Trusts have been gradually falling out of favour, according to a recent report. It is thought that the fall of some 4 per cent in trusts submitting tax returns last year (and 30 per cent since 2003/2004) is due to both a lack of understanding of trusts and to tax reforms introduced in 2006 that made some trusts less tax efficient.
A recent case shows some of the complexities that can arise with the use of trusts. It involved a woman whose husband passed his estate into various trusts in order to avoid Inheritance Tax (IHT), rather than passing all the assets directly to her.
The woman was his partner for many years and they married when he was diagnosed with a terminal illness. He also rushed to ensure his UK IHT liabilities were minimised. He provided for her by the creation of a business property trust for the family as a whole (which qualifies for 100 per cent IHT relief) and a second trust which gave her an income for life, also exempt from IHT because of her life interest. He died shortly thereafter.
Within a year of his will being probated, his widow was unhappy. She was confused by the trust arrangements and the tax implications which could arise for her as a resident of the USA. She was also fearful that the trustees could leave her without funds.
She applied to the High Court to bring a claim under the Inheritance (Provision for Family and Dependants) Act 1975 for greater provision to be made for her. Her application was well past the time limit for such claims and, on asking the Court for dispensation to bring a late claim, she was unable to show that her application stood a strong enough chance of success to warrant a dispensation. She accordingly failed.
The case illustrates that where the arrangements made under a will are on the face of it fair, the courts are unlikely to interfere with the testator’s last wishes. However, trusts can be confusing for some people and it is not clear that the potential impact of the arrangements under US tax rules was given full consideration. Acting in haste produced a situation where the principal beneficiary is unhappy with the result.