Tis known delay and charge vex all who sue
And those disputes law reconciles are few.

Those lines, which I came across this week in a seventeenth century pamphlet, seem apt for the case I discuss in this column. I am fascinated by pathological cases, cases which go wrong, cases which can be great for fee income, but which practitioners know are not good for clients. Typical ingredients which allow litigation to get out of control are bloody-minded litigants, mistakes by lawyers, and breakdown in relations between client and lawyer. Family trust cases are a variant on the theme, and often seem to go wrong, at any rate from the perspective of the beneficiaries. The Jemma Trust litigation is not a Jarndyce v Jarndyce, and it is not a case of outrageous conduct by lawyers, but it is bad enough for the Judge and the Court of Appeal to have commented on the excessive costs. There is no meaty legal principle at stake, but the story is worth telling.

Jemma Trust v Liptrott [2003] EWCA Civ 1476 will be known to many practitioners who deal with administration of estates. In a nutshell the judge a first instance had said it cannot be right for solicitors, when they charge for administration of estates, to charge both an hourly rate and a percentage of the value of the estate. On appeal the Law Society intervened. The Court of Appeal gave guidance on fee levels, permitting solicitors to charge both types of fees together so long as the total is not excessive.

However there is more to the litigation than that. This week there was another judgment handed down by the Court of Appeal, in Jemma Trust v Kippax Beaumont Lewis [2005] EWCA Civ 248 (the first named defendant changed only because the individual defendants, joined for procedural reasons, did not take part in the appeal). Other published judgments can be found by a case title search for ‘Jemma Trust’ in www.bailii.org; as one would expect with arguments over allegedly over-charged and negligent tax advice, the litigation is of course more complex than my summary here might suggest. One must hope for the parties' sake that the saga will soon be over.

The litigation is about the will of Lancashire landowner, Sir Geoffrey Hulton Bart. The Hulton family was Norman. They settled at West Houghton in Lancashire around 1200. They owned land in the area, and naturally developed mining interests in later centuries. The most distinguished member of the family was the railway pioneer, William Hulton. He had Tory leanings, and worked hard to combat the threat of Trade Unionism. In 1819 he ordered a detachment of infantry, cavalry and artillery to deal with a peaceful but dangerously large union meeting. Politicians then, as now, could ruin a promising career by a single unguarded statement. He made the mistake of referring in public to his decision, which was thought to have led to 11 fatalities, and was popularly called the Peterloo Massacre, as ‘the proudest day of my life.’ That comment was political death. Sir Geoffrey, his last surviving direct male heir, died in 1993.

What was to become of the family wealth? Well, a lot of it went in legal fees, and that is what the litigation is about. There is an heir, a nephew, Mr. Butterfield. He, however, seems not have wished to take on the mantle of a Lancashire squire, but chooses rather to reside in the sunny Channel Islands. As far as one can tell from the judgments, Sir Geoffrey’s advisors did not seek to construct mind-boggling tax-saving arrangements during his lifetime, and his will was not unduly complex. When he died his wife had senile dementia. His will said that his land was to be held on trust for his wife as life tenant, then to go to his heir Mr. Butterfield. The money was to be left for tax, fees, legacies, and the remainder to the heir. The executors, and trustees of the land, were to be his trusted family solicitor and his land agent.

The estate was eventually worth around £10 million. The will seems sensible, but the solicitors did make a meal of it. Bear in mind there are two chief beneficiaries of the element of the estate which was land. Lady Hulton, Sir Geoffrey’s now senile wife, was life tenant (entitled to occupy a dwelling house and garden on the land, and to receive income from the rest of the land). Mr. Butterfield was the remainderman, who would be entitled absolutely on her death. The solicitors, on advice, hit on the idea of effectively buying out Lady Hulton’s life interest by a variation in the will, which would then be deemed to have devised the land direct to Mr. Butterfield on Sir Geoffrey’s death. In other words, the trustees would give Lady Hulton a lump sum. In exchange she would consent to varying the will so that all the land went straight to Mr. Butterfield as if from the date of Sir Geoffrey's death. He would then try to claim business transfer or agricultural relief to get out of paying inheritance tax. The scheme was made more expensive by the fact that Lady Hulton was senile, because her mental incapacity meant that consent was required from the Court of Protection. Her relatives who were looking after her interests were not happy about the idea of her being bought out. Eventually, when the executors increased the lump sum offer to £750,000, they agreed.

There is no doubt that the solicitor and land agent who were executors and trustees were wrong to get involved in this scheme. Standing in their shoes as executors, it was not improper for them to try to save tax (and make good fee income in the process). However, standing in their shoes as trustees the scheme meant agreeing to let Mr. Butterfield, the remainderman, buy out Lady Hulton, the life tenant. Lady Hulton got no real benefit out of that deal. Therefore, as executors they might have been saving tax, which was good, but as trustees they were helping one beneficiary at the expense of the other, which was improper.

From a tax point of view the idea was fairly dodgy, because the Inland Revenue might have made a fight over the claim for business transfer relief. However, owing to a mistake by the Inland Revenue, it worked better than expected. There is no need for present purposes to follow exactly what happened. Tax aficionados are referred to the judgments. The Inland Revenue said the purported variation in the will had not worked. The money paid to Lady Hulton to buy her out was to be treated merely as an advance under the terms of the trust. The transfer of her life interest to Mr. Butterfield was to be treated as a gift from her to him – a Potentially Exempt Transfer which he might be taxed on if she died within seven years (as it happens, she died not long afterwards). He was offshore anyway, and was not worried about that. The Inland Revenue were wrong, but the executors managed to lock them into that position.

So the solicitors who acted as executors and trustees, with advice from counsel, had done Mr. Butterfield a lot of good. Saved him a fortune in tax. That is why he has been suing them since 2001 in parallel proceedings, one for detailed assessment of costs of administering the estate, the other for professional negligence, both of which reached the Court of Appeal. I put it in that sarcastic way to draw attention to the point I wish to make. Where wealthy family trusts are concerned, the perception of the trustees is often that they are doing their best to use their panoply of professional skills to look after the interests of the (often young) people whose financial interests have been placed in their care. The perception of the beneficiaries is often very different. I do not know what Mr. Butterfield thinks of the trustees whom he sued. Often beneficiaries look on trustees as ogres who rule their financial lives from afar. They see them as formerly trusted retainers of the 'old man' (or woman, in any event the settler), retainers who now, in or near their own retirements, keep helping themselves to huge slices of the cake in fees, while the beneficiaries whom Fortune intended to favour with Inherited Wealth look on helplessly.

The beneficiaries look on helplessly because, as they are often correctly advised, the worst thing they can do is to attempt to control the trustees by litigating. I emphasize that the rights and wrongs are a matter of perspective. In the Jemma Trust litigation, the executors and trustees were found to have acted in good faith, and indeed their one major lapse was found to have favoured the claimant, Mr. Butterfield. It may be that, by contrast, the beneficiaries thought that the trustees behaved self-interestedly. How much of the cake went in fees in this case? It is difficult to tell. The costs of administering the estate, which was worth up to £10 million, are given in one of the judgments at around £650,000. The negligence action, which has now reached appeal via an oral application for leave to appeal, had cost an aggregate of nearly £1 million by the beginning of the 13 day first instance trial. In other words, quite a lot of the cake went in fees. Incidentally, Mr Butterfield substantially lost the litigation over detailed assessment, and substantially lost the negligence action. There is no need here to say much about that action because it made no new law. His complaints were really of bad tax advice, and of the fact that in the tax saving scheme involving buying out Lady Hulton, the solicitors had (a) generated too much work for themselves, and had (b) let ‘him’ (i.e. the let the trust to which he was entitled in remainder) pay too much for buying her out at £750,000.

The point of the story is that from the perspective of descendants who are made beneficiaries of trusts, the system is fraught with problems. In economic terms, the key to the problems is that ownership and management are separated. In a public company, of course, ownership is with the shareholders, management with the directors. In a family trust, ownership is with the beneficiaries and management with the trustees. In both cases the management may honestly think they are doing a good job, but the underlying interests of management and owners, of trustees and beneficiaries, diverge. And with trusts, as with public companies, the scope for a beneficial owner, be it a beneficiary or a shareholder, to use the courts to remedy what they perceive as self-interest by the management is very limited indeed. It is only in the clearest cases of abuse that a beneficiary (or a shareholder in a large corporation) is likely to succeed in litigation over what he considers excessively remunerated, self-interested, and poor quality management.

Finally, Who is Jemma? I have no idea. I have described Mr. Butterfield as the claimant because he evidently stands behind Jemma Trust, who are in fact the nominal claimant. Perhaps Jemma is an heir to whom Mr. Butterfield wishes to pass the kind of tax-free benefits that the last of the Hultons conferred on him.

Dr John Birchall - Professional English, Legal English, and Common Law Training