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Professional trustees can no longer rely on the Hastings-Bass principle as a cure-all for their mistakes. Michael Alden and Sue Savill report
Professional trusteeships can be a very lucrative area of work. Many solicitors advising on trusts and estate planning encourage clients to appoint a professional in the role of a trustee or executor, knowing that this will ensure a stream of fee income in later years.
Professional trustees have always known that they need to exercise the highest standards of professional conduct. But everyone is human and occasionally there are mistakes. These errors can be costly, not only in the time and effort needed to correct them, but also in financial terms. Fees might need to be written off; work involved in correcting errors cannot be billed; there is the question of compensation; and, of course, there is the reputational damage. Sometimes there are unforeseen financial consequences, such as more tax needing to be paid by the client than had been calculated when setting up the trust.
In recent years professional trustees faced with higher tax bills for trusts than they had anticipated have had a very useful remedy to avoid some of the consequences outlined above.
The ‘rule of Hastings-Bass’ has developed since 1974 so that, as stated in Sieff v Fox (2005), when trustees exercise a discretionary power, the court can overturn their action on behalf of the client if either the effect of exercising the power is different than had been intended when setting up the trust, or the trustees would not have acted as they did if they had taken account of material considerations that were relevant to the trust.
This ability to redress previous actions is an unusual luxury relative to most other areas of law. But two recent court decisions – Pitt v Holt (2010) and Futter v Futter (2010) – appear to limit this remedy so that professional trustees may no longer be able to save their blushes.
The leading judgment in the two recent cases was given by Lord Justice Lloyd, who also heard Sieff v Fox in the High Court. He concluded that the ability to redress the trust deeds retrospectively should be reconsidered.
In Futter v Futter the advice given by the trustee was that there would be no charge to capital gains tax in making certain advancements from the client’s settlement. This turned out to be incorrect. Lloyd LJ held that the trustees did not overlook the need to think about capital gains tax. They were given advice on the right point, but the problem was that the advice was wrong.
It followed that the trustees were not in breach of any fiduciary duty in acting as they did. They relied on advice from a reputable and competent firm. The professional trustee, who was a partner in the firm advising, had also relied on the advice. The trustees’ actions were not void as they were within the relevant powers of the trustees. The appeal by HMRC was allowed and no changes were allowed to the trust in retrospect.
The facts in Pitt v Holt were rather different. Mr Pitt had suffered a head injury, so Mrs Pitt was appointed receiver through the Court of Protection for her husband. Mr Pitt’s damages were settled on a structured basis, with a lump sum being placed in a discretionary trust. This was not a special needs trust so it did not qualify for special inheritance tax exemptions.
Inheritance tax was charged on the settlement, so the funds were depleted considerably, leaving very little in the settlement on Mr Pitt’s death. Had Mr Pitt’s life expectancy been different then there would have been insufficient funds for his needs. Mrs Pitt sought relief under the rule in Hastings-Bass.
Lloyd LJ held that the action of settling the damages into a trust was not void as Mrs Pitt, as receiver for her husband, had that power. The question was then whether her actions could be redressed as she had been in breach of her fiduciary duty to her husband in overlooking the impact of inheritance tax.
Mrs Pitt’s level of skill was such that it was recognised that she needed to rely on professional advice in this area. She took advice from competent advisers but it would appear that the wrong precedent deed was executed by her advisers, so the settlement did not qualify as a special needs trust and thus for the inheritance tax exemptions.
Mrs Pitt also argued the doctrine of mistake. It was held that she had a mistaken belief as to the effect of the deed, which was of sufficient gravity to satisfy the legal test for mistake. The catch was that this was not a mistake as to the legal effect of the deed, but rather as to its financial consequences. It therefore could not be set aside on the grounds of mistake and, as before, the HMRC appeal was upheld.
Lloyd LJ restated the principle that both claimants had the remedy of suing their professional advisers for damages rather than those professional advisers asking the court to put their mistakes right.
Tightening the rule
This cautionary tale for professional advisers may not be new, but it should serve to heighten awareness that the safety net of the rule in Hastings-Bass is being tightened.
Beneficiaries faced with an unexpected tax bill may be less cooperative and quicker to request the dusting down of insurance policies.
Michael Alden is a partner and Sue Savill is an associate at Ashfords