Trust and competence

The basic answer to the question posed above is that there is nothing significantly different about the nature and the underlying causes of claims arising in trust and executry work that sets this area of practice apart from other practice areas.

All the usual features are present:

• As with most practice areas, there is no real correlation between the scale of the error or omission and the severity of the consequences and resultant claim. Costly claims may arise out of relatively minor mistakes or oversights.
• While some claims arising out of trust and executry practice are down to getting the law wrong or other technical errors or omissions (application of inheritance tax rules to charitable bequests is one example), more arise as a consequence of communication failures, misunderstandings or administrative mistakes or oversights.
• In common with other areas of work, risk awareness, risk assessment and practical risk controls have a significant part to play in avoidance of claims.
• A review of the experience of trust and executry claims confirms that being clear about the scope of the work, communicating effectively with the client, identifying and managing critical timescales and addressing “loose ends” at the conclusion of the work are all essential to minimising claims in this practice area. All of this is well illustrated by case studies based on the experience of claims.

Case study – payment instructions

In the course of the administration of a trust, it emerged that one of the beneficiaries was bankrupt. The firm received a mandate requiring the beneficiary’s share in the estate to be paid to the beneficiary’s trustee in sequestration. When the time came, nine months later, to distribute the beneficiary’s share, the mandate was forgotten and the money was sent to the beneficiary himself. The trustee made a claim against the firm. How would you expect this situation to be avoided?

Even if the same person was responsible for this file from start to finish, it isn’t so difficult to picture how this oversight might occur. The mandate is filed when first received and then forgotten about amongst the countless issues to be dealt with when the beneficiary’s share comes to be distributed many months later.

Different firms have different systems to ensure mandates are implemented when the time comes for payment – some annotate the beneficiary’s contact/payment details prominently at the front of the file or wherever they appear on the file or on computer records; some have a means of annotating the ledger record for the trust or executry so that, as an additional level of control, cashroom colleagues are alert to the special payment instruction.

Case study – critical dates

The effectiveness of tax mitigation arrangements devised and implemented by solicitors for a wealthy client was challenged on account of the timing of registration of the client’s conveyance to trustees of a sporting estate. How could that be a problem for the solicitors? How could such a problem be avoided?

Critical timescales and deadlines need to be identified at the outset and a plan made to secure compliance with these.

There have been instances where those handling the instruction have not been sufficiently clear in instructing colleagues attending to the conveyance that time is of the essence if the arrangements are to be effective and that there is a critical date by which the conveyance requires to be completed.

The conveyance needs to be regarded as if it were a transaction with a settlement date, in the same way as if the property were being conveyed in implement of a sale with adverse consequences if the conveyancing is not completed by the due date. Preferably, the “settlement date” will be a date comfortably in advance of the latest date for the transfer to be effective for tax mitigation purposes.  

Case study – “delay” in administration

Allegations of delay are a regular feature of recent claims arising in relation to executry administration. Actual delays are capable of causing loss to the estate or to beneficiaries but there are instances where the allegation of delay is down to a genuine, but unjustified, perception of the executor or beneficiary rather than actual tardiness.

Swift & Co had acted for Mr Bigg for several years. An extremely demanding client, he produced regular work for the firm. When Mr Bigg’s aunt died, the client partner promptly introduced one of his trust and executry colleagues, assuring Mr Bigg that his aunt’s estate was in good hands.

The client partner was shocked when, months later, he received an email from Mr Bigg with a veritable tirade about the length of time it was taking to wind up his aunt’s estate. The email concluded “If it takes the firm six months to wind up a simple estate, I have to question the firm’s ability to handle my other business properly”.

Risk management points

This scenario illustrates the importance of addressing clients’ expectations and managing those expectations. The administration of even a “simple” and modest estate may well take longer than six months to complete and there are sound reasons why ordinarily the estate will not be (fully) distributed before the expiry of six months from the date of death. However, the beneficiary’s expectations may be entirely different and client care, if not claims avoidance, justifies taking trouble to explain the minimum and potential timescales and the external, uncontrollable factors liable to make a difference to these timescales.

Case studies – errors in distribution

A solicitor acting in the administration of an estate sent a cheque to one of the beneficiaries for £15,100 instead of £11,500. The mistake was only uncovered when the final executry account was being prepared and the final distribution was being made some months later. How do you avoid finding yourself in this situation?

Risk management points

Quite apart from the embarrassment, inconvenience and extra work involved, it is notoriously difficult to retrieve funds from a beneficiary who has been overpaid, or paid in error – a situation worth avoiding at all costs. In the most recent years’ Master Policy claims experience, errors in the distribution of executry estates were the most frequent cause of claims in this area of practice.

Different firms have different controls in place to ensure that payments issued are correct. Some firms have an arrangement which requires fee earners to produce to the cashroom some form of vouching when requesting the cheque or instructing the remittance – a copy of the will or computation of the beneficiary’s share.

Case study – survivorship destinations

Mr A’s will left his half share in the matrimonial home to his widow. The widow was also to receive the entire contents of the house and a legacy of £50,000. The residue of the estate was left to Mr A’s grandchildren. On Mr A’s death, his half share in the house passed not to his widow, as the will directed, but to his ex-wife.

Is that a problem for the solicitors who prepared the will for Mr A; for the solicitors who acted in Mr A’s divorce from his ex-wife; or for the solicitors who acted in the administration of the estate?

Risk management points

Claims continue to arise out of survivorship destinations – either on account of the failure to attend to evacuating the survivorship destination or to do so effectively, or on account of failure to identify that the destination has not been evacuated, rendering this aspect of the client’s testamentary wishes/instructions ineffectual.

Analysis of the claims experience tends to suggest that for several years now it has been well understood throughout the profession how to evacuate a survivorship destination effectually. However that does not address the historic position and situations continue to emerge where the intended evacuation has been executed incorrectly. When preparing a will for the “entitled spouse”, there is a potential opportunity to identify and address an ineffective evacuation.

Is the possibility of an (unintended) extant survivorship destination mentioned as an aide memoire on your will drafting checklist? Do terms of engagement in relation to wills (and any associated tax planning advice) make any reference to examining titles, or do they exclude this from the scope of the engagement (in all cases, or in the case of “simple wills”)?

Agricultural tenants

A positive feature of the most recent claims experience is the noticeable reduction in the number of intimations arising out of failure to comply with the critical date that may apply if required to serve notice on the landlord when acting in the executry of certain farm tenants. There was a spate of intimations at the end of 2005/beginning of 2006.

Risk management points

The reduction in intimations since 2005-2006 indicates that the profession has successfully prevented claims, either by spotting/flagging executries which involve the requirement to serve such notices and getting the notice served timeously, or by effectively declining to take on responsibility where there are identified complexities in which the firm has no expertise.

POINTS TO PONDER

• Defining responsibilities
  At the commencement of an instruction (and throughout), be clear about what is and is not your responsibility. Where there are other advisers involved, there may be a greater risk of misunderstanding arising about who is responsible for doing what. Agree the scope of your responsibilities and ensure that is reflected in your terms of engagement or scoping letter.
• Will drafting
  The Master Policy intimations experience includes a number of cases where a “disappointed beneficiary” alleges that he has lost out because of a drafting error or delay on the part of a solicitor in acting on instructions for the preparation of a will, the terms of which would have been (more) beneficial to the claimant.
• Critical dates
  The recent Master Policy experience includes intimations relating to a variety of critical dates – some concern tax-related time limits (CGT or, more often, IHT) that are regular features of trust and executry practice; some are more unusual, for example the time limits for service of notice on landlords under agricultural leases (see the heading “Agricultural tenants”).

ALISTAIR SIM AND MARSH

Alistair Sim is a former solicitor in private practice who works in the FinPro (Financial and Professional Risks) National Practice at Marsh, the world’s leading risk and insurance services firm. To contact Alistair, email: alistair.j.sim@marsh.com .

The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.

Marsh Ltd is authorised and regulated by the Financial Services Authority.