Family trusts are often complex and the consequences of drafting errors can by very serious, giving rise to unintended outcomes and swingeing tax liabilities. Judges do have power to correct such mistakes after the event, however, and one wealthy family in particular will be very thankful that they do.
A mother had placed a valuable portfolio of shares in trust for her three children in the 1960s with a view to minimising Inheritance Tax (IHT) liabilities. After two of them married, changes were made to the trust that granted rights of succession to their spouses. Both relationships failed, however, and further changes were made with the intention of removing the spouses’ interests.
Unfortunately, however, the route taken to achieve the latter objective – which involved revocation and reappointment of the trust – was the wrong one and had very grave tax consequences, including an immediate charge to IHT of 20 per cent of the value of the shares and further charges every 10 years thereafter.
In coming to the family’s aid and rectifying the trust, the High Court accepted the mother’s evidence that her sole intention had been to remove the spouses’ successive life interests and that it had never been explained to her that, by executing the changes, she was also revoking her children’s interests in the trust.