was not suffering from any mental incapacity but she had a number of mental complaints/illnesses which required that she take a number of drugs. The court heard expert evidence as to whether her medical conditions and medication impaired her capacity to make her Will in 1994. The court took the opportunity to review the case law and reaffirmed the test of testamentary capacity laid down in Banks v Goodfellow in 1870 as follows:
“It is essential to the exercise of such a power that a testator
- shall understand the nature of the act and its effects;
- shall understand the extent of the property of which he is disposing;
- shall be able to comprehend and appreciate the claims to which he ought to give effect, and,
- with a view to the latter object, that no disorder of the mind shall poison his affections, or pervert his sense of right or prevent the exercise of his natural faculties – that no insane delusions shall influence his will in disposing of his property and bring about a disposal of it which, if the mind had been sound, would not have been made”.
In other words the testator must:
- Understand the nature of the act;
- Understand its effect;
- Understand the extent of the property of which he is disposing; and
- Comprehend and appreciate the claims of any person to which he should give effect.
A detailed attendance note should be made confirming the position in relation to the above. Where a death certificate records mental incapacity (e.g. alzheimers or dementia), the Probate Office will seek evidence of testamentary capacity so an attendance note may be helpful/essential in future.
Testamentary capacity is a legal rather than a medical test so if a medical doctor is assisting for the purposes of establishing capacity, ensure that he/she addresses the above issues with the client and in his/her report. In some cases, for example, where testators make wills in nursing homes shortly before their death it may be appropriate to have a doctor present at the time when the solicitor is taking instructions from the testator and at the time when the testator signs his/her will, in order to carry out a medical test for testamentary capacity.
- Ensure execution requirements of the Succession Act are complied with
Section 78 of the Succession Act sets out the requirements which must be satisfied in order to make a valid will and provides that the following conditions must be satisfied:
- It must be in writing;
- It must be signed by the testator or by some person instructed by him at the foot or end of the will;
- The testator’s signature must be made or acknowledged by the testator in the presence of each of two or more witnesses, present at the same time, who must attest the signature of the testator by their own signature. The witnesses are not required to sign in the presence of each other.
While there are no requirements as to the capacity of the witnesses to a will, it is preferable that the witness chosen is an adult and mentally competent for the purposes of swearing a future affidavit.
Section 78(5) of the Succession Act states “a signature should not be operative to give effect to any disposition or direction inserted after the signature is made.” It is important therefore if making any handwritten amendments to a typed will, that the attestation clause makes it clear that all signatures were added after the making of such amendments.
- Ensure the Will contains all Essential Elements
Drafting a will is essentially building a structure using a set of building blocks. Certain wills may be very straightforward but as long as they contain all of the necessary elements and have the appropriate clarity, very little should go wrong. More complex wills can involve trusts but still require the necessary building blocks and the same basis of construction.
While complex will trusts may run to many pages, the actually setting up of the trust may only be a short paragraph and the remaining text may relate to the inclusion of powers for trustees etc. It is important that a solicitor identifies exactly what the testator wishes to accomplish by a will rather than hoping that a precedent will somehow fit the bill. Every will should contain the following basic elements:
- Name and address of testator;
- Revocation of previous wills and testamentary dispositions (codicils) as per instructions;
- Appointment of executors;
- Appointment of trustees (if required);
- Appointment of guardians (if required);
- Provision for specific or pecuniary legacies (as desired);
- The establishment of a trust (if required) whether it is of a specific assets or trust for the residue of the estate;
- A clear residuary clause that deals with all foreseeable eventualities;
- Enabling clauses such as a power of advancement, appropriation, apportionment and miscellaneous (as may be required);
- Additional powers of executors and trustees (as may be required); and
- The date, the signature of the testator, an attestation clause, the signature of the two witnesses with their addresses and descriptions.
Obviously not all of the above elements are required in every single will but it is a good checklist. It gives the will a structure from which to operate and thus lessens the possibility of error. This is particularly true in the case of emergency wills drafted at short notice without access to precedents.
- Take instructions from a Client and advise them of any rights of family members and third parties
In terms of taking instructions from a client, it is extremely important not just to follow exactly their wishes but to probe the reasons for testamentary wishes and to take full details in relation to their family, the nature and value of their assets and liabilities. It is important to advise clients of their obligations to a spouse, civil partner, children, co-habitants and the potential rights of any third parties to their estate. The following issues may arise.
- Testamentary freedom
Apart from the title issues mentioned earlier and the issues that might arise in relation to jointly held property, it is extremely important to advise clients in relation to their obligations under the Succession Act to a spouse, children or civil partner or a qualifying co-habitant.
- Automatic revocation by marriage or civil partnership
A will is revoked by marriage or a civil partnership but not by divorce or dissolution of a civil partnership. In the event of a client’s divorce or dissolution of a civil partnership, testamentary arrangements will need to be reviewed.
It is very important to advise single or widowed clients that a subsequent marriage or civil partnership will revoke their wills unless such a will is made in contemplation of a particular marriage or civil partnership. Failure to advise a client of this could well give rise to very difficult circumstances if a new will is not made following the marriage or civil partnership. For example, where a subsequently married client dies intestate, following the revocation of his will by marriage.
Just to note that, since the Marriage Act 2015 a civil partnership is dissolved when those same civil partners subsequently marry. However, section 17 of the Marriage Act 2015 amends section 85 of the Succession Act by inserting the following subsection 1A:
“Notwithstanding subsection (1), where the parties to a subsisting civil partnership with each other marry each other, a will made in contemplation of entry into the civil partnership or during the civil partnership by a testator who is a party to the marriage shall not be revoked by that marriage and a reference in the will to the testator’s civil partner shall be construed as a reference to the testator’s spouse.”
- Promissory estoppel/legitimate expectation
Where relevant, it is important to establish the facts to see if the testator is bound to leave certain assets to certain beneficiaries.
In a recent High Court decision in Naylor v Maher (September 2012), Mr Justice O’Keeffe held that the plaintiff in a case, William Naylor established a legal entitlement to a 120 acre farm of the estate of a man who turned out to be his biological father (although the plaintiff only discovered this after his death). The basis for the legal entitlement was that the testator had promised to leave the farm to the plaintiff on numerous occasions and the plaintiff had received little remuneration for his work on the farm and had worked on the farm at the testator’s request and to the plaintiff’s detriment. The plaintiff also alleged undue influence against his sister to whom the farm had been left but this claim did not succeed.
- Spouses & Civil Partners
As you are all aware, the Succession Act has been amended substantially by the Civil Partnership and Certain Rights and Obligations of Co-Habitants Act 2010 (the “2010 Act”). As you know, originally inheritance rights only applied to spouses but the 2010 Act extended the spousal inheritance rights to civil partners. A surviving spouse or civil partner will be entitled to one half of the estate if the testator dies leaving a spouse/civil partner and no children or to one third of the estate if the testator dies leaving a spouse/civil partner and children. As you know, if no provision is made in a will for a spouse/civil partner, the legal right share vests in the surviving spouse/civil partner automatically. In certain circumstances, it may be preferable to leave a smaller legacy so that the surviving spouse/civil partner is required to elect between the legacy and the legal right share.
Interestingly, the legal position in relation to the legal right share of a surviving civil partner can be contrasted with that of a surviving spouse in the context of a Section 117 claim. Such a claim cannot affect the legal right share of a surviving spouse. The legislation provides that an Order under Section 117 shall not affect the legal right share of the surviving civil partner unless the Court, after consideration of all of the circumstances, is of the opinion that it would unjust not to make the Order.
A civil partner of a deceased who dies intestate has a right to the same share as a spouse of an intestate deceased:
- where a person dies leaving a spouse/civil partner and no issue, the surviving spouse/civil partner takes the whole estate;
- where a person dies leaving a spouse/civil partner and issue, the surviving spouse/civil partner takes two thirds of the estate and remainder is distributed among the issue in accordance with the Succession Act.
Interestingly, while the entitlement of a surviving spouse on intestacy is fixed and not subject to challenge or variation, this is not necessarily the case for civil partners. Children of the deceased civil partner may under Section 67A of the Succession Act take a claim for further provision out of the estate of their deceased parent, which may reduce the intestate share of the surviving civil partner (analogous to a Section 117 claim but the criteria here are more explicit in the factors to be considered by the Court, as set out in the legislation – including any prior provision made for the child by the intestate, the age and financial position of the child, the financial position of the intestate and the intestate’s obligations to the surviving civil partner).
As with marriage, a will made prior to the registration of a civil partnership will be revoked by subsequent registration unless made in contemplation of the registration of that particular civil partnership.
As with divorce, once the decree of dissolution of civil partnership has been granted, the automatic rights of inheritance cease and are extinguished.
Finally, under the Judicial Separation and Divorce legislation there exists a residual provision where a spouse can apply to court for provision from the estate of their former estranged spouse save where blocking orders have been made by the court. Section 127 of the 2010 Act extends this possibility to civil partners.
Where making a will for a client it is important to know exactly their status in terms of single, married or in a civil partnership, if they have been separated or divorced, or if they have been involved in a civil partnership which has been dissolved. It is important to know what rights (if any) a former spouse or civil partner may have. I suggest in all circumstances obtaining a copy of the legal documentation relating to a client’s separation, divorce or dissolution of a civil partnership to establish whether any blocking orders have been made.
- Co-Habiting Couples
In relation to co-habitants, a qualified co-habitant may apply to court for provision out of the estate of his/her deceased co-habitant where inadequate or no provision has been made for them by the deceased co-habitant. The court may on application to it by a qualified co-habitant make provision for that person from the estate of a deceased co-habitant if the court is of the opinion that the deceased co-habitant failed to make adequate or any provision in accordance with his means whether by will or otherwise. The court is required to take into account various factors including the legal rights of any surviving spouse, civil partner or children of the deceased. Where a court orders provision for an applicant co-habitant, the total value of the provision ordered may not exceed the share to which the applicant would have been entitled as a legal right or under the rules of intestacy had the couples been married or civil partners of each other. A qualified co-habitant is defined in the 2010 Act as a person co-habiting with another, with whom he/she is not related, or within the prohibited degrees of relationship, or married to or civil partners with one another, and living together in an “intimate and committed relationship” for two or more years if they are parents of one or more dependent children or five or more years in any other case.
In my view, it is also important to advise a client that if any of their children are in co-habiting relationships that the child and partner may be regarded as qualifying co-habitants and may acquire certain succession rights in relation to each other.
I have certainly met clients who are concerned about leaving, for example, a family farm to a child who is in a qualified co-habiting relationship in the fear that if the child subsequently dies, that the surviving qualifying co-habitant may have a claim against the family farm. In those circumstances, it may be an option for a testator to leave the child a life interest in the farm to ensure that the farm itself does not form part of the estate of the child and would not be the subject of a claim, if any is brought against the child’s estate by a surviving co-habitant.
- The value of detailed attendance notes and written advice
As a solicitor, when drafting a will, it is important to always be alert to the possibility of a dispute even in the most unlikely of cases. Disputes in relation to wills can take many forms including Section 90 construction suits, section 117 claims, claims of non-observance of the execution formalities, lack of capacity, duress and/or undue influence. You may have to give evidence in a case a number of years after the testator’s death and after the Will had been drawn up. While you may remember individual cases, it is extremely helpful to have detailed attendance notes recording all meetings and significant telephone calls that you might have with the client if appropriate in the circumstances.
In relation to possible undue influence, I would usually insist on meeting a testator on their own (if appropriate). It is worthwhile probing with the testator exactly why a particular beneficiary is to benefit. If you have any misgivings, I would suggest asking the question of the testator as to whether or not they feel under any pressure or undue influence. It is particular relevant in the care of an elderly or ill testator who may be less able to withstand influence, in particular where a testator is dependent on an individual. Full inquiries should be made where possible to refute any allegation of undue influence. If you are unsure, I would suggest recording any misgivings in an attendance note.
In the case of elderly clients, I refer you to the guidelines for solicitors in drafting wills for elderly clients published in the Law Society Gazette January/February 2009 and to the guidelines for transactions involving vulnerable/older adults (to include requests for visits to residential care settings) published in the Law Society Gazette March 2012.
If a client is insistent on proceeding in a particular way despite your advice, I would record your advice in an attendance note and preferably with a follow-up letter to the client confirming your advice.
Other claims arise under Section 117 of the Succession Act and again it is important to record not just that you discussed section 117 in the case of a client but the detailed advices that you gave and the reason that a testator client may have given for not providing for the child or children. It may also be worthwhile recording your advices in writing to the client.
8. Taxation Advice
It is not sufficient for the solicitor to take instructions from a client and to draft a will exactly in accordance with those circumstances without taking the taxation consequences into account. Should a beneficiary face a substantial charge to tax that could have been avoided had the solicitor given proper tax and estate planning advice it is quite possible that such a beneficiary may have an action against the solicitor. While all solicitors should have an understanding of the tax implications of making a will (in particular inheritance tax), if the solicitor does not feel competent to give tax advice in particular circumstances they should advise the client to engage the services of a specialist tax advisor.
9. Wills Summary
I would hope if the following steps were followed it should reduce the likelihood of any negligence claim:
- Take instructions from the testator in detail and record these instructions in writing;
- Advise the testator as to the possibility of achieving his wishes and intentions and any legal restrictions that may be relevant to his circumstances. In particular if your testator client has declined to follow advices, for example in relation to Section 117 of the Succession Act, record the advices given in a detailed attendance note (and/or letter of advice) and the decision of the testator and his or her reasons;
- Draft the will to accurately to put in place the final instructions of the testator;
- Read the will from beginning to end to ensure that it makes sense and if in any doubt, ask somebody else to review the will. It is very tempting when using a precedent document to dip in and out of particular clauses but it is important to read the will from beginning to end.
- Ensure that the will is kept safely or if it has been given to the testator that that is accurately recorded on your file.
- Ensure that the will is properly executed in accordance with the provisions of the Succession Act 1965 and that none of the witnesses to the will are in any way compromised, that no beneficiary or spouse of a beneficiary acts as witness.
- In terms of execution of the will, the best way to ensure that a will is properly executed in compliance with the Succession Act is for the solicitor to supervise the execution of the will. This is not always achievable and in that case, make sure that you have given explicit and detailed instructions in relation to due execution in case it is alleged at a later date that it wasn’t properly executed.
- Prior to the testator executing the will ensure that he reads it over himself or that it is read over and fully explained. The amount of explanation will vary depending on the legal complexity of the will. It is not absolutely necessary that a testator understands all of the legal nuances of a particular will but he that he should be familiar with the general effect.
- Finally, keep detailed attendance notes of meetings and/or telephone discussions with your client.
It is important for all solicitors to ensure that they take proper instructions, give relevant legal and tax advice and note these in a detailed attendance note. The will should then be drafted based on the instructions received. While precedents are helpful in drafting wills it is important that they are not over-relied on and that the will is read in its entirety prior to execution to ensure that it make sense.
The role of a solicitor is to take a structured and considered approach to will drafting on behalf of the client and to provide advice to the clients in relation to appropriate structures where necessary (for example tax planning, trusts for minor beneficiaries, a trust for a beneficiary with special needs). In advising a client making his will, I usually suggest that the client focuses on a short time frame and consider what they would like to happen in the event of their death within the next three to five years. It is difficult to properly predict circumstances within a longer time frame. I would normally suggest to clients that they review their wills every three to five years. It may not be necessary to change the will in any way at that stage but it can be helpful to review at that frequency to ensure that any changes in personal or family circumstances or relevant tax changes can be taken into account.
10. Common Trust Types used in Estate Planning
Trusts are flexible and valuable tools in estate planning providing a robust protective mechanism, to retain control over and protect capital, and protect individuals, by delaying the vesting of significant assets in an intended beneficiary until the time is right.
While there are many different types of trust, a discretionary trust is the most common and most flexible structure in estate planning. A discretionary trust involves property being held by trustees to apply the income and capital for the benefit of members of a class of beneficiaries, who are specified in the trust deed, in such proportions as the trustees in their absolute discretion see fit. The beneficiaries have no interest in the fund for legal or taxation purposes until income or capital is appointed out of the trust to them. A non-binding letter of wishes from the settlor to the trustees provides guidelines for the administration of the trust.
In drafting a trust deed the first issue to consider is what type of trust is required. The various types of trusts are dealt with in more detail below. Just to note that precedents, while helpful, should always be adapted to suit the particular case and when using precedents from publications outside of Ireland particular care should be taken to ensure all utilised clauses and provisions are valid under Irish law and appropriate given the statutory powers and provisions in Ireland.
There may be a number of parts to any trust deed but clauses that should be given consideration whether you are drafting an inter vivos trust or a will trust include the following:
- Substantive Trust
- Trusts of Added Property
- Ultimate Default Trusts
- Charging Clauses
- Payment of Expenses
- Appointment Retirements and Removal of Trustees
- Choice of Forum and Administration
- Exclusion of Liability
The statutory powers of trustees can be limited in relation to certain actions but are very broad where there is a trust of land. The actual powers that may be required will vary depending on the purpose of the trust, the disposition of the beneficiaries and the assets to be held upon the trusts.
There is now jurisdiction in Ireland to vary the provisions of a trust but this could prove expensive as a court application is required. Once the trust is executed there are significant taxation consequences to varying it, winding it up or resettling the assets on new trusts.
It is also important when drafting to distinguish between the trust provisions and the trust powers. The trust powers are often included in the main body of the deed, but can easily be misinterpreted as trust provisions and therefore differentiating the two by including the powers in a schedule to the deed is preferable.
Types of Trusts
Simple or bare trusts consist of trustees holding property upon trust for a person beneficially entitled absolutely to the assets in the trust with the trustee having no active duties to perform and simply holding the legal title to the property. The beneficial owner can call for the property to be transferred to him/her absolutely at any time. This type of trust is often used where minor beneficiaries are entitled to assets but do not have the legal capacity to deal with the assets. If it is intended to benefit a minor beneficiary under a bare trust, particular care should be taken as there are taxation consequences. It should also be noted that a minor cannot give directions or provide indemnities. A bare trust may also be used where an individual purchases shares but does not wish his/her interest to become a matter of public record. The true owner will have the shares registered in the name of a bare nominee trustee whose only function is to act as the legal owner of the shares. Generally for taxation purposes all the actions of the trustee are attributed directly to and treated as those of the beneficial owner. It is important that the trust is documented to avoid confusion at a later stage particularly when dealing with the Revenue Commissioners on taxation issues.
(b) Fixed Trusts
Under a fixed trust the beneficiary has a fixed share of the income or capital of the settlement. For example a life interest gives the beneficiary a right to the income of the trust fund for a certain period. This can be for a duration of the life of the life tenant or some other individual or for a specific period. The interest of the life tenant is limited and not absolute and it does not extend to the capital value of the assets held in trust, although power can be given to the trustees to advance capital to a person who has a limited interest. The trust can provide for a succession of life interests until a person (the remainderman) becomes entitled on the termination of the life interests. The remainderman’s interest is absolute. Where the life interest relates to land the LCLR Act 2009 applies and the relevant provisions should be reviewed in any such case. A life interest trust may be wound up with the consent of all of the beneficiaries (life tenant and remainderman).
A life interest may be considered appropriate in the following circumstances:
- A testator may be married for a second time but have children from a first marriage. Consideration could be given to providing the second spouse with a life interest in the estate with remainder to the children of the first marriage. This might be appropriate where the main asset in the estate is the family home of the first marriage.
- A parent might give a child a life interest when due to the disposition of the child it might be considered appropriate to protect the capital during the lifetime of the child for that child’s benefit.
In a fixed trust each beneficiary may also have a fixed entitlement to a specific share or interest in the trust property. For example the trustees might hold properties equally between children of the settlor or testator to be paid to them upon reaching a specified age. Many parents when drafting wills wish to delay their children taking the capital of their estates and can do so where the clause in the will is drafted so that the interest is taken by the children who survive the testator “and reach the age of 18 (or 21) (or 25) years”. The trustees may be given the power to advance capital before the specified age if considered appropriate and the beneficiaries may be given the annual income of the trust (or the income could be applied for their benefit).
A discretionary trust arises where trust property is held by trustees on trust to apply the income or capital or both for the benefit of members of a class of beneficiaries specified in the trust deed in such proportions as the trustees in their absolute discretion think fit. The trustees may have power to accumulate income. The beneficiaries have no interest in the fund for legal or taxation purposes. They cannot compel the trustees to exercise their discretion to make distributions from the trust fund in their favour. When discretion is given to trustees under the terms of a trust it is usually also appropriate to ensure that the settlor provides a letter of wishes which is not binding on the trustees but indicates to the trustees how the settlor/testator would wish the trust fund to be dealt with in given circumstances. It is important to advise the settlor/testator that the letter of wishes has no binding effect and that the letter itself recites this fact.
It should be ensured that the trustees have appropriate powers to administer the trust. Consideration might be given to the trustees having power to appoint property to the trustees of other trusts if appropriate. The testator/settlor must be appropriately advised in relation to the terms of the trust and the powers given to the trustees.
Although discretionary trusts have a cost in taxation terms it may be appropriate in a number of circumstances depending on the disposition and age of beneficiaries as the particular needs of each beneficiary can be considered by the trustees at any particular time during the trust period. A discretionary trust may be considered appropriate in the following circumstances:
- Parents with young children might provide for a discretionary trust in their Wills on the death of the survivor until their youngest child reaches the age of 20 followed by a specific trust until an older age. Once the youngest child reaches the age of 21 discretionary trust tax may apply. The discretionary trust may continue if required by the testator after the age of 20 and whether this is recommended can depend on the value of the estate and the disposition of the child/children. From the point of view of testators with second families, this trust structure can facilitate providing for minor children of a second marriage where necessary, with the balance of the trust fund being divided equally between all the children at the end of the trust period. It may also be useful in the context of a second spouse and children of a former marriage.
- Parents with a child with a disability or any intended beneficiary with a disability may provide for a discretionary trust. Discretionary trust tax may not apply under the provisions of the Capital Acquisitions Tax Consolidation Act and appointments may be made solely when required in order to preserve the beneficiary’s entitlement to State benefits. It should be ensured that all the beneficiaries in the trust are entitled to relief.
- Parents with children whom they consider cannot manage their own affairs for other reasons besides a disability may consider it appropriate to provide for a discretionary trust in their Will and this may also be exempt from discretionary trust tax depending on the circumstances.
Saunders v Vautier (1841) Cr & Ph 240. Section 24(6) LCLR Act 2009 provides that the introduction of variation of trust legislation does not affect any rule of law relating to the termination or revocation of a trust.
election under Section 115 of the Succession Act.
It should be noted that the charge to capital acquisitions tax will not arise in relation to the capital until the beneficiary takes the interest as the beneficiary is not “beneficially entitled in possession” but consideration should be given to whether a discretionary trust tax issue arises.
when he/she wishes this power to be exercised. The letter will not be legally binding on the trustees.