Trusts: rectification of mistake

Genuine mistakes may not be disastrous but in some cases, a mistake can lead to significant financial consequences for third parties, such as trust beneficiaries. A recent case considered the principles of setting aside voluntary dispositions following mistake where a premature transaction was made early in the administration of an estate.

What are the general principles for setting aside a transaction for mistake?

In the seminal case of Pitt v Holt [2013] UKSC 26, the Supreme Court confirmed the relevant test for setting aside a voluntary disposition on grounds of mistake. In the recent case of Smith v Stanley [2019] 2 WLUK 174, the Court followed these principles. The test is as follows:


  • The gravity of the mistake must be assessed by a close examination of the facts. This includes the circumstances of the mistake and its consequences for the person who made the vitiated disposition
  • The court needs to consider whether there is a distinct mistake rather than mere ignorance or inadvertence. Forgetfulness, inadvertence or ignorance is not, as such, a mistake, but it can lead to a false belief or assumption which the law will recognise as a mistake. Mere ignorance, even if causative, is insufficient. Mistake of law is not a defence
  • Other findings of fact may also have to be made in relation to change of position or other matters relevant to the exercise of the court’s discretion
  • The injustice (or unfairness or unconscionableness) of leaving a mistaken disposition uncorrected must be evaluated objectively, but with an intense on the facts of the particular case
  • The evaluation of what is or would be unconscionable must be objective
  • The court must then form a judgment as to the justice of the case on its particular facts


What was the mistake in the present case?

Before the estate was called in, the executors made several informal distributions to the beneficiaries totalling £190,000. They also executed a deed of appointment terminating the life interest of the deceased’s wife’s in a legacy fund and accelerating the discretionary trusts.

The trustees did this on the basis of their accountant’s advice that the appointment would be a PET.

On realising that it was, in fact, immediately chargeable to IHT at 20%, they applied to court for a determination as to the validity of the distributions and the deed of appointment; and to rescind the deed of appointment for mistake if appropriate. At issue was whether the court had jurisdiction to set aside the deed made following – and in reliance on – professional tax advice that turned out to be incorrect.

The trustees’ application succeeded. The Court found that ignorance of the tax consequences can be a relevant mistake, and the making of the deed of appointment was an operative mistake justifying rescission, even though the deed itself was valid and effective. To allow the deed to remain – with the resulting tax charge – would deplete the trust fund to the detriment of the trust beneficiaries. An important point was that there was no intention on the part of the trustees to avoid paying tax.

And what of the distributions made to beneficiaries? The Court found these to be invalid but for different reasons – including the fact that they did not comply with the trust deed.

 

 

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