TrustsWillsPowers to Advance Capital: Should They Be Used?

When a testator is deciding on whether to include a Protective Property Trust (PPT) in their will, there are a number of different options that they will want to consider in relation to a trust. These may include whether to limit the trust period, whether to include powers to move or whether to appoint specific trustees in relation to the trust. A further option they may wish to consider is whether to give the trustees a power to advance capital. This article will detail what the power is and in what circumstances it could be used by trustees. This is mostly in relation to a PPT, however it may also be applicable to other Life Interest Trusts.

What is a power to advance capital?

A power to advance capital is a discretionary power that could be included within a PPT or other Life Interest Trust. This power allows the trustees to transfer trust capital to the life tenant if they see fit. This can be either outright or on a loan basis. This power is entirely discretional on the trustees and the life tenant is not entitled to the trust capital, unlike the income of the trust. The trustees do not need to exercise this power if they never see fit to.

A power to advance capital is not something we consider as a standard inclusion of a PPT or Life Interest, but an optional power that could be included if the testator desires.

There are a number of reasons why you may wish to include a power to advance capital within the trust.

Allows access to additional sums

The most common use of a power to advance capital being exercised by the trustees of a PPT would be after downsizing has occurred and surplus cash is released. Ordinarily this would be invested by the trustees to provide an income to the life tenant. However the power to advance capital could allow the trustees to distribute surplus cash to the life tenant, either outright or on a loan repayable on whatever terms the trustees see fit (usually on death). This gives additional flexibility to benefit the life tenant if income from the surplus is not enough for them and they needed the additional sums for any purpose.

Where there is an inheritance tax liability

Where the cash has been released by downsizing and the life tenant does not require the income from any surplus due to having their own assets, a possible use of the power to advance capital could be for them to make potentially exempt transfers (PETs). Any capital in the trust is taxed for IHT as part of the life tenant’s estate on death and allowing liquid assets to remain in trust when they aren’t needed could cause an additional IHT liability to the life tenant.

The trustees would not have the power to make PETs to other beneficiaries themselves, but they could transfer capital to the life tenant for the life tenant to then make a PET of that capital.

Possibility of winding the trust up

Whilst exercising the power over liquid assets would be the main use of the power to advance capital, the power applies over the whole of the trust fund and not simply liquid assets. There is therefore the possibility that the trustees could transfer the whole of the trust fund to the life tenant outright and end the trust.

That is not necessarily itself a disadvantage and this flexibility may have uses in the future. For example, changes in trust or tax laws in the future may mean that the trust is no longer beneficial or tax efficient for the life tenant, in which case it may make sense for the trustees to end the trust. Alternatively, the life tenant may wish to obtain equity release and the existence of the trust would likely stop this.

These trusts are however normally created with the intention to allow a surviving spouse/civil partner to continue living in a property but protect their interest from third party claims on the survivor (such as care, remarriage or bankruptcy). In the event that the power is exercised to end the trust entirely, this would likely defeat the initial intentions of the testator. The inclusion of a power to advance capital would make it even more advisable that the testator ensures that the trustees are those they trust to follow their wishes.

Using a letter of wishes

As a power to advance capital is a discretionary power on the trustees, it is advisable that the client makes any particular wishes on how the trustees exercise this power clear. Clients may therefore wish to consider making a letter of wishes to their trustees to keep with their wills. This is not binding on their trustees but will ensure that the trustees are completely aware of their wishes.

Photo by Philip Veater on Unsplash.

Chris Rattigan-Smith