Update: wills, probate and trusts

Executors are often surprised to find that they cannot stand down until they have finished the job of administering the estate. In some, particularly long running, estates this can lead to court applications to appoint replacement executors. Such applications may be uncontroversial and supported by beneficiaries. In other cases, the application may be disputed. One such case was The Thomas and Agnes Carvel Foundation v Carvel & Anor [2007] EWHC 1314 (Ch).

In 1988, Thomas and Agnes Carvel, who had made a large fortune in the ice cream business in the US, executed mutual mirror image wills leaving their estates to each other for life with remainder to the claimant (the foundation). Following Thomas' death in 1990 his 1988 will was proved in New York.

In 1995 Agnes made a new will revoking all former wills, appointing her niece Pamela, the first defendant, as sole executrix and leaving her estate to the second defendant. Agnes died in London in August 1998. A few months later her 1995 will was proved by Pamela using the excepted estates procedure.

The hearing in May 2007 of the foundation's application (a) to replace Pamela as sole executrix of the estate with a neutral independent executor under s50 Administration of Justice Act 1985 or Section 1 Judicial Trustees Act 1896 and (b) for its beneficial entitlement to the estate followed years of litigation on both sides of the Atlantic. In the course of this the foundation had obtained an order in the New York courts that the reciprocal agreement between Thomas and Agnes not to revoke their wills was enforceable, while Pamela had obtained an order of the Chancery Division for £8m to be paid to her from the estate for expenses incurred on Agnes' behalf during her lifetime and as personal representative. The order had been registered in various US courts, and injunctions preventing the payment of the £8m issued.

Administration of Justice Act 1985

The relevant parts of s50 of the Administration of Justice Act 1985 (ASA) provide:

(1) 'Where an application relating to the estate of a deceased person is made to the High Court. . . by or on behalf of a personal representative of the deceased or a beneficiary of the estate, the court may in its discretion (a) appoint a person . . . to act as personal representative of the deceased in place of the existing personal representative.'

(4) Where an application . . . is made to the court under subsection (1), the court may if it thinks fit, proceed as if the application were, or included, an application for the appointment under the Judicial Trustees Act 1896 of a judicial trustee in relation to that estate.

(5) In this section 'beneficiary', in relation to the estate of a deceased person means a person who under the will of the deceased . . . is beneficially interested in the estate.'

The Court held that:

(1) The foundation was not entitled to make the application under s50 AJA since 'the will' in this context could only refer to the will of the second testator (Agnes) of which it was not a beneficiary.

(2) The agreement between Thomas and Agnes not to revoke their wills created a trust to carry out the effect of the mutual wills which came into effect on Thomas' death. In this situation the second testator was a trustee and a person claiming to enforce the trust was, therefore, a beneficiary for the purposes of the 1896 Act. The foundation was, therefore, entitled to apply for Pamela to be removed and replaced.

The court went on to say that the guiding principle in deciding whether a trustee should be replaced was the welfare of the beneficiaries '“ a principle which Pamela, whose actions had been calculated to serve her own purposes rather than promote those of the foundation, had wholly disregarded. She was, therefore, removed and the order to pay her £8m, which had been made without notice to any other party or consideration of the merits, set aside.

Sillett v Meek

The issue in Sillett v Meek [2007] EWHC 1169 (Ch) was whether the transfer of a deceased's bank account (of c£300,000) into the joint names of herself and Miss Meek (her companion and carer) two years before her death was intended as a gift or had been done for administrative convenience.

The judge decided that, on the totality of the evidence, the deceased who had not clearly specified her intentions had not really intended Miss Meek to take the account beneficially. The account, therefore, remained part of her estate.

Having decided that there was no gift, it was unnecessary to consider the second issue of whether the gift was made under undue influence. The judge nevertheless went on to say that, had there been a gift, he would have found that it was made of the deceased's own free will.

The case is a reminder of the difficulties that can arise when administering estates where there is a joint account previously in a sole name, especially where the transfer can be explained as having been made to facilitate payment of expenses, such as nursing home fees.

In an ideal world, the transferor would record his/her intention, and bank mandates, asking whether the transferee is to be a joint tenant, tenant in common or merely a third party signatory, would prompt a clear response.

Often, and as in Sillett v Meek, any dispute will have to be resolved in the absence of the transferor, relying on oral evidence.

• Catherine McAleavey is a partner in the private client team at Farrer & Co

Practitioners will be relieved to hear that following lobbying by the society of trust and estate practitioners (STEP) and the Law Society, the Treasury has agreed to make significant changes to the proposed money laundering regulations.

The UK, having adopted the EU's Third Money Laundering Directive in 2005 are obliged to implement it by December 2007.

However, there were grave concerns on the part of trust lawyers about the definition of ' beneficial ownership ' contained in the Draft Money Laundering Regulations 2007 attached to HM Treasury's January 2007 Consultation Paper on implementation. It was felt that the wording did not reflect the many different situations and complexities which arise in connection with the UK's use of trusts under common law, and in fact that it was so unclear as to make it impossible for solicitors to identify those who should be the subject of due diligence.

In response to a letter from the Law Society, the Treasury have formulated an extended definition of beneficial ownership which both the Law Society and STEP broadly agree gives the necessary clarity for trustees. In essence, in relation to trusts, due diligence will only be required where a person has either a vested interest in at least 25 per cent of trust capital or has control over the trust.

' Control' is defined in the regulations as being a power exercisable alone or jointly or with the consent of another, to do various things including dispose of trust property, vary the trusts or to direct or veto the exercise of such powers.

In addition the beneficial owner of the estate of a deceased person will be the personal representative while the estate remains in administration.

Both the Law Society and STEP did have one residual concern about the application of the definition of control to cases where beneficiaries could collectively take action, for example, to terminate the trust under the rule in Saunders v Vautier [1841] EWHC Ch J82 or to direct a trustee to retire under s19 Trust of Land and Appointment of Trustees Act 1996.

This would have meant individually identifying every beneficiary in such a case and it is understood that the regulations are to be further amended to exclude such situations.

Trustees' expenses

In Clays Trustees v HMRC [2007] WTLR 644, the Special Commissioners had to decide whether it was proper for trustees as a matter of general law to attribute part of various expenses of administering the trust to income thereby avoiding income tax on such proportion.The trust in question was very large with a substantial income, and in 2000/1 the trustees had allocated a proportion of trustee's fees, investment management fees, bank charges, custodian fees and professional fees for accountancy and administration to income. The Revenue disallowed certain of these and the trustees appealed.

As the Special Commissioners commented it was surprising that there was no existing authority about attribution of a single expense. The Revenue's case was largely founded on the general rule stated by Lord Templeman in Carver v Duncan [1985] 1 AC 1082, namely that income should bear all ordinary outgoings of a recurrent nature such as rates and taxes and interest on charges and incumbrances, but that expenses incurred for the benefit of the whole estate should be charged wholly to capital.

The Special Commissioners held that in accordance with the requirement to achieve a fair balance between income and capital beneficiaries, a proportion of all the expenses in issue, with the exception of investment management fees, was attributable to income and properly chargeable to income for the purposes of S686 (2AA) ICTA 1988. They said that in the light of the general principle of fairness 'expenses incurred for the benefit of the whole estate' should not be taken as meaning that anything which was for the benefit of both capital and income beneficiaries should be taken wholly from capital and not attributed. Attribution should take place unless the expense was really a capital expense in the sense that the income beneficiary's interest was confined to loss of income on the capital used to pay the expense. As agreed between the parties there was no attempt by the Commissioners to specify the actual proportions which were left to be agreed between the parties if that was possible.

Interest in possession

In Douglas' Trustees v HMRC [ 2007] WTLR 663 the question at issue for the Special Commissioners was whether Mrs Douglas ( Mrs D), who had an alimentary liferent under a settlement made by her husband, had an interest in possession and also whether or not the fact that the Revenue had treated the trust as discretionary for income and capital gains tax purposes was conclusive as to its status.

An alimentary liferent is a Scottish device which, rather like a protective trust under English law seeks to protect a beneficiary from his creditors. Under the terms of the settlement Mrs D was entitled to income of the trust fund or such parts as the trustees with her concurrence considered proper and expedient. There was also an express power for the trustees to pay insurance premiums on any policy on Mrs D's life from income.

Income not applied could be accumulated and added to capital or used as income in future years. During Mrs D's life the Revenue had treated the trust as discretionary for income and capital gains tax (CGT) purposes but on her death the HMRC determined that she had an interest in possession for inheritance tax (IHT) purposes. The Special Commissioners held that the provisions of the settlement were consistent with Mrs D having an interest in possession. In effect Mrs D had a power of veto and the trustees had to pay the whole of the income to her unless she consented to their consideration that it was proper or expedient to pay her a lesser sum.

The power to pay life insurance premiums could not negate the existence of an interest in possession '“ the power could only be exercised in respect of such income as was, with her concurrence, not paid to her and again she had an indirect power of veto. Furthermore any error which may have been made by the Revenue in the past was not a material consideration in deciding on the proper IHT treatment of the settlement.

Retirement of trustees

In Jasmine Trustees Ltd and ors v Wells and Hind [2007] EWHC 38 (Ch) trustees had brought a professional negligence claim against a firm of solicitors and the court was required to determine some preliminary issues. A husband and wife had made a settlement in 1968 of which they were trustees. In 1982 they wished to retire in favour of a bank and an individual and executed a deed of appointment and retirement.

The trustees case centred on the fact that because the retirement of the husband and wife meant that there were not two trustees who were individuals within s 37(1) (c) Trustee Act 1925 ( as it was prior to amendment by the Trusts of Land and Appointment of Trustees Act 1996) they had not been effectively discharged as trustees. This called into doubt the validity of subsequent acts of the trustees and also affected the residence status of the trustees for CGT purposes. They therefore claimed that the solicitors had been negligent in not advising them of these possible consequences. The first question at issue was whether the term ' individual' in s37 (1) (c) included a body corporate.

Mann J concluded that this term meant natural persons and did not include a body corporate '“ this was its natural meaning and furthermore it was clear from the context of the Trustee Act that the use of the word was deliberate and meant something different from 'persons'. The next question was whether the current 'trustees' (appointed by the new trustees and their successors) were trustees of the settlement for the purposes of the CGT legislation. Unfortunately for the defendants, it was decided that were not because the husband and wife, who were still trustees, had not been party to subsequent appointments, which were invalid.

They were merely trustees de son tort and while they might be able to say they were trustees of property vested in them they could not be described as trustees of the settlement. It followed on from this that the majority of the trustees of the settlement were UK resident in the UK from 1989'“1997 and assessable to CGT and income tax as such.

Finally, the court decided that various resolutions passed in the 1990s which declared further trusts could not be valid because the trustees who purported to make the appointments were themselves invalidly appointed.

Nil rateband discretionary trusts

The case of Phizackerley v HMRC [2007] SpC 591 has rung alarm bells for solicitors involved in nil rateband discretionary trust loan schemes. Mrs Phizackerley ( Mrs P ) died leaving a will creating nil rate band discretionary trusts for her husband, children and remoter issue. She predeceased her husband who was her residuary beneficiary.

They owned a house as tenants in common, and following her death Mrs P's half share was assented to her husband in return for his promise to repay £150,000 ( subject to indexation) to the trustees of the discretionary trust.

Mr P then died and HMRC said that his debt to the trustees was non deductible for IHT purposes because it was 'property derived from the deceased' under s103 Finance Act 1986. The argument was that because Mr P had originally provided the funds for the house he had then made a gift to his wife. Mr P's personal representatives appealed on the grounds that that original transfer was not a transfer of value because it was a disposition for the maintenance of Mrs P under s11 IHTA 1984.

The appeal was dismissed by the Special Commissioners who said that the ordinary meaning of 'maintenance' had a flavour of meeting recurring expenses. The normal reason for a married couple to put their house into joint names was for security rather than maintenance, and the debt was therefore caught by s103(3).

• Catherine Sanders is a solicitor at the Offices of Court Funds, official solicitor and public trustee. This article was written in a personal capacity