Wright v Gater

Wright v Gater; Norris J; Chancery Division. 7th November 2011; [2011] EWHC 2881 (Ch)

The deceased (Edward) died instestate in 2009 and his estate, worth in excess of £500,000, passed to his son (Kieran), who died soon afterwards.  Kieran's entire estate (including Edward's estate) passed to his own son (Rory), who was almost two years old at the date of Kieran's death.  Kieran's estate (which had little value without Edward's estate) was therefore held on the statutory trusts contained in section 47 of the Administration of Estates Act 1925: for Rory contingently on his attaining the age of 18, or marrying or forming a civil partnership before then.  In the meantime, the statutory powers of maintennace and advancement under sections 31 and 32 of the Trustee Act 1925 applied. If Rory did not attain a vested interest, Kieran's estate would be held for his uncles and aunts. At the time of the hearing, Edward's estate had not yet been administered.

It was proposed that the disposition of Edward's estate be varied so that there was no additional inheritance tax on Kieran's death (section 142 of the Inheritance Tax Act 1984). At the same time, Rory's mother (Ellen) wanted the variation to include trusts extending the period before Rory took a vested interest, to 25 or 30 years old. An application was made to the court under the Variation of Trusts Act 1958 (the 1958 Act), for the administrators of Kieran's estate to hold Edward's estate on trust contingently for Rory on attaining the age of 30 years, with extended powers of maintenance and advancement and trusts in remainder.  The judge declined to approve the arrangement but did approve a substantially revised one.

Under section 1 of the 1958 Act, unless the judge was satisfied that it was for Rory's benefit, he had no power or discretion to approve the arrangement. He said (at para [11]):

In undertaking that task I have applied the following principles:

(a) I approach the task with what Megarry J in Re Wallace's Settlements [1968] 1 WLR 711 at 718 H described as "a fair cautious and enquiring mind":

(b) What I am doing is not redistributing property according to some wise scheme of which I approve. The Court of Chancery never claimed a power to direct a settlement of the property of a minor, and the 1958 Act did not alter this: see Re T's Settlement Trusts [1964] Ch 158 at 361. Rather, I am supplying consent on behalf of Rory: Re S [2006] WTLR 1461 at para. [16]. The question to be asked is therefore: "Should Rory consent to this arrangement?". That question is answered in the sense "Only if the judge is satisfied that it is for his benefit". So it is never enough that the proposal does Rory no real harm: to elicit his consent it must always confer on him a real benefit.

(c) "Benefit" is generally financial in nature: and when it is the Court is will be concerned "a practical and business-like consideration of the arrangement, including the total amounts of the advantages which the various parties obtain, and their bargaining strength". The Court will ask whether, if the persons on whose behalf consent is to be given were themselves competent and reasonable, the bargain is one that they would enter: Re Van Gruisen's W.T [1964] 1 WLR 499 at 450. If the outcome of the arrangement cannot be predicted with certainty then the Court is prepared to take on behalf of a minor a risk that an adult would be prepared to take: Re Cohen's WT [1959] 1 WLR 165.

(d) But "benefit" need not be financial: and when it is not (or where non-financial benefit falls to be weighed against financial disadvantage) business-like considerations do not provide a sure guide, though the recognition of risk will still have some part to play. In such cases the assessment of benefit and advantage must be approached with caution (as Wilberforce J recognised in Re T [1964] Ch 158 at 161) lest the process simply becomes a reflection of the perceptions and preferences of the individual judge. The difficulties inherent in the task are perhaps illustrated by Re Weston's Settlement [1969] 1 Ch 234.

(e) One step towards objectifying the assessment of non-financial benefit would be to pose the question (based on that posed under different legislation in Re Irving (1975) 66 DLR (3d) 387)

"Would 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 fail to be implemented, be likely to accept the proposal?"

The financial benefit of the original proposal was the achievement of an immediate saving in inheritance tax of £89,000, which fell to be weighed against the disadvantage to Rory of being deprived of his right to income for 12 years, and against the disadvantageous tax regime that would apply once the proposal took effect.

The judge was asked to look at the moral benefit of Rory being prevented from having absolute control of income and capital until he turned 30 years old.  He was referred to  Re Holt's Settlement [1969] 1 Ch 10, Re RGST Settlement Trusts [2007] EWHC 2666 (Ch) and Re Bernstein [2008] EWHC 3454 but did not consider that those cases warranted:

"the conclusion that the Court should regard postponement of vesting beyond the age of majority as 'beneficial' in principle. I think in each case the Court will have to be persuaded that a variation incorporating such a feature is justified on the facts of a particular case; perhaps because of the proven personal characteristics of the beneficiary; or perhaps because the size of the fund, the circumstance in life of the beneficiary, the family context in which the existing trusts will be implemented or some similar feature (the list is not exhaustive) gives rise to risks which any reasonable person would regard as real, and to which the proposed variation provides a sufficient and proportionate response. I accept that it is of benefit to a beneficiary to make provision for eliminating, or moderating or compensating for realistically assessed risks to which he or she is exposed, at least to a degree that is no more than necessary."

He found that, on this test, and because it amounted to a resettlement and not a variation, he could not approve the original proposal.  He did, however, approve the revised proposal, under which (amongst other things) Rory would become entitled to the income of the fund on attaining 18; he would become entitled to 10% of the fund on attaining the age of 21, and to the balance of the fund at 25.

18. "… First, I consider it constitutes a variation and not a resettlement. 

19. Second, Ellen has strong views about postponing any entitlement for Rory for the longest period possible: and if the existing trusts remain unaltered then she and [the other trustee] could implement those views to the extent permitted by the statutory power of the advancement by effecting a resettlement. By approving an arrangement which specifically addresses what is for Rory's benefit I think that (on the footing that no fundamental character flaws emerge as Rory grows up) sensible trustees will regard the proper degree of postponement of his entitlement as settled, and will not seek to exercise the power of advancement to achieve further postponement.

20. Third, assuming an accumulation rate of 2.5%, if the statutory trusts remain unaltered Rory will have unrestricted access to about £750,000 at his 18th birthday. In my judgment any reasonable person would regard that as posing risks for Rory, being brought up in a family not accustomed to significant wealth, and without his father; a context which makes Ellen's ability to discipline and guide him more difficult and which exposes Rory to significant temptation and the realistic possibility of exploitation. I take 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) so that it became "established sensible estate planning practice" (Tiley's "Revenue Law" 6th ed p. 1384).

21. Fourth, I am satisfied that the sort of person contemplated by the "Re Irving test" would consider that the revised arrangement provides proportionate measures to address those risks and goes no further than is necessary to do so. A degree of mental contortion is required, but going through the process enabled me to conclude that the revised arrangement is beneficial (even if I might have had a personal preference for straightforward protective trusts). Certainly Parliament has looked favourably upon trusts of the type contained in the arrangement: see most recently IHTA 1984 s.71D. The practical effect of the arrangement will be to introduce Rory gradually to control of his wealth, and afford those who care deeply for him the opportunity to bring the matter before tne Court again if he shows signs of going off the rails (subject to the input of a professional lawyer).

Link: The BAILII report can be found here.