UK: Trust Claims – The Hidden Risks

Article by Tim Strong and Bob Beauchamp

The risks of claims arising out of trusts advice mainly come from the fact that, when advising on or assisting in the setting up of a trust, a solicitor is likely to owe duties not just to his client but also to the trustees and/or the beneficiaries of the trust. The same duty of care is likely to be owed to each of these categories of person, namely to take care to ensure that effect is given to the client’s intentions (see Carr- Glynn v Frearsons (1999)). However, the recoverable losses arising out of any breach of this duty may differ. This has implications not just in relation to the setting up of a trust (for example, requiring the solicitor to consider the potential effect of a trust structure on the trustees and/or beneficiaries as well as on his client) but also in dealing with any action subsequently brought against the solicitor for alleged negligence in relation to setting up the trust.

In most solicitors’ negligence cases, the claim is brought only in respect of losses suffered by a client or former client. However, trust-related claims are often unique because the losses are usually not suffered by the client or former client since he or she is no longer beneficially entitled to the assets held in trust. He or she therefore may suffer no loss even if the trust does not operate as intended. Instead, the losses most commonly arise because there is a reduction in the value of the trust’s assets and/or on distribution of the trust’s assets to the beneficiaries, for example due to tax consequences which the solicitor has failed to identify.

The trustees are appointed to administer the trust and, in normal circumstances, they are best placed to take action to recover any losses suffered by the trust. Clearly, to pursue a successful action against the solicitor setting up the trust, the trustees have to establish that they are owed a duty of care by the solicitor and that they can recover losses arising as a result of breach of that duty. Estill & Ors v Cowling Swift & Kitchin (a firm), (2000) highlights that, in most cases, they should be able to do so. In particular, it is likely to be reasonably foreseeable to the solicitor that the trustees will be relying on the solicitor setting up the trust to set it up properly. As a result, if this work is carried out negligently, the trustees (as representatives of the trust) should be able to recover losses to the trust arising as a result.

Alternatively, the beneficiaries may seek to recover losses suffered by the trust. For example, it is well established that, depending on the circumstances, a firm of solicitors instructed to prepare a will may owe a duty of care to the intended beneficiaries of that will (White v Jones (1995)). The same principle applies to beneficiaries of a trust and, even in respect of a discretionary trust, the beneficiaries as a class have an action to restore the trust fund to what it would have been if there had been no breach of duty (see Target Holdings Ltd v Redferns (1996)).

The solicitor is protected against a "double claim" in respect of a diminution in the value of the trust fund on the basis that, to the extent that this loss is recovered by the trustees, it extinguishes the right of the beneficiaries as a class to recover this loss (or vice versa) (see Carr-Glynn v Frearsons (1999)). Comforted by this, when advising on setting up a trust or settling a trustrelated claim, most practitioners focus solely on protecting against or providing compensation for losses suffered by the trust. The danger is that the position of (and the separate losses suffered by) individual beneficiaries on distribution of the trust’s assets can be overlooked.

Depending on the scope of the client’s instructions, it may be arguable that the solicitor involved in setting up the trust owes a duty of care to a beneficiary to protect against foreseeable losses arising on distribution of the trust’s assets. For example, if the client’s intention in setting up the trust was (as is likely) to benefit the beneficiaries as much as possible, losses arising on distribution of the trust’s assets to individual beneficiaries (for example, arising from unforeseen capital gains tax or inheritance tax charges) may be recoverable if they result from the solicitor’s negligence. This is particularly true if, for example, capital gains are held over for the duration of the trust but are deemed to arise on distribution out of the trust.

There may be good arguments on which to defend such claims as and when they arise, such as the absence of express instructions to consider the position of individual beneficiaries, that any loss arises as a result of a beneficiary’s own personal circumstances or, in the case of a discretionary trust, from the trustees’ exercise of their discretion on distribution of the trust’s assets. Equally, it may be difficult to see how a solicitor can be expected to satisfy his duty to his client (ie the settlor of the trust) and the trustees (and therefore to the beneficiaries as a class) whilst also ensuring that the position of each beneficiary as an individual is protected. However, the existence of these potential claims may nonetheless be relevant when settling a trust-related claim.

Given the various losses which can arise from a solicitor’s negligence in setting up a trust, we have found it important in practice to take the potential claims from trustees and beneficiaries into account:-

• Making a Part 36 Payment – Part 36 payments can only be made in respect of existing proceedings. Acceptance of a payment by the claimant settlor for example, will not compromise future claims by other potential claimants such as trustees and/or beneficiaries. One way round this is to make an offer in correspondence expressed to be "without prejudice save as to costs" (ie an old-style Calderbank offer) covering the existing proceedings and any potential future claims whilst securing the potential costs benefits of Part 36.
• Settlement – When settling a claim on behalf of a defendant firm, it is clearly preferable to include any future potential claims as part of the settlement. This may require including the trustees as a party to the settlement agreement. As regards potential claims by beneficiaries, the Court’s sanction may be required if the potential beneficiaries of the trust include, for example, minors and unborn children. To avoid the time and expense of obtaining the Court’s sanction, one option (which may not be available in all cases) is to obtain a full indemnity from an appropriate party indemnifying the defendant firm against future claims brought by any of the beneficiaries.

It is therefore possible to deal with these issues satisfactorily but they need to be considered carefully when settling a trustrelated claim. It is also important to bear in mind that the limitation period for future claims by beneficiaries as individuals will arguably only commence when the distribution is made from the trust resulting in an actual loss being suffered by the beneficiary. On a worst case scenario, if proper precautions are not taken, an unwary solicitor (and his insurers) could therefore be faced with a claim from a beneficiary long after the trust was originally set up and/or earlier proceedings for negligence relating to the trust were settled.