UK: When Trustees’ Actions Lead To The "Wrong" Results Futter V Futter (2011)

Last Updated: 17 March 2011
Article by Piers Master

The Court of Appeal decision in Futter v Futter and Pitt v Holt marks a very significant shift in the approach of the courts to mistakes made by trustees. There was a fundamental re-examination of the so-called "Hastings Bass rule".

In future, trustees who have made decisions which result in unintended tax consequences are unlikely to be able to have those decisions set aside, especially where professional tax advice has been taken and that advice turns out to be wrong.

Relevant actions of trustees now need to be divided into three categories:

  • Where trustees act outside the scope of their power; perhaps the exercise of the power will be technically defective or consists of a fraud on the power. Such actions are void – in other words, of no legal effect.
  • Where trustees have acted in breach of trust, perhaps because they have not taken into account all relevant factors, or because they have failed to take into account factors which, if they had considered them, would have been relevant. Such actions are voidable – in other words, valid unless and until a successful application is made to set them aside, usually at the instance of a beneficiary.
  • Actions of trustees which are neither void nor voidable. Such actions will stand.

The Court of Appeal ("CA") held that trustees are unlikely to have been in breach of trust where they have taken, and relied on, professional advice – even where the advice turns out to be negligent. Therefore the decision taken in reliance on that advice is unlikely to be voidable (nor will it be void unless for other reasons). So the decision of the trustees, no matter how unpalatable in fiscal or other terms, will fall into the third category above, and will stand. This marks a significant change, since there has been a long line of cases in the lower courts where trustees who had made a mistake as to the tax consequences of their actions were successful in applications to have their actions set aside, on the basis that the trustees' actions had been voidable under the so-called Hastings-Bass rule.

Longmore LJ, approving the judgment of Lloyd LJ, commented that "these appeals provide examples of that comparatively rare instance of the law taking a seriously wrong turn, of that wrong turn being not infrequently acted on over a twenty year period but this court being able to reverse that error and put the law back on the right course".

In more detail

In Futter v Futter and Pitt v Holt the CA considered the so-called Hastings-Bass rule, originating in the 1974 case of Re Hastings-Bass deceased and developed since then by the courts.

In the interests of protecting beneficiaries against the unintended results of trustees' exercise of their powers, the courts have relied on the Hastings-Bass rule in effect to revoke such exercises. In particular the Hastings-Bass rule has been successfully

invoked where the trustees have exercised their powers in such a manner as to give rise to unexpected tax consequences. Futter v Futter, significantly narrowed the scope of the Hastings-Bass rule.

Setting aside trustees' actions: the position before Futter v Futter The most succinct formulation of the Hasting Bass rule was set out by Lloyd J (as he then was) himself in the 2005 case of Sieff v Fox as follows:

"Where trustees act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have taken into account".

Some commentators felt that the rule was being extended in a way that was "unrestrained" making it difficult to analyse the effect of the decisions. HM Revenue and Customs too felt that the rule was being extended too far, most particularly as it has been relied upon by trustees to have their actions set aside where they have generated unintended tax consequences.

There have also been uncertainties surrounding its scope, including the question whether an exercise of discretion by a trustee which fell within the scope of the Hastings-Bass rule is void (to be treated as never having taken effect) or merely voidable (such that it would only be set aside on successful application by an interested party). It was furthermore unclear whether breach of trust by the trustees is a necessary element of a claim.

What is the effect of Futter v Futter? In Futter v Futter the trustees of two non-UK resident trusts, following erroneous advice from a leading legal practice, had exercised their powers to distribute capital to the beneficiaries. Unfortunately, the hoped for tax advantages of the distribution were illusory because it was not possible for the beneficiaries to offset the trust gains generated against personal losses.

Lloyd LJ's analysis is set out in a number of clear steps. First, he asks when will the exercise of the trustees' power be void and when voidable?

He is clear that the exercise of a discretionary power by trustees will be void if what they have done is not within their power. For example in the unlikely event that the trustees in Futter had not had power to make capital distributions to the particular beneficiaries to whom they made payments, the exercise would have been void.

What about voidability? Here if the exercise by the trustees of their discretionary power is within the terms of the power but the trustees have in some way breached their duties in respect of the exercise, then (unless it is a fraud on a power) the trustees' actions are not void but may be voidable at the instance of an affected beneficiary. Such a breach of trust may arise for example because the trustees have failed to inform themselves

A further twist in the Futter case is that one of the trustees was a partner in the legal firm which gave the tax advice. Lloyd LJ made it clear that he did not consider this affected

his position as a trustee ie as trustee he had fulfilled his duty so that the reformulated Hastings- Bass rule set out by Lloyd LJ applied to him, in his capacity as trustee, just as much as it applied to the other trustee. Nevertheless in his capacity as a partner of the legal practice in question he could still be open to a negligence claim, in the same way as any other partner.

An interesting implication of the Futter decision is that where the trustees fail to take advice, so are in breach of duty, it may well be easier for the courts to set aside any inappropriate trust appointments which such trustees enter into.

Conclusion

The CA decision in Futter has resulted in a fundamental change to the scope of the rule in Hastings-Bass. It is clear that the court considers the rule had become overextended, in effect protecting beneficiaries against the unintended consequences of their trustees' action but at the same time providing an "easy" way out for trustees. Following Futter, and subject to any appeal, there will be fewer cases in future where reliance can be placed on the Hastings-Bass rule. Instead beneficiaries who have suffered loss as the result of their trustees' actions will be forced to sue their trustees where this is possible. In some cases beneficiaries may be prevented from such action by reason of exoneration clauses in the trust deed limiting trustees' liability for their actions. Those more often picking up the tab following the narrowing of the Hastings-Bass rule could therefore be the professionals (via their insurers) who have failed to foresee the unintended results of their trustee clients' actions

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.

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