Rectification of post-death variations: check and re-check

Post-death variations are a valuable planning tool. Where the variation complies with the requirements of section 142 of the Inheritance Tax 1984 and section 62 of the Taxation of Chargeable Gains Act 1992, the original beneficiary can redirect the destination of inherited property and elect to have the redirection treated as the deceased’s for the purposes of inheritance tax (IHT) and capital gains tax.

However, it is not possible to vary the disposition of property that has already been varied (Russell v IRC [1988] STC 195). It is, therefore, important to ensure, before execution, that variation is correct. If there is an error, it cannot be corrected by another variation.

Morrell and others v Morrell and others [2021] EWHC 117 (Ch) is an example of how easily mistakes can be made, particularly where more than one professional is involved. It also demonstrates a possible way of saving the situation by applying to the court for rectification of the original instrument.

Rectification

Rectification is one aspect of a wider equitable jurisdiction to relieve parties from the consequences of their mistakes. Its function is to enable the parties to correct the way in which their transaction has been recorded. In Allnut v Wilding [2007] EWCA Civ 412 Lord Justice Mummery said ”rectification is about putting the record straight. In the case of a voluntary settlement, rectification involves bringing the trust document into line with the true intentions of the settlor as held by him at the date when he executed the document.”

The particular attraction of rectification and what makes it unique is that, unlike other remedies, it does not undo the document, but modifies it. The rectified document can take effect as intended as opposed to the whole transaction being nullified, as may happen in mistake cases. Unsurprisingly, several of the reported cases on rectification involve post-death variations.

The facts

Gillian Morrell died on 11 April 2017, leaving her estate between her two sons, David and Philip, and appointing them as her executors. Each half-share was worth about £450,000. A firm of solicitors dealt with the administration of the estate and Philip was advised on estate planning by an IFA, Mr Stringer. An initial discussion with Mr Stringer on 30 May 2017 suggested that £300,000 would be diverted to a trust for Philip’s three children and £150,000 be retained for Philip and his wife. One of the children was disabled and in receipt of state benefits. The attendance note recorded that the trust would not adversely affect the benefits, indicating that the trusts would be discretionary.

Nothing happened until 2 February 2018, when Philip emailed the solicitors stating that he wished to vary his mother’s will “so the money goes into trust for my children”. There was no suggestion at this stage that any money was to be retained by Philip for himself and his wife, or that they were to be beneficiaries of the trust. On 15 February 2018, the solicitor dealing with the administration emailed Philip and David, updating them on the administration of their mother’s estate, referring to the possibility of a deed of variation being made, and asking for details of the intended gifts “to your children”. This was followed by a letter from the solicitor to Mr Stringer dealing with the assets of the estate.

On 1 August 2018, there was internal email correspondence between Mr Stringer and an assistant. The assistant said “the advice appears to be for £300,000 in trust for the three children and £150,000 for them (Philip and Helen)”. Mr Stringer’s response (within an hour) was that after speaking to “investment help”, the suggestion was that “all the £450 goes … straight into the trust, therefore never landing in their estate”. The assistant responded that he was not sure if Philip could enter into a deed of variation and still benefit from it, but that he would try to speak to “Tax and Technical”. So, now there was a suggestion of a discretionary trust for all five. (It was, of course perfectly possible for Philip to be included in the class of discretionary beneficiaries, as variations are read back for all IHT purposes, so there would be no question of a gift with reservation of benefit.)

On 15 August 2018, the solicitor made an attendance note of a telephone discussion with Mr Stringer, saying that the latter “advised that Phil would like to vary the estate so that a discretionary trust is set up for the sum of £450k for the benefit of his children”. Mr Stringer’s witness statement gave a different account, saying that there would be “a total investment of £450,000 with £100,000 earmarked for each of the three children and £150,000 for Phil and Helen. The funds were to be put into a discretionary trust” and “I have no doubt that I made it abundantly clear that of the £450,000, only £300,000 was intended to be for the children and the £150,000 was intended to be for Phil and Helen”. Judge Matthews commented that this was an odd way to describe a discretionary trust, but in oral evidence Mr Stringer explained that clients would provisionally earmark sums out of a fund for particular beneficiaries.

Misunderstandings appear to have continued over the preparation of the draft. The solicitor prepared a draft which said that “‘my Beneficiaries’ are (names to be inserted)” which she sent to Mr Stringer. On 15 October 2018, Mr Stringer sent two emails to the solicitor, using a secure email system, which the solicitor could not open. She therefore asked him to “resend the dates of birth of the children and their full names”. The judge was shown (unopened) versions of the two printed emails in the documents with the words “email of dates of birth of children unable to open” written on them. There was also an attendance note made by the solicitor of a telephone conversation with Mr Stringer on 18 October 2018: “TC with R Stringer who gave me the dates of birth and names of the beneficiaries for the trust as unable to open secure emails”.

The final version of the variation was sent to Philip, who signed it not realising that he and his wife were not included in the class of beneficiaries. It was sent directly back to the solicitor, who dated it 31 October 2018. The mistake as to the beneficiaries was not appreciated until January 2019.

There was clearly miscommunication and misunderstanding between the professionals, but as Judge Matthews said, “whichever professional was responsible for the failure of the client’s instructions to be correctly recorded, the fact remains that Philip’s intentions were not in fact implemented. He and his wife were not beneficiaries, when he had so intended”.

The judgment

Fortunately, Judge Matthews was satisfied that there was sufficient evidence that, although originally Philip’s intention was to create a trust only for his children, he changed his mind and his final decision was that he and his wife should also be objects of the trust. In this respect, his intention was mis-recorded, and it was appropriate to grant rectification.

The case illustrates how easily misunderstandings can occur between professionals, and how important it is to check and re-check.