The dangers of drafting trust documents without direct input from the settlor

 In Comment

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Case Summary from LawSkills | Private Client specialist trainersRectification of Trust Deed – Andrews v Andrews [2014] EWHC 1725

Mr Peter and Mrs Gill Andrews jointly settled a property on trust with the intention of benefiting their grandchildren and at the same time saving Inheritance Tax (IHT). Sadly, the financial adviser who organised it created a trust benefiting only one grandchild with no flexibility to override these provisions or benefit other grandchildren during the named grandchild’s lifetime. This was not what the settlors intended and so they sought rectification of the trust deed.

The facts

Peter and Gill Andrews sought to rectify a settlement they created which was dated 1 November 2010. At the time the trust was created they had one grandchild – Zoe Andrews – the daughter of their son, Dr Timothy Andrews. The Andrews’ aims had been to benefit all their grandchildren whenever born by transferring a property into trust which would generate an income and to help mitigate IHT.

The evidence of Peter and Gill was that the trust deed which was sent to them by their financial advisor was significantly different from that which had been discussed at earlier meetings. It had been drafted for tax reasons as a fixed life interest settlement with Zoe as the life tenant; only after Zoe’s death would there be a discretionary trust and until then Zoe would be absolutely entitled to all of the trust’s capital and income. Whilst there were discretionary beneficiaries there was no overriding power for the trustees to make appointments or distributions in their favour during Zoe’s lifetime.

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This inability to provide for no-one other than Zoe during her lifetime was neither discussed nor explained to the Andrews. Even the letter of explanation sent with the Deed for signing did not alert them to this problem – it spoke of benefiting the settlors’ children and grandchildren.

It was on the birth of their second grandchild that the Andrews made enquiries about adding her as a beneficiary to the trust that it became apparent that this was not possible and that their original wish to benefit all their grandchildren equally was not carried out in the wording of the Deed.

The Andrews sought an order for rectification of the trust deed to give the trustees an overriding power of appointment which could be exercised at any time for the benefit of any of the discretionary beneficiaries at any time, including during Zoe’s lifetime.

The law

In the case of Day v Day [2013] EWCA Civ 280 the Court of Appeal held that in the case of a voluntary unilateral settlement, there is no requirement for an outward expression of what was required as a precondition to achieve rectification. What matters is the settlor’s intention – although it is necessary to prove that there was a mistake and this is made easier if there was an outward expression of intention so that anything which does not accord with that expression could constitute a mistake.

In Re Butlin’s Settlement Trust [1976] Ch 251 Mr Justice Brightman made it clear that the equitable remedy of rectification was available not only where particular words had been added, omitted or wrongly written but also where the words were purposely used but it was mistakenly considered that they bore a different meaning from their correct meaning as a matter of true construction. In such a case the court would rectify the wording of the document so that it expressed the true intention.

The decision

The Judge was satisfied that on the evidence of Mr & Mrs Andrews and their son Timothy all three of them were mistaken as to the legal effect of the trust deed. The mistake was that they all thought the trust capable of benefiting any grandchild and not just Zoe. He ordered rectification at the cost of the claimants Peter and Gill Andrews.

Practice points

  • No mention is made of the person who drafted the trust deed but since this has to be a solicitor or barrister one wonders what instructions they were given. The person providing advice and the explanatory letter was a financial advisor so it is assumed he instructed the draftsman. This underscores the dangers of drafting trust documents without direct input from the settlor. Always seek to do this even if it is only ever done in the presence of the introducer and with the settlor’s consent.
  • Ensuring clients, however sophisticated, understand legal documents is a challenge but this is the lawyer’s lot and the best way to do this is to ask them to paraphrase what it is they have read. Examine with them whether this is the correct construction and if either their understanding is incorrect or the document is incorrect then that is the time to put matters right rather than rely on rectification later.

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Case Summary from LawSkills | Private Client specialist trainersCase Summary from LawSkills | Private Client specialist trainers