Canada: Pitt v Holt And Futter v Futter – The Case For Amending Trustee Decisions

The U.K. Supreme Court (UKSC) judgment in the cases of Pitt v Holt and Re Futter [2013] UKSC 26, has clarified the law of trusts in applying both the rule of Hastings-Bass and the law of mistake.

Pitt v Holt

In 1990, Derek Pitt suffered serious head injuries in an automobile accident, resulting in his mental incapacity. His wife Patricia was appointed as one of his personal representatives, and was successful in obtaining a judgment of £1.2 million for his care. Mrs. Pitt, on the advice of financial advisors, settled the damages into a discretionary trust. However, in settling the trust, the financial advisors had failed to consider U.K. inheritance tax consequences, so that there was an immediate tax liability of £100,000. Had the discretionary trust provided at least half of the settled property be applied for the benefit of Mr. Pitt during his lifetime, there would have been no immediate tax consequence. As a result, Mrs. Pitt applied to have the trust set aside, based on the rule in Hastings-Bass or, alternately, on equitable mistake.

Futter v Futter

In 1985, Mark Futter created two discretionary inter vivos trusts, one for his benefit, and one for the benefit of his children. Mr. Futter and his solicitor were trustees of both trusts. In 2004, on the advice of his solicitors, Mr. Futter made two distributions, one in favour of himself, and one in favour of his children. The distributions resulted in capital gains tax, which the solicitors mistakenly assumed would be offset against capital losses recognized personally. However, the solicitors had failed to consider recent legislative amendments. When the mistake was realized, the trustees applied to have the distributions declared void based on the rule in Hastings-Bass.

The rule in Re Hastings-Bass arose from a 1974 decision of the UKSC, and provided that "Where a trustee is given a discretion as to some matter under which he acts in good faith, the court should not interfere with his action notwithstanding that it does not have the full effect which he intended unless:

  1. what he has achieved is unauthorized by the power conferred upon him, or
  2. it is clear that he would not have acted as he did (a) had he not taken into account considerations which he should not have taken into account, or (b) had he not failed to take into account considerations which he ought to have taken into account."

In analyzing whether the rule in Re Hastings-Bass applied to the two cases before the court in of Pitt v Holt and Re Futter, the UKSC held that the dispositions in both Pitt and Futter could not be set aside under the rule, however, the trust settlement in Pitt could be set aside under the equitable doctrine of mistake.

In Futter and Pitt, the UKSC had two questions to answer: the first was the application of the rule in Re Hastings-Bass, the second, the ground of mistake:

  1. If a trustee exercises a discretion based on a mistake as to the related tax consequences, is the decision, and the tax consequences thereof, voidable and binding on taxation authorities?
  2. If a person, whether or not in a fiduciary position, makes a voluntary disposition and the decision was based on a mistaken understanding of the tax consequences, is the disposition and the tax consequences triggered, voidable?

The rule in Re Hastings-Bass

Lord Walker stated that the rule in Re Hastings-Bass set out three cases in which trustees' dispositions of trust property could be set aside (undone) by the courts:

  1. where the trustees had no power to dispose of trust assets;
  2. where the trustees acted fraudulently in disposing of trust assets; and
  3. where the trustees acted within their powers, did not act fraudulently, but acted without sufficient deliberation.

If either (1) or (2) applies, Lord Walker stated, the disposition of trust property taken by the trustees will be void. If (3) applies, the disposition of trust assets may be voidable.

In both Pitt and Futter, the trustees' dispositions of trust property were within their power to dispose of trust assets, and there was no fraud involved in doing so. Therefore, the trustees' disposition of trust assets actions could not be set aside based on either of the first two rules described.

Lord Walker noted the third rule may apply to set aside a disposition of trust assets if "inadequate deliberation on the part of the trustees [was] sufficiently serious as to amount to a breach of . . . fiduciary duty. Breach of duty is essential . . . only a breach of duty on the part of the trustees . . . entitles the court to intervene. It is not enough to show that the trustees' deliberations have fallen short of the highest possible standards, or that the court would . . . have acted in a different way (at paragraph 73). If there is inadequate deliberation, the court must have a degree of flexibility in the court's possible responses (at paragraph 92), and may set aside the disposition of trust assets if it can be shown that the trustees would have, or may have made a different decision had there been sufficient deliberation.

In both cases, the Supreme Court held that the trustees had acted with sufficient deliberation. Their decisions were made with sufficient deliberation, but based on improper legal advice. Therefore, the trustees' disposition of trust assets could not be set aside.

Although the rule in Re Hastings-Bass could not be applied in either Pitt or Futter, Lord Walker went on to note that the law of equity can be applied to set aside the trustees' disposition if that decision was affected by a "causative mistake of sufficient gravity (at paragraph 122). A mistake will be causative if the disposition would not have been made but for the mistake. A mistake "must be distinguished from mere ignorance or inadvertence" (at paragraph 104), and "the gravity of the mistake must be assessed by a close examination of the facts . . . including the circumstance of the mistake and the consequences for the [trustee] who made the disposition" (at paragraph 126). If the court finds that the trustees made a mistake as to the legal character of the transaction, or on a fact or law which is basic to the transaction, and that the mistake is serious enough that to leave it in place would be unjust, unfair, or unconscionable, then the a decision of trustees can be set aside.

In Futter, the ground of mistake had not been pleaded, and therefore, this ground could not be applied. However, in Pitt, an alternative claim for setting aside the trustees' disposition on the ground of mistake had been pleaded, and, as there was nothing artificial or abusive in establishing the inter vivos trust, and had the tax consequences to the trust been identified to Mrs. Pitt, the trust would have been settled differently.

The result of the cases is that, in disposing of trust assets, if a trustee relies on advice which later proves to be inaccurate, the rule in Re Hastings-Bass may not apply to relieve the trustee of the financial consequences to the trust and its beneficiaries for that decision. However, in some cases, the rule of mistake may be applied, at the court's discretion.

The rule in Re Hastings-Bass has not been applied in Canadian cases for the rectification of trustee errors. In broad terms, in Canada, rectification based on mistaken dispositions is granted by courts where a document or disposition does not reflect the true intention of the parties1. This includes errors which have an adverse income tax effect. The comments by Lord Walker on the equitable relief of mistake may be instructive to trustees making an application before the courts for rectification of errors. As Canadian cases generally consider the trustee's intention at the time of taking the action, a review of the circumstances leading to the error, and evidence of the intention of the parties at the time the error was made, may be useful.

Footnote

[1] For a review of the law of rectification, see Rectification: Taxes and Wealth Management, March 2015, Recent Developments and Notice, by Leslie Askt, Miller Thomson LLP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions