The recent decision in the case of X and Y demonstrates starkly that care must be taken with ‘pre-printed’ trust deeds.
What happened in X and Y?
The background to the case is a claim by an unmarried cohabitant following the death of their partner. The claim of a cohabitant on death relates to the assets personally held by the deceased partner. Assets held in trust would be outwith the direct assets in question in such a claim (although they could have a bearing on what the cohabitant is awarded by the court from the assets personally owned by the deceased).
The deceased in X and Y had attempted to place certain insurance policies into trust. The deceased was the sole trustee and in order to obtain control of those policies following their death, parties applied to the court to be appointed as trustees to replace the deceased. The argument from the surviving cohabitant was that the trust deed paperwork had not be completed correctly and accordingly there was in fact no valid trust relationship and the policies remained in the personal estate of the deceased … and available to be part of the pot for the cohabitant on death claim. The cohabitant’s argument was successful. As the trust deed paperwork had not been completed correctly there was no trust. And it is beyond a dead parrot situation… there never was a parrot (or trust).
Why was there no trust in X and Y?
There was no trust as there is a rule that the settlor (person setting it up) of a trust cannot also be the sole trustee where they do not take steps to intimate the existence of the trust relationship to at least one beneficiary (the knowledge of the insurer has been determined in previous case law to be insufficient). Intending there to be a trust relationship is not enough – go beyond Jedi mind trick, one must.
There needs to be another trustee or intimation to at least one beneficiary. As well as a trust deed you need these elements. You need all the steps… see Leicester City and the transfer of Adrien Silva on this point.
This rule is designed partly to strike at attempts to defraud creditors by an individual claiming (without any notice to anyone) that assets in are in fact held in trust and outwith the reaches of a creditor (“an important safeguard against manipulation of the trust mechanism in insolvency” as the sheriff neatly put it in X and Y).
The failure to appreciate this rule when completing the trust deed was fatal to the trust’s validity, fatal to the policies being held outwith the deceased’s personal estate and fatal to the attempt to ensure the policies would definitely pay out for the benefit of the intended beneficiaries.
Is it the fault of the pre-printed trust deed?
As well as it being difficult to say a piece of paper can be at fault, the answer would seem to be “no”. In X and Y the trust deed did have some guidance notes. It said “It is important to appoint at least one additional trustee to act with you as soon possible so the trust will be effective.” Many similar trust deeds can be very sophisticated and well crafted documents. It seems to be how they are the handled that can cause issues. Filling in ‘blanks’ and ticking boxes can be deceptively complicated.
Some points to look out for
Is a trust validly created?
Who are the trustees? Will those trustees result in later logistical or administrative issues?
Might you ‘run out’ of trustees somehow?
Have the intended trust assets being properly transferred into the hands of the trustees?
Are you sure who are the beneficiaries of the trust?
Are there any individuals that should be excluded from (potential) benefit?
Are you sure the basis upon which the assets are to be held for the beneficiaries is as desired and intended?
Is the tax treatment of the trust understood and acceptable?
What happens on the death of the person setting up the trust? Are there time limits to take particular decisions?
Does the basis upon which assets are held for the beneficiaries mean there is in reality a transfer of control of the asset to the beneficiaries (whoever they may be)?
How do trustees make decisions? Has the trustee makeup in-built a decision-making stalemate by accident?
Did you appoint a “protector”? “A what?” many will ask…
Does a tick of a box satisfactorily introduce e.g. Scots law into an otherwise wholly e.g. English document?
Does the signing page create confusion at a later date as to whether or not the trust is valid?
Getting it right
Whatever type of document is used, it needs to do what the person setting up the trust intends. It also needs to fit with the wider tax and succession rules as well as the estate planning aims of the individual and their family and loved ones.
If a pre-printed or bespoke document does it, it does it. Of course, the person setting it up needs confidence in what the document does and the adviser needs to be clear it works as planned (and at a later date they might be responsible for the terms, effectiveness and suitability of the trust deed). The adviser might also ‘inherit’ older (pre-printed) trusts and might need comfort (or be asked for comfort) that everything is ‘in order’.
X and Y is a ‘when trusts go wrong’ case that has actually reached court. Other situations akin to those in X and Y do not reach court but have equally significant consequences with the ‘wrong’ people inheriting assets and/or the ‘wrong’ (and a more disadvantageous) tax treatment applying. And all of this coming as a shock at the point of discovery of the issue.
We should say the issues here can be similar to the issues with death benefits (see previous blogging). Apparently simple yet deceptively complicated rules and paperwork causing financial and other disappointment.
What to do to try and avoid disappointment?
The key point is that whatever steps are taken the individual setting up the trust and their advisers need to be confident and comfortable that the trust deed will do what is intended. A ‘pre-printed’ trust might do just that. There can be significant assets at stake and it would be unfortunate if, as with in X and Y, the destination of those assets may be different from that hoped for.
The ‘disappointed’ beneficiaries in a ‘when trusts go wrong’ case would no doubt have wished further checks had been carried out to be comfortable the trust deed did as planned. A trusts lawyer can help with that and the decision-making and steps around placing assets into trust. It is also one of those situations where seeing a lawyer early, but not often, is perhaps a good mantra.