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Beneficiaries, Trusts, Wills

Do trusts still work?

I was asked this week, in a round about way, whether trusts “still work”?  The question was actually couched as to whether I was aware of any statistics about how many trusts are wound up.  I am not aware of any statistics along those lines.  However, from my own experience I still settle more trusts than I wind up.  When trusts are wound up, the general drivers seem to be that the trust is no longer required (for example the purpose was creditor protection and the perceived risk no longer exists), administration costs are too high relative to recognised benefits, the settlors and / or trustees are emigrating and there is concern about double taxation; and more recently the anticipated residential care subsidy is not available and so a “trust reversal” is being undertaken before a new application is made.

So some reasons not to keep a trust – but what are the reasons to keep one? A constant theme is concern, regardless of the state of the settlors’ relationship, about children’s relationships and a strong desire to ensure that trust assets do not end up in the hands of a disenfranchised spouse or partner. Another is testamentary freedom. Wills are important, and a lovely idea. However, the will-maker has no ultimate control over his or her estate, no matter how carefully the will is drafted, due in no small part to the provisions of the Property (Relationships) Act 1976 that apply to wills and the Family Protection Act 1955. This is demonstrated by the Court of Appeal decision in Thurston v Thurston (note this is a long running litigation and there are other related decisions).   In the case regarding his will and the Thurston Family Trust (the Trust) Mr Thurston’s wife, son and grandchildren all contested in various ways the bequests each received under Mr Thurston’s will.

The upshot of the carefully drafted decision (that also touches on the Trust) was that Mr Thurston’s will was substantially re-written.

Compare this outcome with the decision in Penson v Forbes where Ms Penson challenged a decision to remove her as a beneficiary of the S I Jack Family Trust settled by her mother Mrs Jack. Prior to her death the trustees of the S I Jack Family Trust, who included Mrs Jack, removed Ms Penson as a beneficiary. Mrs Jack died soon after.

At the time of Mrs Jack’s death the trust in question owned her family home, which had been fully gifted.

Ms Penson claimed variously that the trustees acted in breach of trust in removing her as a beneficiary (breach of fiduciary duty, failure to act even handedly); and that the trustees had committed a fraud on a power. The decision is interesting reading as there is little guidance as to what matters trustees must take into consideration when exercising a power to remove a beneficiary. The end result was that Ms Penson’s claim was struck out as having no prospect of success.

Accordingly, Mrs Jack’s wishes were achieved. However, had Mrs Jack instead attempted to exclude her daughter from a testamentary disposition the result might have been quite different if say, Ms Peson’s claim was pursuant to the Family Protection Act.

Food for thought…

References:

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