Eccentric wishes and charitable purposes

Trust and estate practitioners, as well as their clients, are not above enjoying a gift or two, say Richard McDermott and Adam Carvalho

The festive season is fast approaching and the courts have been busy. Recent decisions in cases involving unusual and eccentric testamentary wishes or charitable giving are an early festive gift for trust and estate practitioners to mull over during the holiday break. There are also some welcome changes introduced by the Inheritance and Trustees' Powers Act 2014 to discuss and a key case on charitable giving. Let us also not forget the details of an early festive gift from the DWP.

Wills: The Vegetarian Society v Scott [2013]

John McKeen died in November 2007. He was survived by his sister Jennifer Scott and her three sons. McKeen's will left around 80 per cent of his estate to the Vegetarian Society. Scott argued the will was invalid for lack of capacity. Had she succeeded, she would have inherited under the intestacy rules. The challenge failed, with the judgment of His Honour Judge Simon Barker QC representing an important reminder that, subject to limited exceptions, the principle of testamentary freedom remains very much alive. Practitioners should also bear in mind that:

1. The test for testamentary capacity, set out in Banks v Goodfellow QBD [1870], is both time-and-decision specific, and an existing impairment of the mind will not necessarily prevent a finding that the testator had capacity. McKeen had suffered from logical thought disorder and schizophrenia and, while these conditions manifested themselves in rather erratic behaviour and choices (for example he was not a vegetarian and had no apparent connection to the Vegetarian Society), the court still found that he had sufficient capacity to execute his will. HHJ Barker QC heard how McKeen had conducted several social and business relationships during his life, with his solicitors explaining in evidence that he was "usually unkempt…but also polite, intelligent and humane." The instructions McKeen gave to his solicitors were "clear and coherent".

2. It is crucial to ensure that, for the purposes of assessing capacity, expert evidence is obtained when appropriate and in accordance with all applicable requirements. Astonishingly, in this case, Scott's expert was unfamiliar with the elements of the test for testamentary capacity and had been heavily influenced by Scott's impartial and incomplete instructions.

3. The decision to challenge a will should not be taken without a detailed assessment of the merits and, if and when proceedings begin, clients and practitioner alike must not lose sight of the overriding objective. In Vegetarian, Scott was penalised on costs for rejecting multiple offers to settle and for the unreliability of her evidence.

Secret trusts

The British painter Lucian Freud died in July 2011 leaving a substantial net estate of around £96m. His residuary estate was estimated at around £42m. A will from 2004 left his residuary estate to his executors on half-secret trusts. His final will in 2006, stated at clause 6 that Freud left his residuary estate "to the said Diana Mary Rawstron and the said Rose Pearce [his executors] jointly". The executors' evidence was that they held the residue on fully secret trusts outlined by Freud before the will was executed.

Freud was known to have fathered at least 14 children. Paul Freud was accepted for the purpose of this claim to have been one of those children. He argued that under the 2006 will the executors held the residue on half-secret trusts. Had he succeeded, he could have sought to establish that the terms of the trust were not communicated to the executors before execution of the will, in which case there would have been a partial intestacy. The executors applied for a declaration that they were absolutely entitled to the residue.

Diana Rawstron and Rose Pearce v Paul Freud [2014] EWHC 2577 (Ch) provides a reminder of the tests for valid secret and half-secret trusts and an illustration of the approach taken after Marley v Rawlings to the construction of wills.

A secret trust is created where a person gives property to a legatee absolutely but the legatee agrees to hold that property on specified trusts. The trust fails if its terms are not communicated
to the legatee during the testator's lifetime.

A half-secret trust is created where the will makes clear the legatee takes the property on trust without setting out its terms. The trust fails if the terms are not communicated to the trustee before the will is executed, in which case the trustee holds the property for the residuary beneficiaries or those entitled under the intestacy rules.

Paul Freud advanced a number of arguments in support of his position that the 2006 will established a half-secret trust. He argued the trust administration and charging clauses in the 2006 will would not have been required unless the executors took the residue on trust, the executors were not stated to take the property 'beneficially' or 'absolutely' and common sense suggested the executors were not inheriting a £42m residuary estate themselves as Rawstron was the deceased's solicitor and Pearce just was one of a large number of the deceased's children.

Richard Spearman QC, sitting as a deputy judge, applied the contractual approach to construing wills outlined by Lord Neuberger in Marley v Rawlings. The above arguments could not outweigh the simple point that clause 6 was expressed as a simple gift and made no mention of any trust. The fact that Freud referred to the executors by name in clause 6 was consistent with a wish that they took personally. A reasonable explanation was that the deceased intended to impose a secret trust. Further, the deceased had revoked the 2004 will and executed the 2006 will on professional advice; had he intended to create a half-secret trust he could have done so.

Spearman found the executors took the residue absolutely. His judgment ended on a generous note towards Paul Freud, stating "I can readily understand, from his personal point of view, why the defendant has been reluctant to accept the claimants' interpretation of clause 6 of the will", and a note of caution to solicitors who may find themselves in similar situations: "No matter how honest and well-meaning a solicitor may be, this does not guarantee that the solicitor's evaluation of any particular question of mixed fact and law is correct."

The declaratory relief will, however, allow the executors to administer the residue in accordance with what appear to have been the deceased's wishes.

Marley v Rawlings: costs

Last December, the Supreme Court allowed Terry Marley's application for rectification of Alfred Rawlings' will, which was resisted by Rawlings' sons. The result, that Rawlings' estate passed to Marley could, however, chave been a pyrhic victory depending on how the court had dealt with the question of costs. Rawlings' estate was valued at around £70,000. The parties' costs of litigating to the Supreme Court are likely to have exceeded that sum. Where a party pursues a reasonable challenge to a will based on an error in its drafting or execution, the court can order that costs are payable from the estate. Such a costs order could have exhausted the estate.

Marley argued that the sons, as the losing party to hostile litigation, should pay his (and their own) costs. Lord Neuberger, in the leading judgment on the costs of the proceedings, thought this result would be harsh. The sons' position had not been unreasonable, indeed it had been vindicated in the lower courts. He thought the estate should bear the costs. He went on to say, however, that if he ordered the estate to bear the parties' costs, Marley would have a claim to reconstitute the estate against the solicitor to which he did not think the solicitor would have a defence, and the insurer would then indemnify the solicitor's firm. Lord Neuberger short-circuited the process by ordering the insurers to pay the parties' costs (though the sons' counsel had to forego their success fees).

The court will be wary before making a costs order against a third party. However, Lord Neuberger felt able to make such an order because the insurers had (correctly) required Marley to pursue rectification before issuing a negligence claim and underwritten his costs so their position was akin to that of a third-party funder. This "practical approach" avoided the need for further litigation between Marley and the will draftsman. It will be interesting to see the extent to which lower courts are willing to carry out such "short-circuiting". The litigation has ended with Mr and Mrs Rawlings' wishes being carried out. Mr Marley will inherit their estate and, with an extension of the rectification jurisdiction, clarification of the rules on construction and a practical costs judgment.

The Inheritance and Trustees' Powers Act 2014

The Act came into force on 1 October 2014 and practitioners will be aware of its effect on the intestacy rules and on sections 31 and 32 Trustee Act 1925. The Act has, in addition, made a number of changes to the Inheritance (Provision for Family and Dependants) Act 1975 (the 1975 Act) four of which we highlight below:

1. A person in relation to whom the deceased "stood in the role of a parent" can now apply for financial provision from the estate. The (possibly arbitrary) need for a marriage or civil partnership has been removed. A step-child or foster child of unmarried parents or in a single parent family can now, therefore, apply within this category. While the change reflects the reality of modern families it is possible that, as the Law Commission anticipated, this widening of the category could result in some "speculative ill-judged litigation".

2. A person applying under the 1975 Act on the basis that they were being maintained by the deceased need no longer show they contributed more than the deceased. A person in a relationship of mutual dependency, for example, will now be able to apply for financial provision. Paid carers or lodgers will still not qualify. The legislation clarifies that the assumption of responsibility by the deceased for the applicant is not a threshold requirement (though it will be a section 3 criteria the court will consider in determining the claim).

Testators should give thought as to whether anyone might fall into the expanded categories of claimants and, if so, whether provision should be made for that person. The Act also simplifies and clarifies aspects of the 1975 Act identified as needing reform.

3. The courts are given power to vary the trusts on which the deceased's estate is held. It had appeared, previously, that the courts lacked power to vary will trusts or the statutory trusts arising on intestacy.

4. Grants limited to settled land or trust property, grants that do not permit distribution of assets (e.g. ad colligenda grants) and grants made outside the UK (unless resealed under the Colonial Probates Act 1982) will not start the six month clock running. An application can (if necessary) be made before representation has been taken out.

The Law Commission had recommended a change to section 1 of the 1975 Act to allow claims where the deceased was domiciled in England and Wales or the claimant was habitually resident there at the time of death. The proposal was considered too complex, though it could have prevented litigation in relation to the question of domicile. Family provision has evolved considerably since the Inheritance (Family Provision) Act 1938 which only allowed applications by i) a surviving spouse; ii) a son who was under 21 or disabled; and iii) a disabled or unmarried daughter. We will need to see how the amended legislation is applied by the courts but in the meantime the changes are welcomed.

Charitable gifts

Practitioners should note, following September's decision of the High Court in Routier and Venables v HMRC [2014] EWHC 3010 (Ch), that a gift to a trust established for charitable purposes will only qualify for the exemption from inheritance tax (per section 23(6) Inheritance Tax Act 1984) if the trust's purposes are charitable under UK law and the trust is governed by UK law.

Coulter was domiciled in Jersey when she died in October 2007. It is assumed (but is unclear from the report) that her estate comprised assets held in the UK. Under her will, residue was to pass to a trust (governed by Jersey law) for the benefit of the Parish of St Ouen (the Parish) in Jersey to provide housing for elderly people living there. The trust income was to be accumulated and then distributed to an unincorporated body established by the parish,
and in default to pass to Jersey Hospice Care.

HMRC argued the gift of residue was subject to IHT of £600,000. The trustees, who were keen to avoid a lengthy dispute, therefore executed a deed of variation, replacing the residuary gift with a legacy of £10,000 to Jersey Hospice Care and an absolute gift of the residue to the Parish for the purpose of the construction of homes for the elderly of the Parish. The deed added a further clause to the will, allowing the trustees to amend the terms of the trust to ensure it complied with the terms of section 23(6).

HMRC continued to state that IHT was due and the trustees thus entered into a second deed of variation which replaced the reference in the will
to Jersey law with a reference to the law of England and Wales. After argument, it was agreed that the second deed did not have retrospective effect (presumably because it was signed more than two years from the date of death.

Mrs Justice Rose DBE held that the gift was subject to IHT because the section 23(6) exemption was only available for trusts governed by UK law and with charitable purposes under UK law. One of the most significant factors in her judgment was the House of Lords' decision in Dreyfus v HMRC [1956] AC 39 which held that it would be incongruous to require the courts to determine whether the purposes of a body governed by foreign law constituted UK charitable law purposes.

The decision will have been galling for the trustees, not least because it seemed easy on the facts to conclude that the test for being charitable under UK law had been satisfied. The court was clearly concerned about the risk of opening the floodgates to future claims, particularly those where the similarities between UK charitable trusts and foreign charitable trusts are less obvious. Practitioners would be wise to review their files to determine whether clients' existing wills will be affected by this important decision.

Missing Beneficiaries

While the decision in Routier may not be an early festive gift, a service offered by the Department of Work and Pensions (DWP) will hopefully provide more cheer. For £4.26 a time, the DWP will forward a letter to a missing beneficiary to any current address they hold. Hopefully this will prompt the beneficiary to come out of the woodwork. To make use of the service, the relevant form (and further information about the process) can be found here.

Richard McDermott, pictured, and Adam Carvalho are associates at Farrer & Co