The importance of distinguishing funds

Batt v Boswell [2022] EWHC 649 (Ch) is a graphic illustration of the likelihood of family disputes where trustees do not clearly distinguish trust money and personal money.

Charles died in 1991 and left his estate to his wife, Phyllis, for life, remainder to their two children, Helen and Hugh.

Phyllis and Hugh were appointed as trustees and the trust contained a wide power of investment allowing the trustees to invest in their absolute discretion as if they were entitled beneficially.

The matrimonial home, which was owned as tenants in common, was sold shortly after the death of Charles, so half the net proceeds of sale became trust capital.

Phyllis put the net sale proceeds into various building society accounts. She did not segregate trust money from her own money, and nor was Hugh a joint account holder or otherwise noted as having any interest.

In 1992, Phyllis lent Hugh £50,000 secured on his house. They did not discuss where exactly it was coming from.

HHJ Paul Matthews concluded that neither Hugh nor Phyllis consciously decided whether the loan was being made with trust money or out of Phyllis’s free estate. Phyllis later ‘forgave’ the loan. Hugh’s understanding was that this was an advance from his father’s trust and HHJ Paul Matthews accepted that this was the probably the case.

At around the same time, Phyllis was buying a bungalow to move into. Hugh gave evidence which HHJ Paul Matthews accepted that the purchase was funded from the sale proceeds of the matrimonial home and that Phyllis had said that she was fortunate that she could use the money left by Charles, and so keep her own savings intact.

Helen found out about the loan and complained to her mother that this was unfair unless she also received £50,000. Phyllis refused to give her any money at that stage, so Helen asked to be added to the title of the bungalow as a beneficial joint tenant.

HHJ Paul Matthews took the view that this was consistent with Helen being aware that the trust funds were to be used to purchase the new property.

Given that trust funds were to be used, Helen wanted to be sure she would get her share when her mother died. Phyllis told Hugh that she had decided to agree to this in order to satisfy Helen.

The fact that the property cost more than the £50,000 lent to Hugh (and later forgiven) was explained by the fact that the acquisition did not immediately benefit Helen.

In principle, she would have to wait until Phyllis died to have a free asset she could use, let or sell. The higher value was seen as compensation for waiting.

Phyllis formed a relationship with a widowed family friend and they bought a house together. Helen and her husband moved into the bungalow and Phyllis later gave her share of the property to Helen and her husband.

Following family tensions, Phyllis went to a solicitor and recorded the gifts that had been made to Helen and Hugh and that they had come from the trust. Helen regarded this as an attempt to rewrite history.

Phyllis died in 2019 and appointed Helen and Hugh as executors.

There were two separate actions:

1. A claim brought by Hugh to remove Helen as a co-executor of her mother’s will on the basis that she was bringing an action against her mother’s estate and was, therefore, in a position of conflict. The judge hearing the application removed both Helen and Hugh and replaced them with an independent solicitor. The question of the costs of the application was deferred to be decided by the judge dealing with Helen’s application against her mother’s estate.
2. A breach of trust claim brought by Helen pleading amongst other things) (i) a failure to invest the trust fund, and (ii) a wrongful transfer of the trust fund to Phyllis “who spent it as if it were her own personal money”.

In relation to the breach of trust claim, HHJ Paul Matthews found that the trust funds had been properly dealt with under the rule in Saunders v Vautier [1841] EWHC J82 which allows beneficiaries who are of full age and capacity and solely absolutely entitled to assets held on trust to call upon the trustee for the transfer of the trust assets to him or her, or as he or she directs, and so bring the trust to an end.

In the present case, the life interest trust created by Charles’s will had only three beneficiaries: Phyllis, Helen and Hugh.

Helen and Hugh had vested interests in the capital of the fund of one half each. So long as Phyllis was alive, neither Helen nor Hugh could require their share of the capital to be paid over to them, unless Phyllis agreed.

But, once Phyllis agreed to such a payment, the rule in Saunders v Vautier meant that all those who were interested in the relevant share of the trust fund (as to Helen’s share, Phyllis and Helen, and as to Hugh’s share, Phyllis and Hugh) could combine to require the payment of the relevant share as they directed.

Provided the relevant share could be severed without difficulty, then there was no need for the consent of the third beneficiary. Here the fund was in cash, and there was no difficulty in severance.

The conclusion was that both the gift of the bungalow and the £50,000 were properly transferred to the beneficiaries of the will trust.

The following points come out of the case:

1. Trust funds and personal funds should be carefully distinguished to avoid these kinds of arguments.
2. Executors should be aware of the risk of conflict of interests. Helen was ordered to pay the costs of the application to remove her as executor. She had contended that Hugh should pay the costs personally on the basis that it was inappropriate for him to try to have her removed as executor whilst himself remaining an executor.

Hugh had brought the action on the basis that Helen was in a state of “irreconcilable conflict”. She had been appointed as co-executor of their mother’s will.

Yet in her capacity as a beneficiary of their father’s will trust, she had, written a letter before claim to Hugh’s solicitors, threatening to bring a breach of trust claim against both Hugh and the estate of Phyllis.

HHJ Paul Matthews said that so long as Helen was threatening to make a claim against Phyllis’s estate for her own benefit as a beneficiary of her father’s will trust, she could not properly act as executor of Phyllis’s estate.

Accordingly, the claim to remove her was entirely justified. She should have agreed to be removed.