Royal Courts of Justice
The Rolls Building, Fetter Lane
London EC4A 1NL
Before :
MR JUSTICE NORRIS
Between :
(1) Ellen Martha Frances Wright (2) Michael Robert Greenstreet (personal representatives of Kieran John Greenstreet Deceased) | Claimants |
- and - | |
(1) Jonathan Brian Gater (personal representative of Edward John Greenstreet Deceased) (2) Rory Joseph Greenstreet (a minor acting by his mother and litigation friend Ellen Martha Frances Wright) | Defendants |
Marcus Flavin (instructed by Blandy & Blandy) for the Claimants and for the Respondents
Hearing date: 21 October 2011
Judgment
Mr Justice Norris…………………………………………………………….7 November 2011
Mr Justice Norris :
Edward Greenstreet died intestate on 28 October 2009. His entire estate, which had a net value of some £514,600, passed to his son Kieran. No inheritance tax was payable because the deceased was entitled to a doubled-up nil rate band. Edward Greenstreet’s estate remains unadministered.
Unfortunately, Kieran himself died intestate on 17 May 2010. His entire estate (which includes his inheritance from Edward Greenstreet) passes to his son Rory by his partner Ellen. Rory was born on 27 May 2008 and so is now three years old. Kieran’s own net estate amounts to some £6,000. The inheritance tax payable on the combined estates on Kieran’s death is about £89,000. Nobly, Ellen does not intend to make any claim against Kieran’s estate (being content with the joint property that passed to her by survivorship and with the death benefit which she received). The position therefore is that the aggregated estates of Edward Greenstreet and Kieran are held upon the statutory trusts contained in Section 47 of the Administration of Estates Act 1925. This means that they are held on trust for Rory contingently on his attaining 18 (or marrying or forming a civil partnership under that age), and in the meantime the statutory power of maintenance under Section 31 of the Trustee Act 1925 and of advancement under Section 32 of that Act will be available. If Rory does not attain a vested interest then the aggregated estates would be held upon the statutory trusts for the persons identified in Section 46(1)(v) of the AEA 1925. At the hearing it was established that this meant that the aggregated estates would be held upon statutory trusts for Kieran’s uncles and aunts (the brothers or sisters of the whole blood of a parent of Kieran living at Kieran’s death). I will call this group “the Ultimate Beneficiaries”.
If Rory were to take Edward Greenstreet’s estate directly (instead of via Kieran’s estate) all inheritance tax would be avoided. An arrangement varying the dispositions taking effect on Edward Greenstreet’s death to substitute Rory for Kieran is entirely straightforward (it now being established by ReBernstein [2008] EWHC 3454 that there is jurisdiction under the Variation of Trust Act 1958 to vary the trusts of an unadministered estate).
But a complication has been introduced. By paragraph 11 of her witness statement Ellen says:-
“I have been advised of the consequences of the “Relevant Property” regime under the Inheritance Tax Act 1984 as amended, and also of the income [tax] treatment of accumulated income. Nevertheless I am strongly of the view that it is extremely undesirable that Rory should be entitled to income, let alone capital, as soon as he is 18. I do not think it is to the benefit of any child to be in absolute control of that kind of income or capital in their early twenties. I consider that the consequences of the fund being deemed “Relevant Property” are far outweighed by the risk of his being entitled to such significant funds before he is 30, or at the very earliest 25”.
Ellen and Kieran’s uncle Michael Greenstreet (who are together the administrators, for the use and benefit of Rory, of Kieran’s estate) have therefore commenced proceedings under the Variation of Trust Act 1958 (“the 1958 Act”) for the approval of an arrangement under which they will hold Edward Greenstreet’s estate as trustees:-
Upon trust for Rory contingently upon his attaining the age of 30 years:
Subject to an unrestricted power to accumulate the whole of the income until Rory attains 30:
Subject to a power to apply income to or for the benefit of Rory until he reaches the age of 30:
With the benefit of an enlarged power of advancement under Section 32:
Subject to those trusts and powers upon trust as to both capital and income for any widow or civil partner of Rory at Rory’s death and any children of Rory in such shares as the trustees should appoint within six months after Rory’s death: and
With an ultimate trust in favour of the Ultimate Beneficiaries along with Ellen and the issue of Lesley (an aunt who predeceased Kieran). (There is a power to appoint within this class, and in default of complete exercise of that power there is a trust for equal division). I do not know the ages of the members of this class, so that it is not possible to form a view as to its likely composition 27 years hence.
My approval of this arrangement was sought against the background of a looming deadline (the second anniversary of Edward Greenstreet’s death). From the judge’s point of view there were some unsatisfactory features in the procedure adopted. First, the matter was put before me as paper application asking me to approve the variation without a hearing. There may be a truly exceptional case in which this course is appropriate (though I cannot at present think what it might be): but in my judgment the approval of a variation (no matter how apparently straightforward) ought to be considered at a hearing at which proper argument is presented, which the judge can test on behalf of those whose consent he is supplying, and where there is an opportunity to test the evidence upon which the application is founded.
Second, the proposed arrangement is promoted by Ellen (as one of Kieran’s personal representatives); but she is also Rory’s litigation friend. Nobody can doubt the sincerity of the views she has expressed, and it is absolutely plain that she seeks no personal advantage for herself in any of the proposals (notwithstanding she features in the ultimate trust). But I consider it improper to have placed her in this position. She cannot possibly both advocate the arrangement and subject it to independent scrutiny in the sole interest of Rory. The difficulties in her position were mirrored by those of Counsel, who found himself both drafting the arrangement and writing an independent opinion in support of it on behalf of Rory, without the advantage of any of the proposals being tested in negotiation or subjected to contrary argument. This is a small (and united) family so that the representation of Rory’s individual interest is not easy. But I would have been assisted if Rory’s litigation friend had been a family friend or a professional (such as a solicitor) who had instructed separate Counsel to undertake entirely independent scrutiny. The instruction of separate Counsel is in my view a fundamental requirement.
Third, the procedural problems were compounded because Michael Greenstreet appears not to have been advised as the watchdog role of a trustee (and participated as a claimant); and the only defendant with a fiduciary role (Mr Gater) was the administrator ad colligenda bona of Edward Greenstreet’s estate, who did not see it as part of his duty to perform the watchdog role either. There was therefore nobody looking out for the interests of unrepresented beneficiaries, in particular the Ultimate Bebeficiaries, or fulfilling the role of general oversight. I do not criticise Ellen and Michael Greenstreet for making the application: they were satisfied that the scheme was beneficial to Rory, and Rory himself was not in a position to make the application: see Re Druce’s Settlement [1962] 1 WLR 363 at 371 per Russell J. But the disadvantages of taking such a course were clearly spelt out in Re Druce at page 370 of the report (though the judge said of Counsel for the trustees in that case that “his performance as touch judge was not marred by the fact that he started in the line out”). In the instant case the duality of Mr Flavin’s position made the burden on him very onerous.
Given the duality in the role of Ellen (as promoter of the arrangement and Rory’s litigation friend) the duality in the role of Michael Greenstreet (as promoter of the arrangement and as watch dog for, in the circumstances, both Rory and those interested in the event that Rory did not attain an absolute vested interest) and the effective non-participation of Mr Gater it fell to me to scrutinise the arrangement without assistance. I declined to approve the arrangement proposed, but on 26 October 2011 I approved a substantially revised arrangement and said I would give written reasons.
Section 1(1) of the 1958 Act empowers the court
“if it thinks fit by order [to] approve on behalf of…any person having…an interest, whether vested or contingent, under [a trust] who by reason of infancy…is incapable of assenting”
an arrangement which varies or revokes the trusts in whole or in part. But the proviso declares that
“the court shall not approve an arrangement on behalf of any person unless the carrying out thereof would be for the benefit of that person” (emphasis supplied).
Whether assisted or not, I must be satisfied that the arrangement proposed by Ellen and Michael Greenstreet is for Rory’s benefit, otherwise I have no power or discretion to approve the arrangement.
In undertaking that task I have applied the following principles:-
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”:
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 161. 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.
“Benefit” is generally financial in nature: and when it is the Court is will be concerned in
“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.
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.
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 fall to be implemented, be likely to accept the proposal?”
In the instant case the financial benefit is the achievement of an immediate saving of inheritance tax of £89,000. That falls to be weighed against the significant financial disadvantage which Rory will suffer over time through being deprived of his right to income for 12 years, through the alteration in the contingency upon which he becomes absolutely entitled and through the disadvantageous tax regime which will apply once such trusts are brought into existence. It is said that that financial disadvantage is cancelled out by the moral benefit conferred on Rory by preventing him being in absolute control of income or capital until he is 30. Is such deferment beneficial?
The cases show that a deferment of vesting is capable of constituting “benefit” for the purposes of the 1958 Act. In Re T’s Settlement Trusts [1964] Ch 158 a strong case was made out on the facts that a beneficiary (who in 18 days was to become absolutely entitled to substantial funds) was “alarmingly immature and irresponsible as regards money” and that the possession of a large sum of free capital would expose her and her fortune to considerable hazards. Wilberforce J deferred vesting and imposed protective trusts in the meanwhile. Such specifically fact-based cases can be put on one side, for in the instant case the proffered evidential basis for the proposed deferment is simply Ellen's view that it would not be good for her three-year-old son to have access to substantial sums of money before attaining 30.
Mr Flavin submitted that this was enough, and he relied on the following cases:-
In Re Holt’s Settlement [1969] 1Ch 100 Megarry J received evidence from a mother whose children were due to become entitled to funds at the age of 21 that she believed it most important that young people should be reasonably advanced in a career and settled in life before they were in receipt of an income sufficient to make them independent of the need to work. The judge “speaking in general terms” fully in concurred in that view, and approved an arrangement which postponed vesting of their interests (though it is to be noted that it also accelerated their interests in other parts of the fund and conferred an estate duty saving).
In Re RGST Settlement Trusts [2007] EWHC 2666 (Ch) funds were held upon trust for X with the remainder (in default of exercise of the power of appointment) to his three children aged 7,5 and 2. It was beneficial for tax purposes to insert a life interest in favour of X’s surviving spouse (thereby postponing the interest of the children). An alternative would have been to make outright transfers to the children during the lifetime of X. HHJ Behrens accepted (at paragraph [20]) that it was not appropriate to put substantial sums on bare trust for the children given their ages and the fact that they would then have complete control of the assets at the age of 18. That was regarded as a moral hazard, and in preference to that vesting was deferred.
In Re Bernstein [2008] EWHC 3454 a testator had left £100,000 legacies to his grandchildren at 25. In order to achieve a tax saving Blackburne J was asked to approve an arrangement under which the individual legacies were replaced by interest in a fund in which the widow had a short-term interest. The judge commented
“ One of the consequences of the arrangement is that the grandchildren take absolute interests on the termination of the widow’s income and interest, with the result that they will be able to call for payment of the capital of their respective shares as soon as they reach their majority as against the contingency of reaching 25 under clause 5 of the will prior to variation. This might not be considered necessarily for their benefit”
Mr Flavin submitted that if acceleration of vesting from 25 to 18 was regarded as a “disbenefit” then the postponement from 18 to 25 ought to be regarded as a benefit. .
I do not consider that these cases (or cases such as Re CL [1969] 1 Ch 587 or Re Remnant [1971] Ch 560) warrant 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.
Adopting the approach indicated, I considered that I could not provide consent on Rory's behalf to the originally proposed arrangement. First, it seemed to me to come dangerously close to (if not to cross) the line between “variation” and “resettlement”. Nothing remained of the original statutory trust. Second, there was nothing in the character or setting in the life of this three year-old toddler to suggest that that was a real risk that he would be incapable of dealing with any income or capital inherited from his grandfather without supervision before he attained 30. I pictured myself trying to explain to a 28-year-old Rory who was married and with children and who wanted to embark on a particular career why he could only do so with the approval of his mother and uncle (or the persons they had appointed to succeed them), and why I had taken away his access to his inherited funds. Third, it seemed to me wrong to approve the establishment of a long-term trust where close family members controlled the purse strings. Whilst accepting without hesitation that Ellen and Michael Greenstreet were genuinely seeking to do what they perceived to be the best for Rory (and would no doubt continue to do so), I consider that Rory has the right to have his independence and autonomy as a young adult respected (an independence and autonomy which may cause tension between himself and his family and which suggests that in these financial matters there should be a distinction between his close family and his trustees).
I consider that I can approve the revised arrangement. Under this arrangement:-
the trustees of the fund are to be Ellen, Michael Greenstreet, and Mr Gater (a solicitor);
Rory will become entitled to the income of the fund contingently on his attaining the age of 18 (albeit not on the contingency of earlier marriage);
Rory will become entitled to 10% of the fund as it then stands (including accumulations but without bringing any previous advances into hotpot) contingently on attaining the age of 21;
Rory will become entitled to the balance of the fund contingently on his attaining the age of 25;
if Rory fails to obtain 18 then the fund will be held for the Ultimate Beneficiaries;
if Rory attains 18 but dies before reaching 25 the fund is held for any widow or civil partner of Rory's and any issue of his in such shares as he may by deed or will have appointed, and in default of such appointment then in such shares as the trustees may within a limited period appoint;
there is a default trust in favour of the Ultimate Beneficiaries, Ellen and the issue of Lesley (with Rory again having a power to appoint within the class, the trustees then having a time-limited power, and an ultimate trust for stirpital division):
there are the usual (enlarged) powers to apply income and advance capital.
I approved an arrangement in this form for these reasons. First, I consider it constitutes a variation and not a resettlement.
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 Michael Greenstreet 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.
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).
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 the Court again if he shows signs of going off the rails (subject to the input of a professional lawyer).
Before reaching that conclusion I considered Re Gerbich [2002] 2 NZLR 791. That case actually concerned an advancement under New Zealand law. Under the trusts applicable on intestacy the beneficiary would become absolutely entitled at 20. The terms of the advancement for which the Court’s approval was sought contemplated a deferral until the beneficiary was 30, or at the least 25. Hammond J (at p.798) said:-
“That may well have been wise, and many testators so provide. But here on intestacy the child was entitled to the estate at her majority. To extend the term seems to me to recast the estate in a way which would indubitably be an entire remaking of the lawful position”.
I do not think that Hammond J was there saying that as a matter of principle it is never possible to defer vesting under a statutory trust arising on intestacy. If he was, then I would respectfully disagree. When read in context I think he was saying that the proposed advancement already went to the furthest bounds of what was permissible as an advancement, and that in the particular and peculiar circumstances that had arisen he regarded that further proposal to defer vesting as a step too far.
The parties should be grateful to Mr Flavin for responding to observations from the Bench in sufficient time to enable them to meet the deadline they faced if a claim under section 142 IHTA 1984 was to succeed.
Mr Justice Norris…………………………………………………….7 November 2011