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Court Allows Trust Error to Be Corrected

Mistakes do happen, and in some circumstances they can be rectified by the courts.

In a recent case, the wife of a man who died in 2015 went to court after a mistake in dealing with a trust created under his will left a substantial potential Inheritance Tax (IHT) bill to pay.

The man’s estate had been passed into the trust and his wife was to receive the income from the trust for life. The trustees had the discretionary power to create trusts for the benefit of other beneficiaries and the power to advance the capital to the man’s widow for her benefit.

Some distributions had been made prior to the trustees taking control of the assets. They then executed a deed of appointment which terminated the widow’s life interest and brought the discretionary trusts into effect. They believed this would have no IHT implications. They were wrong: the termination of the wife’s interest created an immediate and substantial IHT liability.

The trustees went to court to rescind the deed of appointment on the ground that had they been properly advised of the IHT consequences, they would not have executed it.

In order for a mistake to be rectified, certain conditions must be met. These are:

  • There must be a clear mistake, not just an action borne out of ignorance or inadvertence. There must be a false belief in the outcome of the decision;
  • If the mistake is the result of carelessness, it may still be capable of being rectified if the person making the mistake did not deliberately run the risk of being wrong; and
  • The effect of the mistake must be such that the recipient of the property could not in conscience retain it in the circumstances.

The injustice or unfairness of the mistaken disposition must be objectively evaluated given the facts of the case.

The court ruled that the distributions made informally were invalid, since they had to be made by deed and also were not made with the consent of the life tenant of the trust (the widow).

The further advances were set aside on the grounds of mistake.