A failure may be negligent or it may be a mere ‘mistake’. A ‘simple’ mistake can be easy to make – but potentially disastrous for those affected – not to mention the cost implications of having to put it right.
Trustees typically have the power of appointment by which they may change the terms on which capital and income is held; and the power to apply income and capital for the beneficiaries’ benefit. But what are the consequences should a mistake is made or formalities not complied with?
The courts have, in recent years, seen a number of trusts cases involving mistake, reflecting the reality that there are many pitfalls to watch out for. A reminder of one such case involving both mistake, and a failure to properly exercise a power, may prove a useful reminder of the risks.
In Smith v Stanley (20191), the executors/ trustees had taken early steps in the administration of the deceased’s (D) estate. D died leaving £4.2m on trust for the benefit of his surviving wife for life. This was subject to a power of appointment for the benefit of a class of discretionary beneficiaries (these were named). The will also extended the statutory power of advancement under s32 Trustee Act 1925.
On the trustees’ request, the executors make various informal distributions to discretionary beneficiaries totalling £190,000. They also executed a deed of appointment terminating the widow’s life interest in a legacy fund, thus accelerating the discretionary trusts. However, they were wrongly advised by a solicitor (and relied on that advice) that the appointment would be a potentially exempt transfer. In fact, it was immediately chargeable to IHT.
The trustees therefore asked the court to determine the validity of the distributions and the deed of appointment; and to rescind that deed for mistake if necessary.
The Deed of Appointment - The executors had used a deed and had validly exercised their power of appointment which, inadvertently, gave rise to the IHT charge. The court took the view that ignorance of the tax consequences can be a relevant mistake and recognised that the tax charge would cause substantial financial disadvantage to the discretionary beneficiaries.
It was tax-efficiencies rather than tax avoidance that the trustees were seeking and the mistake was fundamental to their decision. Recission was therefore justified.
The pre-appointment distributions - The executors had no power to make them because a deed was required and the consent of D’s widow (as life tenant) had not been sought. This failure to comply meant that their purported exercise of the power of appointment was void. The court could not intervene where the trustees failed to execute a deed.
Care must be taken by the trustees when exercising their powers, both under the trust terms and the legal formalities required under statute. Practitioners advising on the creation and drafting of trusts, and the exercise of powers under the trusts, also need to take care to ensure they’re not giving negligent advice on, for instance, the tax implications of a proposed course of action. Otherwise, they risk a professional negligence claim.
1Smith v Stanley  2 WLUK 174