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

Example 1

By Will, T who dies in October 1999 settles the whole of his estate on trust

• for his widow, W, for life, and
• on her death the capital to her son, S, absolutely if he is then living, but
• if he is then dead, the capital to his children.

S and W make an IoV attempting to bring the trust to an end in part in order to vest £200,000 in S absolutely and to assign S's interest in the remainder to X.

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

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

Accordingly, in the above example, you can regard

• W as having validly assigned her life interest in £200,000 to S, who will receive the income from
• that capital during his life, and
• S as having validly assigned to X his defeasible interest in the residue of the trust fund after W’s death if he survives her.

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

The result is that the IoV can be treated as partially effective on execution because W's life interest in £200,000 has been redirected. The spouse exemption on T's death is reduced accordingly.

What further effect the IOV has depends on whether S survives W

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

• the fund representing the £200,000 then vests in S absolutely, and
• X takes the residue

• but if S dies in W’s lifetime leaving children

• X’s interest is defeated
• S’s estate continues to receive the income on the £200,000 fund during W’s lifetime, and
• on W’s death that income interest in S’s estate ceases and his children take the whole of the capital under the unvaried provisions of T’s Will.

Example 2

T’s Will Trusts are the same as in Example 1.

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

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