Trusts, Estates & Tax: what makes a winning team - Part 3

In October 2023, the Berkshire, Buckinghamshire and Oxfordshire Law Society awarded me (Louise Lewis) “Lawyer of the Year” in recognition of my work with my team, with my community and with the legal profession, including my voluntary work with STEP. I was very quick to publish my thoughts to say that this was not my award, but my team’s award and that everything we do, we do as a team. I therefore wanted to take the opportunity this year to showcase the team and to let everyone know about the work that we do.

Next to be profiled is Managing Associate, Katie Gotrel and below is an example of her recent work.

IA Case Study: Postmortem Planning - Disagreement & The Discretionary Trust

More recently Katie has been building on the independent administrator (IA) specialism, a specialism which has been born and raised in the Oxford Trusts, Estate and Tax department at Freeths. Whilst IA work could still be considered a relatively niche area (with few law firms specifically offering this service to clients) it is a fast evolving and an increasingly popular area of estate administration. The work regularly involves dealing with intricate family dynamics and strained relationships and Katie has been commended on her ability to provide practical and bespoke solutions to circumvent further dispute and progress the estates. 

Appointing an IA is often a result of break down in confidence and trust between executors and/or family members. This could be due to disagreements with the way that the executors have managed the estate, lack of progress or allegations of fraud and misconduct. As a result, the Trusts, Estates and Tax team works very closely with the Private Client Dispute Resolution team to help resolve these points of contention. Certainly, it is our experience that the appointment of an IA will bring much needed impartiality to beneficiaries and helps focus on reaching an outcome without losing the elements of the estate.

This case study is very typical of an independent administrator case and involves a £5m estate with a number of complexities, the below focuses on how dispute can affect estate planning.

The IA in this case is Freeths Trustees Limited (our professional trust corporation) appointed by a section 116 application (Section 116 of the Senior Courts Act 1981) which is made before the Probate Registry has issued a Grant. Ordinarily, we would opt for the more straight forward section 50 application (section 50 of the Administration of Justice Act 1985) so that a Court Order would be obtained to demonstrate our appointment in advance of obtaining the Grant of Representation but in this case, the section 116 route was required because it was considered that the removal of the executors was considered ‘necessary or expedient’ in the circumstances. The executors, also beneficiaries of the estate, were unable to come to any agreements on the progress of the estate and the estate administration had therefore come to a complete standstill.

In this case, the Will left the residue of the deceased’s estate on a discretionary trust. The deceased wrote a letter of wishes alongside her Will which requested that the trust fund be divided equally between her two adult children. The deceased specified that certain properties be allocated to each child and that, if necessary, a balancing payment be required to equalise the position. However, the children were unable to reach a final agreement upon the division of the assets, taking into account some significant lifetime gifting (circa. £7.6 million) and so, following the letter of wishes, the daughter would have received a sum of circa. £230,000 more than the son.

With discretionary trust of residue, the typical approach is to appoint assets out within 2 years of the deceased’s death to benefit from the reading back provisions for IHT and CGT i.e. the appointment is treated as having made by the deceased at the time of their death. However, as the parties in this case could not agree on their respective shares of the trust fund, it was necessary for the administrator to consider the options regarding how and when to make appointments out of the trust and the tax consequences in each scenario. A key role of the administrator is to remain impartial and seek professional advice to aid their decision making, or otherwise open themselves up to scrutiny from the beneficiaries and potential personal liability if a claim is later brought against them.

Three options were put to the administrator, the first, which would give the parties flexibility to resolve the dispute was to keep the trust going and not make appointments out of the trust before the 2 year period. The trust would be taxed under the relevant property regime which would mean exit charges on each disposal and ten-yearly charges (which are notoriously difficult to calculate) and the CGT and Income Tax position regarding the appointment out of the trust would depend upon whether the deceased’s estate was still in administration. The second option was to appoint the discretionary funds onto interests in possession trusts for the benefit of the children within 2 years but it was considered that whilst this may be IHT efficient in the short term (as it would avoid relevant property charges) may pose the risk for the children that the assets will be deemed to fall into their personal estates. There was also the drawback of a potential CGT charge when the children were to eventually acquire the assets with this option.

The third (and preferred) option considered was to make absolute appointments in part of the trust fund to the children within the 2 year deadline. As the children were not in agreement as to their respective shares, the proposal was that 80-90% of the value of the fund would be appointed to each of the children thus leaving sufficient assets in the fund (10-20%) to resolve the dispute between the children. Provided that the appointments occurred with 2 years of death, there would be no IHT or CGT consequences of this proposal as they would be treating as having taken effect on the deceased’s death.

It is important to note that the options above are not exhaustive and whilst the third option in this case was the preferred option, this was based on the specific circumstances and facts of this case. It is essential that estate planning is always looked at on a case-by-case basis.

The IA specialism is becoming an increasingly popular area of work for Freeths and we continue to be referred by a number of firms to deal with this specifically. It is a fast paced and varied area of estate administration with a number of complex and interesting elements from both the personal level of dealing with strained relationships to the technical level applying for emergency Grants, complex tax reporting and dealing with estates that come to us which have, for one reason or another, perhaps been left dormant and unadministered without progression for many years or, as we often find, been administered by the previous personal representatives incorrectly.

Katie and the IA team take great satisfaction in bringing an estate to an end which otherwise would have not been possible without our involvement due to the intricacies and disputes involved. Please do contact Katie with queries.