24 November 2006
Wills and Estates Law Update - terminating trusts set up under a will
Termination of Trusts
Trust structures set up by deed or by Will for a particular purpose may outlive their desired objective. For instance, trusts established for the benefit of an infant can have unintended limitations when that beneficiary becomes an adult and capable of managing his or her own financial affairs. It is not always simple to bring a trust to an end so that the beneficiaries can have the full benefit of the trust fund.
Often trusts for the benefit of minors provide for the trust to continue throughout the life of the named beneficiary with the children of the named beneficiary to become entitled to the trust fund after his or her death. This can result in the trust fund being inaccessible to the named beneficiary and to his or her children even when the named beneficiary is aged say 60 or 80 and his or her children are 40 - 60 and all are more than capable of making their own decisions about how their interest in the trust fund should be dealt with.
Beneficiaries in these circumstances are likely to want to make their own decisions as to how the trust fund should be used in their interest, and to request the trustee to stand aside so that they can have access to the trust fund. How may this be achieved?
Where all the beneficiaries have a vested interest in the trust fund and they are of full legal capacity, the beneficiaries are able to agree to put an end to the trust and direct the trustee to transfer the trust fund to the beneficiaries, notwithstanding any directions to the contrary in the trust instrument, and the trust is brought to an end in that way.
When all the potential beneficiaries cannot be identified
However, even in the above circumstances, a problem arises where there remains the potential of further children of the named beneficiary. That may be either by birth or by adoption. Either way, it will not be possible to identify all the potential beneficiaries of the trust in order to permit them to agree on its termination.
In some limited circumstances, the application of a rule of construction, known as the class closing rule, can apply to determine that no more persons will be admitted as beneficiaries entitled to a postponed class gift. However, the benefit of that rule will often not be available and the potential of more beneficiaries will remain. On a number of occasions we have been called on to advise trustees of the steps which may be taken to accommodate the requests of beneficiaries to terminate a trust. Our advice has been that, even if the class closing rules cannot be applied and all the potential beneficiaries of the trust cannot be identified, a solution may still be found.
In circumstances where all the identified beneficiaries agree to the termination of the trust, and agree to give an undertaking to the Court to account for an appropriate share of the trust fund distributed to them on the termination of the trust should a further beneficiary be identified, an application can be made to the Court to seek a declaration that the trustee is justified in distributing the trust fund to the named beneficiaries.
Interest on legacies - it isn't always simple
Experienced executors are generally aware of the "executor's year", being the period of 12 months allowed to an executor of a deceased estate to pay, free of interest, any legacy left by the will.
Rule 1: A pecuniary legacy carries interest from the end of the period of one year following the testator's death until payment.
Sounds simple? A number of further rules regulate the liability for interest on legacies. If the Will of the testator defers the time for payment of a legacy, then the time when interest becomes payable on the legacy is deferred accordingly.
Rule 2: If a legacy is payable at a future time (after 12 months from the date of death), it carries interest only from the time fixed for payment.
But sometimes the liability for the payment of interest on a legacy begins to accrue from the date of the testator's death. That may occur where the deceased has stood in certain defined relationships with the legatee and/or whether or not the Will provides for the maintenance of the legatee.
Rule 3: Where a legacy is payable to a minor and the testator (not being a parent of, or in loco parentis to the beneficiary) indicates a general intention to provide for the maintenance of the beneficiary out of the legacy, interest on the legacy is payable from the date of death.
Rule 4: If the legacy is given by a parent of, or a person standing in loco parentis to, an infant legatee, where the time for payment is postponed until the child's coming of age and there is no provision for his or her maintenance, interest runs from the date of death.
Rules 3 and 4 effectively override Rules 1 and 2, so that in the circumstances set out in Rule 3 or 4, even where, say, the Will provides for payment of the legacy on the beneficiary attaining 18 years, interest will become payable from the date of death. The liability for interest can become substantial where the beneficiary is of a very young age at the date of death.
Wills commonly provide executors with broad powers and a power to make payment to a beneficiary may be tucked away in terms such as "to use any part of that share in my estate to which a beneficiary is or may in future be entitled for the benefit of that beneficiary." Such a clause is capable of being construed as providing for the maintenance of the legatee, which will bring Rule 3 into operation.
The application of the above rules can become very important when making a distribution of the estate and determining the amount which should be retained on account of legacies payable at a future time. If inadequate provision for interest on legacies is retained, it can be very difficult to recover any shortfall from beneficiaries to whom the residue of the estate may have been distributed. The executors may even become personally liable to the legatee beneficiaries to meet the shortfall.
For the Will drafter, it is important to be aware of the rules set out above to ensure that the testator's intention is reflected in the provisions of the Will.