In Wright v Gater [2011] EWHC 2881 (Ch), Mr Justice Norris made some very helpful comments on the court’s approach to applications under the Variation of Trusts Act 1958 (VTA) which seek to defer a minor’s entitlement to capital beyond 18.

This application was made on behalf of Rory, the three-year-old son of Kieran. Under the intestacy rules Rory had an entitlement on the statutory trusts to the estate of his father.

Kieran’s estate included an entitlement to the unadministered estate of his father, Edward. Edward had died intestate shortly before Kieran passed away. Edward’s estate was valued at £514,600 and no inheritance tax (IHT) was payable because he had the benefit of a full transferred nil-rate band from his predeceased wife. The IHT payable on the combined estates by Kieran’s administrators was about £89,000.

Rory’s mother, Ellen, applied to the court for approval under the VTA of a post-death variation which would:While happy with the IHT saving element, Norris J was unhappy with both the terms of the proposed deferral and with certain unsatisfactory features of the application process:

  • The application had been made as a paper application asking for approval of the variation without a hearing. Norris J considered that all variation applications (no matter how apparently straightforward) ought to be considered at a hearing where there is an opportunity to test the evidence upon which the application is founded.
  • There was no separate representation of Rory’s interests. Ellen, as one of Kieran’s personal representatives, was putting forward the proposed variation but was also Rory’s litigation friend. Counsel was in the same position, having both drafted the arrangement and written an independent opinion in support of it on Rory’s behalf, without the advantage of any of the proposals being tested in negotiation or subjected to contrary argument.
Rory’s litigation friend should have been a family friend or a professional (such as a solicitor) who had instructed separate counsel to undertake entirely independent scrutiny.
  • Nobody was looking out for the interests of unrepresented beneficiaries, in particular those entitled if Rory failed to obtain a vested interest under the intestacy rules (the ‘ultimate beneficiaries’), or fulfilling the role of general oversight.

  • substitute Rory for Kieran as the beneficiary of Edward’s estate, thus avoiding the IHT payable if the estate passed to Kieran; and
  • defer Rory’s entitlement to 30 because Ellen thought it was inappropriate for an 18-year-old to have control of income and capital.

The terms of the proposed deferral

When exercising its jurisdiction under the VTA, the court must be satisfied that the arrangement is for the benefit of the minor. It is not sufficient that the proposal does no harm, it must confer a real benefit. While ‘benefit’ is generally financial in nature it does not have to be. However, when assessing non-financial aspects, a judge has to be careful not simply to apply personal preferences and perceptions. One step towards making the assessment of non-financial benefit objective is to ask whether a prudent adult, motivated by intelligent self-interest, and after sustained consideration of the proposed trusts and powers and the circumstances in which they may fall to be implemented, would be likely to accept the proposal.

Here there was a clear financial benefit in achieving an immediate IHT saving of £89,000. However, there were significant financial disadvantages for Rory in deferring his entitlement to income and capital for 12 years and imposing the IHT-relevant property regime on the settlement leading to anniversary and exit charges.

Those advocating the arrangement contended that this financial disadvantage was cancelled out by the moral benefit conferred on Rory by preventing him being in absolute control of income or capital until he is 30. But was that correct?

Norris J accepted that there are numerous cases where the court has taken the view that a deferment of vesting constituted a ‘benefit’. However, all these cases turned on particular features (such as the proven personal characteristics of the beneficiary, the size of the fund, the life circumstance of the beneficiary and the family context in which the existing trusts would be implemented) which gave rise to risks which any reasonable person would regard as real, and to which the proposed variation provides a sufficient and proportionate response.

Adopting that approach, Norris J could not provide consent on Rory’s behalf to the originally proposed arrangement:

  • It came close to (if not to cross) the line between ‘variation’ and ‘resettlement’. Nothing remained of the original statutory trusts.
  • There was nothing in the character or setting in the life of this three-year-old toddler to suggest that it was a real risk that he would be incapable of dealing with any income or capital inherited from his grandfather without supervision before he attained 30.
  • It was wrong to approve the establishment of a long-term trust where close family members controlled the purse strings. Rory had the right to have his independence and autonomy as a young adult respected.

Revised arrangement

Norris J approved a revised arrangement in which:

  • A professional was included as a trustee;
  • Rory became entitled to income contingently on attaining 18;
  • Rory became entitled to 10% of the fund contingently on attaining 21;
  • Rory became entitled to the balance of the fund contingently on attaining 25; and
  • Default trusts were included to cover the possibility of Rory failing to achieve a vested interest.

Norris J accepted that, if the statutory trusts had remained unaltered, Rory would have had unrestricted access to about £750,000 at his 18th birthday and considered that any reasonable person would regard that as posing risks for Rory. He took judicial notice of the frequency with which testators and donors acting on competent advice employed ‘accumulation and maintenance trusts’ to moderate these risks (at least before the Finance Act 2006). Parliament had looked favourably upon trusts of the type contained in the arrangement (see most recently section 71D of the Inheritance Tax Act 1984).

The revised arrangement provided proportionate measures to address those risks and went no further than was necessary to do so. The practical effect of the arrangement would be to introduce Rory gradually to control of his wealth.

Professor Lesley King,College of Law