Trust business - where is the evidence? Part II

As promised last month, this month I will consider some real-life cases where trust information was missing or incomplete, the problems this led to and what the solutions in such cases were or might be.

The case of too many trusts and not enough deeds

In this case a married couple made a settlement under which, broadly speaking, they both had life interest, which continued until the death of the survivor of them, with the capital passing to their three children on the second death. In the meantime, the trustees had wide powers to deal with the trust capital for the benefit of the settlors, and the settlors (and the survivor of them) had a power to appoint trust benefits to any of their children or their issue. The trustees were the settlors and two of their children.

So far, so nothing unusual and we are not presently concerned with any tax implications of the arrangement. This trust was basically understood as a form of “probate” trust with the settlors being in control and where nothing was expected to happen without the settlors’ knowledge and approval. The initial property held in the trust was the settlors’ residence. As such, the two children trustees had little interest in the trust provisions whilst the parents were alive.

The settlors also made several other trusts holding various investments, including pre-2006 flexible trusts and post-2006 discretionary trusts.

At some point it transpired that the third of the settlors’ children had a drug habit and so the parents decided to exclude her from being a beneficiary under the trusts. This required a deed of removal of the said potential (or named (default), depending on the trust) beneficiary from each of the trusts. With some help from the adviser and from the life offices holding the trust investments, solicitors prepared a number of deeds of removal of the beneficiary and these were executed. Somewhere along the line, the above mentioned probate trust was “missed”. It was only after both the settlors passed away that the remaining two trustees got round to looking at all the trusts. This is where the final default clause of the “probate trust” was discovered. As the settlors had not made any appointments during their lifetime (and not removed the drug addicted daughter from benefit), on the second death the trust capital vested absolutely in the three children equally. This included the unfortunate drug addicted daughter. It is not what the parents wanted but it was too late to do anything about it, short of going to Court.

The moral of the story should be obvious: if you are a trustee, make sure you are familiar with the trust (all the trusts!) and this includes understanding of all the trust provisions. The first rule when you deal with any trust is: Read the Deed.

And be particularly careful where the settlor or the trustees want to exercise their powers in cases where the settlor has created a number of settlements taking advantage of the so called “Rysaffe” rule.

The case of a missing trust and an incomplete deed

This was a case of a pre-2006 flexible power of appointment trust. The settlor’s original intention was that his two adult children were to benefit in due course and so he named his son S and daughter D as equal current (default) beneficiaries. The trust included the usual several classes of potential beneficiaries to whom the trustees could make appointments of benefits to override the default position.

Some years later the settlor died. Under his will made a year before his death, his daughter D was the executrix and the sole beneficiary of his estate.

D made a claim to the life office in respect of the bond, apparently unaware of the existence of the trust. The life office had a record that a trust existed but held no copy of the trust and no record of any additional trustees having been appointed by the settlor.

After some searching, a copy of the trust turned up. This did not include an appointment of additional trustees. D continued with her claim on the grounds that in the absence of a surviving trustee, she was entitled to the proceeds as the executrix. This would have been a proper course to follow except that a deed of appointment of trustees which was executed a day after the trust was subsequently found. In this deed the settlor appointed his wife and both his children D and S as additional trustees. Both the widow and the son were still alive. However, the deed of appointment, while naming the parties and having spaces for all the parties to sign etc, was executed only by the settlor, S and D. His then wife did not sign the deed. The question was therefore whether the deed - and so the appointment - was valid.

Apart from the fact that the documents were not immediately to hand and so the process took months, the problems may not have been as dramatic if all the family members were cooperating. However, it transpired that a few years after the trust had been set up, there was a breakdown in family relationships culminating with the father disinheriting his wife and son. (Hence the new will in favour of the daughter). D was not on speaking terms with her brother.

Correspondence was also found where the settlor requested the adviser (representative of the life office) to provide the necessary forms to change the beneficiaries under the trust but this was never actioned. Even though in writing, this was not enough to effect a change of beneficiary under the trust, which had to be by a deed executed by the trustees.

With regard to the deed of appointment of additional trustees, it was decided on balance that it was valid as far as the appointment of S and D was concerned as it had been executed by F and D and S. However, the widow was not validly appointed. As a result, any payment of the bond proceeds could only be made to both the trustees into a joint bank account, and S and D shared the proceeds between them.

D, probably rightly, considered that she had lost half of her entitlement due to negligence of the life office.

Clearly neither D nor the settlor at the time he wanted to change the beneficiaries received proper advice. D appeared not to understand that the trust in question was a flexible trust and so the trustees could still follow the settlor's wishes and appoint the funds to her. Of course, this may not have been possible with only her brother as the second trustee but it may have been a possibility if an independent trustee was appointed, assuming that indeed her father's intentions were clear in this respect.

The case illustrates how many things can go wrong in what starts as a straightforward gift to a trust. Clearly the adviser was at fault for not having dealt with the settlor's request concerning the change of the beneficiaries. The life office was at fault for not having a proper record of the trust or of the deed of appointment of additional trustees (both of which were only found after a lengthy delay). And, of course, for accepting the deed of appointment given it had not been executed by all the parties.

The unfortunate case of a designated unit trust account which could not prove it was a trust

It is fair to say that over the years there has been a lot of confusion about designated unit trusts accounts. It is however now pretty much settled that, unless there is evidence the contrary (e.g. a statement on the UT application that a designation will NOT create a trust) and the investor intends to make an absolute gift to a named beneficiary who is identified as a “beneficial owner” then, at least in England and Wales, such a designation will create a bare (absolute) trust. Ideally of course people should use proper trust deeds and appoint at least one additional trustee, but it seems that designations are still popular because of their perceived simplicity. I say “perceived” because matters are not exactly simple, especially where the investor loses capacity or dies. In this particular case a grandmother set up two designated accounts, one for each of her grandsons. Or so she thought, apparently. The initial investment was made over 15 years ago, and additional funds were put in about seven years ago. Unfortunately, in due course the grandma lost mental capacity, although she had previously appointed an attorney under an LPA.

Now one of the grandsons is 18 and would like to have his money. Hm, the account is still in the name of the grandma but she can’t deal with it for lack of capacity. Can her attorney under the LPA deal with it? Unfortunately, the powers of an attorney do not stretch to stepping into the shoes of the donor acting as trustee.

Can the payment be made to the grandson directly? But wait, where is the evidence that this is a trust? Unfortunately, the records of what happened when the first investment was made were very scant – there does not seem to be any evidence that this was intended as a gift and the “old” brochure and application form for the investment did not have any details about any gift. In fact, with this provider, some designations at that time were used to informally earmark the investment, whilst in other cases an actual immediate gift may have been intended. It was somewhat “better” (evidence-wise) with the additional investment seven years ago as there was, by then, a new form and some evidence that the additional investment was intended as a gift.

So, the first question to determine was whether the investment was in bare trust or not. Based on the available evidence only the part originated from the later investment was in trust. So the beneficiary (absolutely entitled) could ask the account holder (as trustee) to pay over those funds to him. Unfortunately, the account holder no longer had capacity so could not do this. Where a sole trustee loses capacity there is no easy way to appoint a replacement trustee other than making an application to the Court.

What of the part of the account originating from the earlier reinvestment? Well, if this was not held in trust then it belonged to the investor and the attorney under the LPA could deal with this. But the attorney had already admitted that he believed the money belonged to the grandson and the grandson wanted it. So the provider had a notice of the possible third party claim, leaving it unwilling to deal with the attorney. It looked like the only way to resolve it was to apply to the Court for directions. Unless some actual evidence of the trust of the initial investment came to light. This could be just a letter signed by the grandma (no need for a deed), supported by some evidence that any income from the investment was /taxed on the beneficiary. Then it would be just a matter of appointing replacement trustee; still not straightforward but not as bad as trying to prove the existence of a trust.

Conclusions

Perhaps some of the above may sound familiar? As shown above, not dealing with the paperwork and/or keeping evidence of trust related matters could at the very least result in confusion and delays and in some cases much worse and costly consequences. For the clients, advisers and providers of investments and trust “forms” alike.