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Is Trust Provision in a Will Ever Reasonable Financial Provision for a Surviving Spouse?
Date: 27/11/2023 Type: Articles Topic: Private Client | Investment and HNWI’s |The modern family can pose a variety of difficulties for high-net-worth individuals when it comes to their estate planning. But perhaps the most common dilemma arises where the individual holds the bulk of the family’s wealth and has a spouse and one or more children from previous relationships, all of whom need to be provided for. In those circumstances, how does the individual make suitable provision for the surviving spouse whilst ensuring the bulk of the wealth ultimately passes to the children?
Often, the individual chooses to leave the bulk of their estate in their will on flexible life interest trusts for their spouse, with the remainder passing to the children on the spouse’s death. During their lifetime, the survivor generally has a right to use and enjoy the trust assets, including occupying any properties in the trust, such as the matrimonial home, and receiving the income arising on the other trust assets. The life tenant does not generally have a right to the trust’s capital, although modern will trusts commonly grant trustees the power to distribute capital to either the life tenant or the remainder beneficiaries, should the need arise. Depending on the circumstances, such arrangements can work well for the family, whereby the spouse is well provided for their lifetime, whilst the children are assured of their inheritance in the long-term, without the risk the assets will be dissipated during the survivor’s lifetime or passed outside the family on their death. Flexible life interests trust for surviving spouses also benefit from the spouse exemption from UK inheritance tax, which is often a significant factor driving the deceased’s testamentary wishes.
But such arrangements are not welcomed by everyone and can be prone to claims under the Inheritance (Provision for Family and Dependants) Act 1975 (the ‘1975 Act’), in which the Court has a discretion to vary the will to make reasonable financial provision for the claimant, taking into account various factors prescribed by the Act. Spouses in particular are entitled to claim reasonable financial provision, whether or not it is required for their maintenance. Amongst other things, the Court will have regard to the level of award the spouse might have achieved, had the marriage been terminated by divorce rather than death. The starting point for the Family Courts in divorce proceedings, particularly in the case of a long marriage, will be to treat the parties to the marriage equally and to seek to achieve a clean break between them, taking into account the circumstances of the case.
Where the deceased has made no outright provision for the spouse in their will, the spouse therefore may potentially have a claim under the 1975 Act for a substantial part of the estate assets, free of the terms of the will trust. Indeed, there have been numerous claims where it has been held that making a spouse the object of a trust did not make reasonable financial provision for them, including Cunliffe v Fielden [2006] 2 WLR 481, P v G [2007] WTLR 691 and Sargeant v Sargeant [2017] WTLR 1451.
The strength of such claims was notably explored by the Court of Appeal in Cowan v Foreman and others [2019] EWCA Civ 1336, which dealt with a preliminary issue in that case. The Court of Appeal emphasised that each case must be considered on its facts, and it was not to be suggested that a beneficial interest in a discretionary trust can never amount to reasonable financial provision for the purposes of the 1975 Act. But in the circumstances of that case, the Court of Appeal held that Mrs Cowan’s claim would have real prospects of success if the matter went to trial. The key factors the Court took into account in that case included the size of the estate (valued at £30 million for probate), the 20-year duration of the relationship and the fact that the claimant had been left without any autonomy or security whatsoever, having been deprived of any direct interest in any assets of value, including the matrimonial home. The claim was settled between the parties before it reached trial.
Whilst there will undoubtedly be cases where a beneficial interest in a trust will amount to reasonable financial provision for a spouse under the 1975 Act, no such case has gone to trial to date. However, the recent case of Sim v Pimlott and others [2023] EWHC 2296 (Ch) offers a colourful example of where outright provision of approximately a third of the estate and a defeasible life interest in the residue was held to be reasonable financial provision for a spouse.
That case concerned a claim made against the estate of Dr Sims, valued at £1.2 million, by his widow, with whom he was in the middle of an acrimonious divorce when he died. In the will, the widow received a legacy of £250,000, a further £125,000 if she released her interest in a property in Dubai, and a life interest in the residue. Interestingly, the legacies to the widow were conditional on (amongst other things) her not bringing a claim under the 1975 Act, which the judge considered to be fair. Accordingly, when she brought a claim, all she was left with was the life interest, which the trustees had the power to terminate in favour of the remainder beneficiaries. The judge held that it was wrong in principle for the claimant to pursue a claim knowing that in doing so, she would forego the legacies, and then to argue that, because she had foregone that benefit, the will failed to make reasonable financial provision for her.
The judge did express that it was potentially unreasonable for the will to allow for a situation in which the widow became homeless if she failed to fulfil the conditions imposed in the will (the matrimonial home would have needed to be sold to fund the legacies under the will). But that did not ultimately affect his judgment in the case.
Whilst the circumstances in Sim v Pimlott were unique, the case nevertheless demonstrated how providing financial autonomy and security in the matrimonial home for the spouse were material factors for the Court when considering whether the deceased had made reasonable financial provision for her. In contrast, where the will fails to make outright provision for the spouse and effectively deprives them of any direct interest in any assets of value at, the estate is inherently vulnerable to a claim under the 1975 Act. This is particularly the case where the marriage was a long one and the value of the estate is substantial.
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Oliver Auld - Charles Russell Speechlys
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