Trust deeds can be an effective means of managing family wealth and minimising tax liabilities but, as a High Court decision strikingly showed in a case found and reviewed by one of our expert advisors, Solicitor Emma Walker, any mistakes in their drafting can have serious repercussions for generations to come.
The case concerned a family trust with substantial assets that was created in the 1930s by a woman in contemplation of her son’s marriage. It had been amended more than once over the years, most recently by a deed of appointment which created a sub-fund for the benefit of an unmarried male member of the current generation (the heir). That fund was worth several million pounds.
Some years after the deed was executed, the trustees’ legal advisers detected serious shortcomings in its drafting. Amongst other things, it triggered immediate and future Inheritance Tax liabilities and removed the trustees’ power to apply capital for the heir’s benefit. Due to his being unmarried, it also prevented any benefit from the fund being granted to his partner or his three young children.
In those circumstances, the current trustees asked the Court to rectify the deed. In granting the relief sought, the Court noted that the errors in the deed’s drafting could not be remedied by an exercise of interpretation. Its unusually restrictive wording was clearly flawed, and it was hard to see how its effect could be any further away from that which had originally been intended. HM Revenue and Customs would have received an unintended windfall had the deed remained uncorrected, but did not resist the trustees’ application