When disaster strikes

‘[The Lord Mayor] can do nothing to make his year of office memorable; nothing that is, which his predecessor did not do before, or his successor will not do again. If he raises a Mansion House Fund for the survivors of a flood, his predecessor had an earthquake, and his successor is safe for a famine.’[1]

—A A Milne, 1921

History

A ‘disaster relief fund’ is not a novel concept, but perhaps the earliest established form was the Lord Mayor of London’s Fund in the 1800s. As author A A Milne observed, the Lord Mayor’s sole responsibility seemed to be responding to disasters in the late 19th and early 20th centuries. Today, one need not be a Lord Mayor to administer a disaster relief fund. However, as legal practitioners, one must consider the most appropriate legal structures and parameters to allocate and convey these funds to survivors and bereaved families.

Structuring disaster relief funds

It is unsurprising that the main legal structures for disaster relief funds are trusts, given the need for a few individuals to hold legal title to assets that they administer for the benefit of a class of people. The two types of trust are charitable trusts and discretionary (non‑charitable) trusts. In 1982, the Attorney General set out the distinction between these structures in a parliamentary debate:

‘(i) Charitable funds attract generous tax reliefs; donations to them may do so (and in particular will for the most part be exempt from capital transfer tax). But charitable funds, being essentially public in their nature, cannot be used to give individuals benefits over and above those appropriate to their needs; and the operation of a charitable trust will be subject to the scrutiny of the Charity Commissioners.

‘(ii) Non‑charitable funds attract no particular tax reliefs and donations to them are subject to no special tax treatment (and will have to be taken into account for capital transfer tax purposes unless, as is likely to be the case for the bulk of donations, they are within the normal reliefs). But under a non‑charitable trust there is no limit on the amount which can be paid to individual beneficiaries if none has been imposed by the appeal; and only the Court acting on behalf of the beneficiaries will have control over the trust, which will not be subject to scrutiny by the Charity Commissioners.’[2]

Advantages of charitable trusts

A charitable trust benefits from multiple tax reliefs, both in the hands of the donors and in the hands of the charitable trustees. All donors benefit from inheritance tax (IHT) relief and capital gains tax (CGT) relief on gifts of qualifying shares, and higher‑rate taxpayers also benefit from gift aid and income tax relief on gifts of qualifying shares. Charitable trustees can claim gift aid and IHT relief, as well as income tax relief and CGT relief if the funds were invested or donors contributed assets holding chargeable gains.

However, distributions from charitable trusts must meet the definition of ‘charitable’ in the Charities Act 2011 (the Act) and trustees have no discretion to distribute funds beyond this. Under s.3(1)(a) of the Act, the trustees can apply funds to ‘prevent or relieve poverty’, and s.3(1)(j) allows for the ‘relief of those in need because of youth, age, ill‑health, disability, financial hardship or other disadvantage’. However, charitable trustees cannot distribute more than is necessary to meet beneficiaries’ needs and must answer to the Charity Commission for England and Wales (the Commission) in respect of how they allocate such funds.

The administration of disaster relief funds for the Titanic and Penlee lifeboat disasters provides practical examples of the benefits and limitations of these structures. Although collected a century ago, the Titanic relief fund was subject to charitable law, notably Special Commissioners of Income Tax v Pemsel, where Lord Macnaghten set out the charitable purposes that form the basis of charitable law today. These included relief of poverty, education, religion and ‘trusts for other purposes beneficial to the community, not falling under any of the preceding heads’.[3] The Titanic fund was certainly not such a disaster as its namesake but it had its shortcomings, namely the period for which the fund ran and the treatment of beneficiaries.

The Titanic fund

After 1,500 people died in the sinking of RMS Titanic in April 1912, monies poured in nationally and internationally. Despite the significant funds collected, the trustees decided that the fund should run until the death of the last beneficiary and that donations should maintain, but not improve, beneficiaries’ living standards.[4] The fund ran for almost 40 years, until 1959. This decision shows that the trustees were reluctant to entrust beneficiaries with autonomy over their own funds, and many received small weekly payments, which made them dependent on the trustees rather than helping them to move on and rebuild their lives.

Further, with huge inflationary pressures throughout the First World War and beyond, these periodic payments did not rise with living costs. The trustees also treated beneficiaries differently, concerned that they did not rise ‘above their station’, and so the widow of a second‑class steward received almost half that of a bedroom steward’s widow.[5] As historian Sarah Gregson notes:

‘In stark contrast to the generosity of donors, distribution of the fund was governed by trustees’ determination to grant only small amounts of money to those deemed worthy of the largesse extended to them by donors.’[6]

The trustees’ approach appears to have done little to alleviate the hardship the disaster caused or give effect to donors’ intentions. Instead, it appears that it left beneficiaries in need, took away their dignity and created division rather than relief.

Non‑charitable discretionary trusts

Although a non‑charitable discretionary trust does not benefit from tax reliefs, the structure would help to avoid the Titanic fund issue of only providing for beneficiaries’ basic needs, as trustees have greater discretion to benefit beneficiaries above the necessities of everyday life. The trustees are still subject to fiduciary duties under English and Welsh law, but the Commission has no oversight. Although discretionary funds do not attract tax reliefs (Her Majesty’s Revenue and Customs’ (HMRC’s) Trusts, Settlements and Estates Manual 1471 provides that they will be treated like other UK‑resident trusts),[7] unless the funds are invested for a substantial length of time rather than being distributed to beneficiaries, they are unlikely to be subject to considerable taxation.

As a practical matter, although any discretionary trust with UK‑domiciled settlors falls within the relevant property regime, where those contributing are individuals making gifts within their nil‑rate band or annual exemption, the effective rate of IHT would be, in all likelihood, 0 per cent on distributions from the trust within the first ten‑year period from its creation. This is set out in detail in HMRC’s Inheritance Tax Manual.[8]

However, the pitfall of discretionary trusts is that distributions are limited only by the size of the fund, as with the Penlee disaster fund. At Penlee, eight courageous lifeboat men drowned off the Cornwall coast in 1981. The trustees split the GBP3 million fund between the eight victims’ families and closed the fund. The poor beneficiaries were the subject of some public vitriol and the public expressed concern that the monies could have been used more appropriately to both assist the victims’ families as well as provide for other needs in the community, such as a new lifeboat.

Conclusion

Both structures, therefore, have benefits and limitations, and Titanic and Penlee highlight the difficulties inherent in administering a disaster relief fund. For the modern trustee, the erudite guidance from Disaster Action is essential reading.[9] It considers the two trust options and sagely advises that, rather than choosing between a charitable and non‑charitable discretionary trust structure, disaster relief trustees should set up both structures to make use of the advantages of both. Thereby, trustees can simultaneously obtain tax reliefs and impose limitations to avoid excessively enriching beneficiaries, but also provide for more than their basic needs.