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Voidable Trusts – 4 Reasons Why Courts Can Set Aside A Trust

Voidable Trusts – 4 Reasons Why Courts Can Set Aside A Trust
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Voidable Trusts – 4 Reasons Why Courts Can Set Aside A Trust

Trusts may be set aside by the courts (“voided”) for a variety of reasons.  In this blog we will be looking at four legal doctrines whereby the courts may set aside a trust. These doctrines apply in common law jurisdictions:

  • Fraud;
  • Duress;
  • Undue influence; and
  • Mistake.

Fraud

Fraud in relation to a trust occurs where settlements are made on the trust with intent to defraud creditors or subsequent purchasers. Fraudulent intent may be found as a matter of fact or may be inferred from the facts of the case. In certain circumstances, settlements on trusts which have been made for the purpose of disinheriting children or partners may be set aside, or for defeating a spouse’s claim for financial relief, for example, in the case of divorce proceedings. 

For further information in relation to when a voluntary transfer can be set aside in Ireland please see our post on ‘Understanding Voluntary Transfers In Ireland.

Duress

Duress refers to a situation whereby a person or party has been forced into a contract or a trust. The trust cannot be considered a valid agreement under these circumstances. Where a client settles a trust they must do so independently and of their own free will.

Undue Influence

Undue influence refers to a situation whereby a person or party has entered a contract because of another person or party exerting “undue influence” or pressure upon them. It differs from duress in that undue influence may be presumed where there is trust involved, such as between family members. Other relationships of trust include trustee and beneficiary; principal and agent; religious adviser and disciple; doctor and patient. Evidence may be required to refute the presumption of undue influence.

Where a trust is found to be entered into as a result of undue influence, this will render the trust voidable.

Mistake

Mistake generally occurs when a person or party would not have entered into a transaction “but for” the mistake in question. In March 2011 the England and Wales Court of Appeal delivered judgement in the twinned appeals of Pitt v Holt and Futter v Futter and restated the rule for setting aside voluntary transactions on the basis of mistake. 

These cases referred to the basis for trustees and tax advisors to set aside transactions resulting in unintended tax consequences. It was held that the donor must be mistaken as to the legal effect, as opposed to the consequence, of the disposition or an existing fact that is fundamental to the transaction. The mistake must be so serious in its nature as to render it unfair for the beneficiary to retain the benefit of the gift.

It was also held that the creation of unforeseen tax liabilities is a consequence and not “an effect” which is inadequate to invoke the doctrine of mistake. The UK Supreme Court has on 9 May 2013 unanimously backed the England and Wales Court of Appeal's opinion on mistake (although in the Pitt case it allowed the trustees' appeal on another ground, and agreed to set aside a trust that had produced adverse inheritance tax consequences). Click here for further information.

Other jurisdictions such as Guernsey and Jersey do not make this distinction between the effects and consequences of a transaction and instead the test is simply whether the mistake is such that the settlor would not have entered into the transaction “but for” the mistake in question.

Be Aware Of The Doctrines

To conclude, it is important to be aware of these doctrines and receive appropriate advice when settling a trust or entering any kind of contract to avoid any likelihood of the trust or contract being set aside at a later date. 

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