UK: Will Drafting Negligence Claims – An Exemption For Financial Advisers?

Fishy advice in the case of Herring v Short Financial Services LLP

A recent decision from Leeds serves as a reminder of the duty of care owed to disappointed beneficiaries where wills have been drafted incorrectly. Here, the disappointed beneficiaries sued both financial adviser and drafting solicitor.

This article sets out the background, the decision, and an invitation to hear the Barrister who acted for the claimants.

Background

Mrs Shemwell was a relatively wealthy widow with no children or close relations. She died with an estate worth approximately £2m.

In April 2011, she had inherited approximately £300,000 from her sister. She was interested in mitigating the inheritance tax payable on her death and met her longstanding financial adviser, Mr Sully, who recommended that she set up two trusts. She had already set up trusts a few years earlier and only had £175,000 remaining of her nil rate band. So she therefore invested £175,000 into a discretionary trust. The primary beneficiaries were the children of her late husband's niece, Tim Herring and Claire Hartley. Rather than pay an immediate 20% tax charge on any other funds, she invested the remaining £125,000 of the inheritance from her sister in a loan trust which again named Tim and Claire as the sole discretionary beneficiaries.

A loan trust consists of a loan to the trustees that is repayable on demand or the settlor's death. Upon the settlor's death it falls into the estate. However, whilst the loan is outstanding, any capital growth is outside the trust and available to the beneficiaries. Thus, whilst not as effective in tax planning terms in the long run because the capital falls back into the person's estate, it does avoid an immediate 20% inheritance tax charge, which Mrs Shemwell did not want to pay.

Mr Sully explained how the loan trust worked to Mrs Shemwell at a meeting in July 2011 and followed it up with an explanatory letter in August 2011. Tim and Claire criticised the letter in particular because it did not specifically state that the capital would form part of her estate.

Mr Sully's note of the July meeting included the record that:

'She identified two relatively removed relations to receive the funds on her death in equal proportions, which are Tim Herring and Claire Hartley ...

It was agreed that her solicitor (Mr Woodhead) would contact me as we will need to discuss what is in trust and for whom so that he can amend her Will to meet her needs.'

The Claimants relied on the reference to making of the Will as meaning that Mr Sully was 'part of the Will making process'.

In October 2011, Mrs Shemwell did meet with Mr Woodhead at her home to give instructions for a new Will. Mr Sully was invited to attend in order, according to Mr Sully, to provide 'an up to date valuation of her investments'. He was only at the meeting for a little under 10 minutes. During that time, he provided Mrs Shemwell with a five page document which contained an up to date valuation of the assets which were the subject of the trust. After showing this to Mrs Shemwell, he handed it to Mr Woodhead. He was asked to leave and left before there was any discussion about the proposed terms of the new Will.

Mr Sully had also prepared a sheet of paper on which he had written details about the trusts as an 'aide-memoire'. The aide-memoire appeared to show that £146,472 was held for each of the two Claimants. However, that figure included the value of the assets in the loan trust – assets which would revert to the estate upon Mrs Shemwell's death.

Mr Sully handed the aide-memoire to Mr Woodhead before he left. Mr Woodhead's evidence is that Mr Sully used the expression 'lifetime gifts'. Mr Sully challenged that.

Mrs Shemwell's instructions to Mr Woodhead were that the Claimants should receive £200,000 each on her death. Mr Woodhead did not ask about the terms of the trust. He included legacies of £54,000 to each of the Claimants in the Will. Mrs Shemwell executed her Will on 8 November 2011. She executed a further Will on 22 May 2011, also prepared by Mr Woodhead, which made no change to the legacies in favour of the Claimants. The result of the drafting was that the Claimants would not receive the money in the loan trust.

Mrs Shemwell died unexpectedly after a hip operation in June 2012.

Shortly thereafter, Mr Sully told Ms Hartley and Mr Herring that they were entitled to all of the trust funds whereas they were in fact only entitled to the sums under the discretionary trust. The Claimants relied on that error as supporting their submission that Mr Sully never really understood how a loan trust worked.

The Claimants issued a claim against Mr Sully's employer, Shorts Financial Services LLP, seeking to recover the shortfall. They later joined Mr Woodhead's firm, BRM. The claim against BRM was compromised at a mediation. The claim against Shorts Financial Services LLP continued all the way to trial.

The decision

The Judge concluded that Mrs Shemwell did not rely on Mr Sully when making her Will. She never discussed its terms with him or asked for his advice in relation to it. He provided a valuation of her assets at the meeting he attended as requested. He did not know the extent to which she wished to benefit the Claimants and was asked to leave very shortly after the start of the meeting. He was not contacted by Mr Woodhead when the latter was drafting the Will.

The Judge also did not accept that the aide-memoire was misleading and thought it was difficult to see how Mr Woodhead's interpretation was consistent with the total of the trust monies within the estate.

He did consider it was negligent for Mr Woodhead to have drafted the Will on the basis of the aide-memoire without further enquiries as to the nature of the trusts involved.

It was therefore clear in the Judge's view that this case could be distinguished from the leading House of Lords decision White v Jones on liability to disappointed beneficiaries. The background to White v Jones was that solicitors had failed to prepare a will in time before their elderly client passed away. The intended beneficiaries who lost out as a result of that failure successfully sued the solicitors for the loss.

The invitation

Michael O'Sullivan of 5 Stone Buildings who appeared for Tim and Claire is giving lunchtime seminar about the case, and lessons to be learnt on Friday 16 September.

Please click here if you would like to attend.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.