If a Trustee makes an incorrect distribution to a beneficiary, then realises this mistake many months later how is this resolved?
Is the beneficiary entitled to repay the incorrect amount paid even though they were advised they were entitled to it? What if it has been spent or gifted etc?
I understand that mistakes have been considered in many cases (Pitt etc) from a tax perspective but how is this resolved practically?
This would amount to a breach of trust. The trustee would have personal responsibility for this and the rightful beneficiaries would be able to pursue the trustee for any loss to the trust.
Practically, the trustee should contact the person incorrectly paid and ask them to return the funds. If they refuse I am not sure that the trustee would have much recourse against them, particularly if the error was made and received in good faith (although someone else on the forum may be able to advise on this). The trustee would need to put the trust back into funds themselves.
As the trustees are governed by the terms of the trust a distribution of trust property to the wrong beneficiary gives rise to a breach of trust. The trustees must restore the relevant property or ensure the value of the trust fund is restored. The “wronged” beneficiary(ies) is/are entitled to appropriate equitable compensation due to the breach of trust by the trustees.
[Target Holdings v Redferns [1996]].
Malcolm Finney
Hi Lucy
In what way was it a mistake? How much was it? It strikes me as a non-lawyer that if a trustee pays out to someone not entitled then unless the person is minded to accept a request to repay it and accept the distribution as void (assuming they were not a valid beneficiary), the trustee is personally liable. Or PII may pick it up for professional trustees.
If it was a valid distribution just made in error then I would think similar liability as above, but if repaid is there an argument that the beneficiary is adding to the settlement?
Sara
The incorrect amount paid. I agree it is a breach of trust and lack of due care.
If a beneficiary is advised they are genuinely entitled to a distribution it would be unfair/impractical to expect them to hang onto it incase the trustees have paid the incorrect amount.
I did wonder if tracing would be enacted in respect of returning the funds ?
@MalcFinney Thanks for your helpful response. Practically speaking is there onus on the beneficiary who received the gift to return it many months after being notified the value was incorrect?
Does the same apply if a beneficiary receives an overpayment from an estate post-probate (as opposed to a trust)? I was always told in this situation, a beneficiary must repay it especially if they have been made aware that a mistake has been made. In this case I’m aware of, the solicitors were executors but not trustees and transferred the funds gathered to the trustees for distribution.
The law on recovering property or compensation from a PR and a trustee are not quite identical but broadly the proper claimant is the beneficiary who has lost out and the proper defendants are the trustees and the beneficiary who has wrongly or excessively benefited. If a sum of money is involved a personal remedy is appropriate but a proprietary remedy (tracing) may be more so if the claim involves a specific asset.
There is no limitation period for recovery of trust property from a trustee but 6 years from a third party; s21 Limitation Act 1980. But beware s32: where
(a) action is based upon the fraud of the defendant; or
(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or
(c) the action is for relief from the consequences of a mistake;
the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.
Even so where an equitable remedy e.g. equitable compensation or tracing is involved the court may allow the defence of excessive delay (“laches”). It makes sense for the trustees to confess to the right and wrong beneficiaries to reach an out of court settlement and reduce their residual personal exposure in the event that money or property (or its proceeds) is dissipated.
Jack Harper
t
You say that the “incorrect amount [was] paid”. In what way was it the “incorrect” amount?
It sounds as though you are saying the trustees intended to pay the beneficiary ÂŁx, but the person organising the bank transfer arranged for the larger ÂŁy to be transferred to the beneficiary.
For example, the trustees might have exercised their power in a Deed of Appointment - exercising a power of appointment - to appoint ÂŁx to the beneficiary. The payment of the additional amount would then have been in error. The trustees are unlikely (at least under the power of appointment) to have validly made a distribution of the excess to the beneficiary and they should be able to recover the balance.
However, there may other powers in the trust. For example, the trust may contain a power to “pay or apply capital to or for the benefit of any of the beneficiaries”. In that case, if all of the trustees agreed to the payment of £x, but one of them arranged for the payment of £y, then it would seem that the power was not validly exercised and the excess can be recovered from the beneficiary.
If all of the trustees (or as many as were required - for example, if the trustees could exercise the relevant power by majority, then only a majority of the trustees) were aware that ÂŁy was going to be paid to the beneficiary and if there was a power to pay capital to beneficiaries without the need for anything more (eg a deed), then it could be that the trustees exercised the power validly and they cannot, on the face of it, demand the excess back. Instead, the trustees will have to show that they had made a mistake in determining the amount to be paid.
If a validly exercised power has given ÂŁy to the beneficiary, then it is not unfair or unjust for the beneficiary to keep the funds. It is the correct legal position. The trustees cannot simply revoke an irrevocable distribution. The correct position is that the trustees would have to apply to court on the grounds of mistake to request that the exercise of the power (in respect of the wrong amount) either be cancelled or treated as being in respect of the correct amount.
If no power was validly exercised to release the excess to the beneficiary, then the beneficiary holds the excess on resulting trusts for the trustees.
What is not clear at the moment is where exactly the error occurred. Did they just calculate it wrong and then validly exercise their power to give that wrong amount to the beneficiary? Or did they calculate it correctly, agree on the correct amount, but then the person who made the transfer typed the wrong amount in?
Paul Davidoff
New Quadrant
Hi Paul
Thank you for taking the time to consider and return such a detailed response, it is extremely helpful and intimates to me now that further investigation is required.
