Ensuring the valid execution of trusts and other documents - Part II

The case in question is that  of Bowack v Saxton, [2020] EWHC 1049 (Ch) and it concerned  two trusts relating to two AXA investment bonds. The judge declared that the trusts were  valid despite the lack of a date, the lack of the details of the trust property and the lack of a witness's signature on the "trust forms". Given the facts of the case (as described below) the decision was not that surprising . However, how it came to be necessary for the High Court to get involved in the first place is quite interesting, especially as the procedures at AXA, which led to the uncertainty, are not uncommon amongst life offices dealing with trusts.

And even though English High Court judgments do not create legal precedents, the reasoned judgment from Judge Matthews is most useful, especially for those providing, and those using, "standard" trust forms.

The facts in Bowack v Saxton

In 2014 Mr Michael Bowack (a retired accountant) and his wife Ann Bowack (a retired magistrate) each invested £325,000 into an AXA Isle of Man Ltd ("Axa") bond to be issued  subject to a discretionary trust. This was following advice from a financial planner from Hargreaves Lansdown Ltd ("HL").

They both executed "standard" declarations of trust (which were in the form of deeds, provided by AXA) appointing themselves and their daughter Claire Saxton as trustees, with the latter as principal beneficiary.

However, when the documents were forwarded to AXA, it noted that Claire's signature on the trust forms had not been witnessed by an independent person and  there was no ID verification for Claire  and so the trusts were "not processed", which was advised to HL

It also turned out that the declarations of trust as executed left the effective date blank and failed to identify the trust property as the two bonds. The reason why these were left blank on the forms was that the settlers were instructed on the trust forms to leave those blank, as they (i.e. the date and the bond policy numbers)  were to be completed by AXA.  However, this did not happen and so the dates and the bond numbers remained missing.

Even though the trusts were "not processed", AXA cashed the two cheques it had received in payment for the bonds, and duly issued the bonds, which were subject to Manx law and only assignable with the company's agreement.

A long correspondence ensued to try to set matters right, including at some point Axa suggesting that new trusts should be executed by the settlors. Such an action would of course have potentially serious IHT consequences and,  if trusts had already been in existence, would not have been appropriate in any case. In the circumstances  the Bowacks resorted to the Courts, in effect having to sue their own daughter to establish the validity of their estate plan.

The Bowacks sought a declaration that each of their two trusts was properly and completely constituted (and, if so, who the trustees are), or alternatively rectification of the relevant documents so as to make them conform with the true intentions of the two settlors.

Both  HMRC and AXA (now called Utmost Wealth Solutions Ltd) were notified of the claim and neither opposed it.

The judgment

We have a 16-page judgment going over some very technical points, which doubtless will be essential reading, especially for those involved in the drafting and administration of trusts. But the key important conclusions are as follows:

A failure to express the date on which the trust is constituted is not fatal to its validity. It is sufficient that it was constituted. Here, it is clear that the applicants intended that their bonds be subject to a trust as soon as issued. Accordingly, if the trust was properly constituted on or shortly after issue, that is the date on which it takes effect.

As for the failure to identify the particular trust property in the trust deeds by inserting the bond numbers in them, again, it is not necessary for the validity of the trusts that the numbers be inserted, as long as the relevant property can be identified from the circumstances. Here it was clear which bonds were to be held in trust.

The next issue for the Judge was the effectiveness of the appointment of the additional trustee and assignment of the policy. We covered the legal requirements for such an appointment in some detail in last month’s article.

In this case the trust deed was to operate as an assignment of the bond by the applicant once issued. The Judge concluded that the assignment of the bonds once issued to the trustees was effective and valid under English law. He concluded that, given that the assignors’ (settlors') signatures were witnessed, this was sufficient to  justify the validity of the deed itself. 

It is interesting though that on the last point the Judge  recognised an alternative argument (by reference to T Choithram International SA v Pagarani [2001] 1WLR 1, (contrary to what he had held)  that the assignment to the other trustees could be  ineffective, but  even if there were no effective assignment to the other trustees, the trust would still be completely constituted with that applicant as trustee, although if it was still desired to appoint the other persons as trustees, that would have to be carried out later.

Given the above findings, there was no need to consider the claim for rectification.

As outlined in last month's article, in England and Wales  there are no special legal formalities to satisfy in order  to make a trust (other than for trusts of land and equitable interests) so the findings of Judge Matthews on this are not surprising.

Given that this judgment is not a new legal precedent, the question of the effectiveness of the assignment may still need to be further clarified, although obviously not in this particular case, as nobody is going to appeal it.

Whilst it is reassuring that the trusts declared in this case were legally valid, the case shows the dangers of "blank" spaces/boxes on "standard trust forms" and the importance of proper completion of trust documents. It should not be necessary to  bring High Court proceedings (doubtless at considerable expense) in order to have certainty of any trust arrangement.

Of some interest will be the comments expressed by the Judge in relation to this type of arrangement generally. In particular, given that the  matters concerned  what he called

"life-changing estate planning exercises which involve hundreds of thousands of pounds," he said he was "not very impressed with the documentation supplied to the claimants, or the way it has been handled". Indeed,  he found "the 'one size fits all', 'tick-box' nature of the forms, and the unduly formalistic (and legally ignorant) approach of the professionals involved  profoundly worrying".

So far, we have been concerned with the valid execution of trust documents. But it is important to remember that, other than where the settlor declares himself to hold property as trustee for others (which is possible under English law), i.e. in cases where other trustees are appointed, in order  to actually validly constitute a trust some property has to be transferred to or under the control of the trustees. Let's then consider how to ensure this happens. The answer will depend on the type of asset in question.

Ensuring that property is transferred to trustees.

Life assurance policies (including investment bonds)

We considered this in some detail in last month's article.  Briefly, to vest  title to a life policy in all the trustees a deed of assignment will normally be executed. A notice of assignment also needs to be given to the life office. In practice, a copy of the deed of assignment sent to the office will  constitute  notice.

Chattels and equitable interests

A deed of assignment will also normally be used to give effect to the legal transfer of  chattels and equitable interests under an existing trust. The latter would, for example, include a right to income or a right to a reversion under a trust. In such a case, in addition to a deed of assignment, notice to the trustees of the existing trust must be given.

Land/real property

Where land is transferred to a trust, the proper method of transfer will be a Land Transfer Form and entry in the Land Registry. Where the land is still unregistered the method of transfer will be conveyance and application to register land in the Land Registry.

Cash and investments

As regards cash and investments, when cash is being given to the trustees, normally this would involve a transfer to a bank account in the name of the trustees. Occasionally the settlor of the trust will create a trust with the intention that the available cash is invested in a particular investment. In such a case the necessity of opening a trustee bank account solely for the purpose of receiving the settlor's cheque and forwarding the funds on to the investment provider  may be questioned, especially if the investment is to be made for growth so that no bank account will be required to receive any dividends. In such a case it would be acceptable for the settlor to draw a cheque on his account, made payable to the investment company, and to hand over the cheque to the trustees for onward transmission. However, due to the Money Laundering Regulations, in each case it will need to be verified that this procedure is acceptable to the company in question.

Finally, let’s consider the transfer of shares or units in a unit trust. Frequently these days shares and units are held by nominees rather than outright. Where the shares/units are held outright, so that the investor actually possesses a share certificate, a stock transfer form will be necessary and a change of entry on the Company Register. With regard to shares held in private limited companies, prior to any share transfer it may be necessary to seek consents from other shareholders or directors – the company's Articles need to be checked in this respect.

When shares or units are held by a nominee, the investor will usually have an account identified by a number but will not actually have a share certificate. In such cases what the investor owns is the beneficial title to the assets held by the nominee whilst the nominee holds the legal title. In such cases, the trust document itself should identify the asset as being "the beneficial title to the XYZ shares" and identify the nominee holding the shares. In addition to the written trust document evidencing the transfer, to complete the transfer of title a written direction to the nominee signed by the beneficial owner (the original investor) will be necessary.

The nominee company's procedures for handling such transfers ought to be verified in each case. The nominee company may require additional information about the new beneficial owners of the shares who in this case will be the trustees (not to be confused with the trust beneficiaries who will have no rights against the nominees, in the same way as they have no rights against the company itself where shares are held by the trustees). It should also be remembered that where shares are transferred to a trust it will be the trustees as individuals who will be registered as the new owners (i.e. "Mr Smith as trustee "etc. rather than "John Brown's trust). It is not possible to register the trust itself as a holder of assets as a trust is not a legal entity in any of the UK jurisdictions. The procedures may be different in certain foreign jurisdictions.

Comment

The above concludes our considerations of valid trust creation. Those involved in dealing with trusts, including assisting clients in the completion  of trust documentation, but in particular the life offices'  administrators involved in the " processing" of trust  forms should take the comments of Judge Matthews to heart.

Next month we will look in more detail at executing powers of attorney and option agreements; and we will also consider how  the trustees  and attorneys can carry out their duties during periods of lockdown  and social distancing.