The Advantage of a Gift Over Provision in a Trust Fund

During the 1820s, a rich British investor named Richard Wright set up a trust fund with 2,000 pounds worth of East India Company common stock, worth approximately $4.8 million in current U.S. dollars, in a trust fund for his great-nephew Daniel Vautier. The trust instrument stated that all the proceeds would be paid out when he was 25, and the trust would terminate at that time.

When Vautier turned 21, he petitioned the trustee to terminate the trust and either give all the East India stock to him, or liquidate it and give them the proceeds. It posed a fascinating legal question: “If the sole beneficiary consents to termination of the trust, but that is not what the settlor wanted, what prevails?”

The Judge, Lord Cottingham, argued that the desires of the living supersede those of the deceased: “I think that principal has been repeatedly acted upon; and where a legacy is directed to accumulate for a certain period, or where the payment is postponed, the legatee, if he has an absolute indefeasible interest in the legacy, is not bound to wait until the expiration of that period, but may require payment the moment he is competent to give a valid discharge.”

This holding caused quite a kerfuffle among the wealthy that wished to establish trust funds. A common motivation for establishing a trust is a desire to provide for loved ones incapable of managing money for themselves—giving them the power to terminate the trust would defeat the original intent of the settlor that provided the funds for the trust in the first place.

To combat this, English lawyers began adding “gift over” provisions which added a clause that, if it existed in the Vautier case, would say “and if Daniel Vautier dies before the age of 25, then the funds shall be held in trust for Daniel Vautier’s issue.” Now, Vautier is no longer the only beneficiary of the trust. The possibility of Vautier having children, and dying before the age of 25, thus created a new class of beneficiaries with an interest in the trust.

By creating this class of possible beneficiaries, Vautier would forfeit the ability to terminate the trust because he is no longer the sole beneficiary. A gift-over provision, which creates another set of beneficiaries without taking away in substance what you are trying to give to a sole beneficiary, is a defense mechanism against a sole beneficiary’s right to unilaterally terminate a trust fund and take the proceeds.

Not all states followed the Saunders v. Vautier rule, making a gift-over provision unnecessarily in some U.S. states, but it interesting the perpetual tug-of-war that often seems to arise between beneficiaries who want money now and the settlors of the trust fund who often desired a more sedulous approach to distribution.

Notice: Nothing in this article should be regarded as legal advice, and should be read for entertainment purposes only. If you are attempting to draft a trust instrument, you should seek out the advice of learned counsel to ensure implementation of your desires and goals.

Originally posted 2018-06-01 01:20:25.

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