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High Court Rectify Trust Deeds

on Friday, 21 April 2017.

The High Court rectify trust deeds that wrongly reassigned successive life interests of the settlor's children, instead of their then-spouses - RBC Trustees V Stubbs [2017] EWHC 180 (Ch)

The High Court has agreed to rectify two deeds drafted by solicitors that removed the successive life interests of the beneficiaries' spouses and also, mistakenly, reappointed the beneficiaries' share with significant adverse tax consequences, on the ground of mistake.

Background

In 1991 a settlement was altered to appoint settled shares on trust for the settlor's three children. A deed executed in 2004 created successive life interests in favour of two of the children's spouses, such that if either child died, their respective interests would pass to their spouses without incurring an inheritance tax liability.

In 2007 one child separated from her husband and the trustees instructed solicitors to revoke the husband's interest. The deed was executed in 2008 and revoked the husband's interest, but also, revoked the appointment of the child's settled share and then reappointed her life interest on the same trusts that existed before (minus her husband's life interest). Further family troubles in 2013 led to the second child's marriage breaking down. Solicitors were again instructed to revoke the wife's interest, but the same mistake was made again and a deed similar to the 2008 deed was executed in 2014.

Due to inheritance tax changes in 2006, both deeds incurred very unfavourable tax consequences and liabilities. The trustees applied to court for the deeds to be rectified on the ground that they mistakenly revoked and reappointed the trusts instead of simply revoking the spouses' interests. The Respondents, who were the settlor and her three children, supported the claim for rectification.

The Law

The leading authorities have created 4 tests which a claim must meet for rectification to be successful, which state (in summary) that there must be:-

  1. clear evidence of the trustees' subjective intention
  2. a flaw in the document so that it did not give effect to that intention
  3. a specific intention to achieve something different from what had been done and
  4. an issue capable of being contested - even if the parties consent to the application.

Decision

Applying the four tests, the Judge held that:

1. Subjective intention:

It was clear that the solicitors were instructed to draft deeds which only removed the spouses' interests and there were no contrary intentions, which the solicitors accepted - one solicitor admitted he failed to consider the difference between the intention and the eventual consequence and had used an earlier, inappropriate draft to save time.

When the settlor signed the deeds, she knew she was removing the spouses' interests and never considered her children's interests - the mistake was not obvious to a lay person.

2. Flaw in the document:

Both deeds altered arrangements that were unintended. Unlike in Allnutt v Wilding [2007] EWCA Civ 412, the mistake did not solely relate to its tax consequences. Whilst the application was motivated by the tax consequences, rectification was needed because the trustees' intentions and the effect of the deeds were different.

3. Specific intention to achieve something different:

This was clear as the trustees wanted to remove the spouses' interests only - the Judge stated the trustees did not have to show a positive intention not to revoke and reappoint the interests.

4. Issue capable of being contested:

The fact that a dispute arose over whether the children's interests arose under the 2004 deed or the two later deeds was sufficiently contestable.

Commentary

This case provides a useful summary of what factors the court takes into consideration when asked to rectify deeds (paras 36 - 42) and a clear explanation as to how the facts of this case were applied to each test (paras 42-68). Of particular note is the fact that even if all parties to the application agree to the document / deed being rectified, there must be an issue that is capable of being contested.

Drafting trust deeds can be complex and incorrectly drafted deeds can cause profound and far-reaching consequences, in particular where tax planning is involved.

If you require specialist advice in this area, please contact Michelle Rose on 0117 314 5246 in our Private Client team 

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