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Failed gifts and trusts

Author: Jo Summers and Helen Wholley (jsummers@pwtadvice.co.uk) - 05/01/2006

At law school and university, trusts law school students are introduced to the concept of a ‘resulting trust’. This can arise when gifts fails, so that it reverts to the donor or settlor (or their estate). Similarly , a trust can fail for many reasons. It could be void for uncertainty. It could break the rule against perpetuities or it could be that the declared trusts do not effectively deal with all the assets.

However a resulting trust is not the only outcome when a gist fails. If certain prerequisites exist, then the rule in Lassence v Tierney [1849] may be applicable. This rule is sometimes known as the rule in Hancock v Watson [1902].

The rule in Lassence v Tierney is one of construction. The rule applies where there is an initial gift made to the donee or legatee, onto which trusts have been imposed or engrafted. It arises if these trust fail and the court construes the initial gift to the donee or legatee as being an absolute gift.

The rule indicates that, even though the trusts here failed, the assets do not revert back to the donor or the testator’s personal representatives. Instead, the gift remains absolute in the donee or legatee. The initial gift continues even though the trusts attached to it are void. The rule applies regardless of the reason for failure of the trust.

Example
A testator bequests a gift to X for life if he attains the age of 21, with the remainder to X’s children on his death. X dies after the age of 21, but without issue. The declared trust has failed. However, under the rule in Lassence v Tierney the gift to X is held to be absolute. The trust fund passes in accordance with X’s estate. It is not held for the testator on resulting trust. The rule only applies, however, if the gift is correctly worded, as explained below.

Hancock v Watson

The rule in Lassence v Tierney is clearly exemplified in Hancock v Watson. The testator provided for his residuary estate to be placed on trust for his widow for her life and afterwards to be divided into 5 portions. Two portions were given to his friend, Susan Drake, for life and after her death upon trust for her children. If she died without issue, her shares were to be distributed between his brothers children on the condition they reach the age of 21., or marry earlier. Susan Drake died without issue. His brother’s children were 21 and had married. The gift to the children failed for infringing the perpetuity rule.

Lord Davey restated the rule in Lassence v Tierney when considering the testator’s will, as follows.

It is settled law that if you find an absolute gift to a legatee in the first instance, and trusts are engrafted or imposed on that absolute interest which fail, whether from lapse or invalidity or any other reason, then the absolute gift takes effect so far as the trusts have failed to the exclusion of the residuary beneficiary legatee or the next of kin as the case may be.

The rule enabled the court to enforce the absolute gift to Susan Drake. Although the trusts failed, a resulting trust was avoided.

Absolute gift

The rule of Lassence and Tierney will only apply if there is, or can be construed, an absolute gift in the first instance. This rule of construction appears equivocal. Deliberated the rule in the Scottish Houses of Lords case Fife v Irvin [1939], Lord Romer stated that the idea of using engrafted trusts is usually inconsistent with the idea that an absolute gift has been given to the legatee. He confirmed: The court endeavours to reconcile the inconsistencies by imputing the intention to modify the absolute gift only so far as necessary to give effect to the trusts, whatever those trusts may be.

In some instances the terms used by the testator or settlor clearly provide the legatee with an absolute gift. In Hancock v Watson the testator used the words ‘I give’ and subsequently confirmed that the two portions were to be ‘ allotted’ to her. Lord Cottenham emphasised in Lassence v Tierney that for the rule to apply it must be a testator’s purpose that the legatee is to benefit. The testator must be merely restricting the legatee’s mode of employment of the gift by engrafting the trusts upon it to ‘secure certain objects for the benefit of the legatee’ for the rule to apply. In Watson v Holland (inspector of Taxes) [1985] Peter Gibson J provided the following guidance on how to establish whether there has been an initial absolute gift:

In most cases where the rule has been held to apply the engrafted, inconsistent trusts have been separated from the absolute gift either by being placed in a separate clause or sentence or by being introduced by words implying a contrast, such as proviso or word such as ‘but so that’. This is not an essential requirement and in an appropriate context the engrafted trusts may be introduced by the word ‘and’ or the words ‘so that’.

The use of language such as ‘but for’ and ‘in the event of’ could indicate that there is an initial absolute gift. Indeed, where there is a will and codicil separating the gift and the engrafted trust it would be easier to determine whether the gift was absolute. This was highlighted in Norman v Kynaston [1869]. However, in other instances it can be difficult to determine whether there is an absolute gift or whether the beneficiary was only meant to take a restricted interest in the gift.

In cases where terms used to describe the initial bequest are ambiguous, the language of the instrument as a whole and the testator’s intention evidenced within it should be considered to determine whether the initial gift was absolute. For example, references else- where in the instrument to the legatee’s share would indicate that the share is to be owned by the legatee. Peter Gibson J in Watson v Holland again provided guidance on when the rule would not apply. He stated that ‘if the instrument discloses no separate initial gift, but merely a gift coupled with a series of limitations over as to form one system of trusts, the rule will not apply’.

If the gift to the legatee cannot be distinctly separated from the trusts engrafted upon it, then the rule may not apply. The rule is even less likely to apply if the imposed trust is limited and for a specific purpose which is not for the benefit of the legatee. In these circumstances a resulting trust will arise in favour of the settlor or the testator’s estate if the trust fails.

Examples

A testator provides a third of the trust fund to each of his three children. He provides for the income of each third share tot go to one of the children. The testator directs that on the death of that child the trustees are to hold that share for that child’s own children. If that child dies without issue it is unlikely that the rule will apply. This is because the trusts in default of appointment may still operate. Similarly, in Re Abrahams’ Will Trusts [1969] the trust property was applied under power of advancement for the benefit of a beneficiary. This was achieved by the way of transfer to another settlement in which that beneficiary was interested. The trusts of the transferee settlement failed to exhaust the beneficial interest, as they were void for perpetuity. The trust property reverted back to the transferor’s settlement and was not taken by advanced beneficiary absolutely.

Application of the rule

The rule in Lassence v Tierney is widely applicable. It arises when a gift is made through a settlement, as well as when the gift is made outright to the donee or legatee. The rule can apply to wills and to inter vivos dispositions. In Re Burton’s Settlement Trusts [1955] a settlor set up a trust fund divided it into two shares. He provided for one share to go each of his daughters for life, with gifts over in favour for their issue. If the trusts concerning the share of either daughter should fail, their share should ‘accrue by way of addition to the share of the other daughter’. Both daughters died without issue. Roxburgh J confirmed that the rule stated in Hancock v Watson applied. The original gift remained in favour of the estates of the two daughters, or possibly in favour of the survivor of them. The funds were not held for the settlor on resulting trust. The case highlights that the rule is also applicable to accruer clauses. However, it is unlikely that the original gift would be held in favour of the survivor of the two daughters in Re Burton’s Settlement Trusts today.

This is because the rule of Lassence v Tierney has been held only to apply to shares passing under an accrual clause in limited circumstances. The rule applies when a testator or donor has provided for shares to be accrued outright to the other beneficiaries when one beneficiary dies or dies without issue. The rule does not apply when their shares are to be accrued to the original shares of the other beneficiaries.

In Re Litt’s Will Trust [1946] the shares were to accrue directly to their other beneficiaries. The testator included the provision that if the child attained a vested interested in their share and died without issue, their share and any additional share that might accrue would ‘accrue to any child of his’. The testator’s children all died without issue. The court held that the rule of Lassence v Tierney would apply twice. There was an absolute gift in the first instance to his child and an absolute gift in the accruer clause. Therefore, the original gift would vest in the personal representatives of the last survivor of the original absolute beneficiaries.

However Upjohn J confirmed in Re Atkinson’s Will Trust that if the testator directed that the share would accrue to the share of another child, and not to that child directly, the rule would not apply. The accruer clause would be held to be part of the engrafted trust that failed. The original absolute interest would be upheld and vest in the original beneficiary’s estate. If the initial absolute gift is found in favour of a class of beneficiaries, they will take the gift as tenants in common.

Drafting Tips

It is necessary for trust practitioners to be conscious of when resulting trusts can arise, When a gift fails and reverts back to the settlor or donor (or their estate) it can have adverse tax consequences, for instances, an IHT liability could arise with regards to a donor’s estate. HMRC has also been known to argue that the settlor has a tax liability on the settle income if the trust assets could revert to them. This may cause significant financial difficulties for the client. It is for this reason that practitioners will usually include a clause expressly excluding the settlor and their spouse from benefit. When taking instructions from a testator or settlor for a gift with conditions or trust provisions imposed onto it, consideration should be given to what would happen if the conditions were not complied with, or if the trust fails. It would be prudent to establish whether the settlor would want the assets back or whether they would want the gift to vest in the beneficiary or the beneficiary’s estate. It could be suggested to the settlor that they name a single default beneficiary to take outright if the gift fails. This would provide clarity on the matter, as the rule Lasssence v Tierney would not arise.

Trust practitioners should take care when providing for shares to accrue to other beneficiaries If a beneficiary dies without issue does the settlor want the share to remain in trust? Is the settlor happy for the share of the deceased beneficiary to go outright to the surviving beneficiaries? The wording of this accruer clause is important. The shares should be accrued directly to the other beneficiaries and not to their shares if the settlor intends the rule in Lassence v Tierney to operate.

Finally, the wording of a clause for a gift with conditions or trust provisions imposed onto it should be carefully considered. The use of the words is very important. The rule in Lassence v Tierney will only apply if the initial gift can be construed as absolute and the trust can be considered to be an ‘add on’ to the gift. The use of I give to X but on trust’ could make the settlor’s intentions clearer.

from Trusts and Estates Law & Tax Journal, Jan/Feb 2006.

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Please Note:
These articles were based on the legislation in force at the date of publication. The laws may well have changed since. These articles should not be taken as being or replacing proper legal advice.

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