Setting Aside Deeds Of Appointment

Hopes and another v Burton and others

Case background

This is a case from November 2022 where a claim to set aside two deeds of appointment made by the Trustees was successful.

The Trust was created by a declaration of Trust by the settlor Hilary Marsden (formerly Burton) in respect of a policy she held with Skandia Life.

The settlement provided for two types of beneficiaries, “Possible Beneficiaries” (PB) and “Immediate Beneficiaries” (IB).  The IBs were entitled to an absolute interest in the Trust Fund and income in shares set out in the trust instrument. The PBs were to all intents and purposes Discretionary Beneficiaries whom could be appointed capital and/or income from the Trust fund at the absolute discretion of the Trustees.

Following the death of the settlor, new Trustees were appointed to the Trust, and it was generally agreed that IB (1) should not benefit from the Trust and her share should create a new discretionary trust, IB (2) should be appointed funds to assist with securing her housing position and the remaining IBs (3&4) interests should be unchanged.

The first deed of appointment was drafted which stated that IBs (3&4) should have a right to income for life and on their death, the Trustees hold the capital and the income for the benefit of the named Discretionary Beneficiaries who were a narrower class than the PBs in the original settlement. IB (1) was excluded from the PBs in the original settlement and her share of the capital and income of the fund was to be held for the benefit of the new Discretionary Beneficiaries.

In the second deed of appointment, £100,000 of IB (2) share was appointed into a new discretionary trust fund for the benefit of the more narrowly defined Discretionary Beneficiaries.

Judgment

The judge considered the legal principles to rescission on the grounds of a mistake and if the Trustees made an operative mistake as to the substance or effect of the first deed of Appointment.

He found on the evidence that the trustees in making the first appointment did not intend to alter the interests of IBs (2,3 & 4) at all. Their intention was that those interests should remain as they were. Those interests were absolute defeasible interests, subject only to the exercise of the trustees’ powers during the Trust Period, so at the end of the Trust Period, or on an earlier release of the trustees’ powers of appointment, they would have taken their share of the Trust fund absolutely.

The first Appointment removed that absolute entitlement to capital. Instead, they are only entitled to the income from their share, and on their death, their share is held on the new discretionary trusts. Capital could not, therefore, be appointed during their lifetime.

He stated that this cannot in his judgment be described as leaving the trusts for them as they are.

He went on to say that in any event, the fact that the trustees could exercise their powers (if they chose to do so) under the first Appointment to place the beneficiaries in the same position as they would be under the Trust (and vice versa) would not in his judgment be sufficient to prevent a change in the substance of their entitlement. It was a mere workaround; and, critically, depends on the trustees deciding to exercise their powers in a particular way, rather than a matter of entitlement.

In his judgment, it was self-evident that a right to capital which is absolute unless the trustees exercise their power of appointment is radically different from a life interest in that capital with the possibility of obtaining an absolute interest only if the trustees decide to exercise their power of appointment.

He was satisfied therefore that the first Appointment created radically different interests held by IBs (2,3 & 4), and that the trustees were mistaken in doing so. Their mistaken belief was apparent from their actions following the Appointments. As they had appointed capital to IBs 2 & 3. They were entitled to do so under the Trust, but not under the Appointments.

He concluded that this mistaken belief was in his judgment sufficiently serious as to make it unconscionable not to set aside both Appointments.

The tax consequences of the Appointments in terms of establishing new settlements and the ending of existing interests in possession were also considered and it was concluded that the Trustees were also mistaken in their belief when entering into the first Appointment either that it had no adverse tax consequences, or, at the very least, that there was no risk of adverse consequences. Either of those mistaken beliefs was considered to be sufficiently serious to justify setting aside the first Appointment.

Conclusion

This case raises an important point that trustees should not expect to be able to rely on the doctrine of mistake to provide them with a defence to alleviate any unforeseen tax charges. Therefore the importance of taking advice on the tax consequences of any changes to a Trust Instrument or appointment of funds is paramount.

However, the decision, in this case, is an encouraging confirmation of the Court’s continuing willingness to set aside voluntary transactions on the ground of mistake, especially where there are other factors, in this case, fundamental changes to the beneficiaries’ interests which were at odds with the intentions of the Trustees and beneficiaries.

The wording of a Trust Instrument and Deeds of Appointment need to be carefully drafted to ensure that they deliver the expressed intentions and expected outcomes.  If this is not the case a dispute is likely to arise.