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Ensuring trusts and other documents are legally valid

Technical Article

Publication date:

02 October 2018

Last updated:

29 July 2019

Author(s):

Barbara Gardener

Over the last two months we have been considering the question of whether there are simpler alternatives to using a trust. We addressed the possibility of using statutory trusts and designations and outlined the possibility of using contract law instead of a trust. We also looked at whether there is a possibility of setting up trusts electronically and, if so, would this make it easier and more acceptable to use trusts, especially with life assurance policies.

(AF1, JO2, RO3)

As mentioned last month, on 21 August the English Law Commission issued a Consultation Document on the electronic execution of documents. This therefore seems to be a good opportunity to look at the methods of executing documents to ensure they are legally valid and what happens if a particular document is not executed properly.

Problems with incorrectly executed documents

There is hardly a week at Technical Connection when we do not receive enquiries about problems with incorrectly executed trusts, trusts that have not been signed or dated, or have uncompleted boxes, or had words added which conflict with the rest of the trust, or have been damaged, or had amendments or changes made after the original execution, or… well, the list is endless.

It may well be that  having to execute  a  trust (or any deed for that matter) electronically, with a proper trail of who wrote what and when (without an opportunity for people to write anything which they are not supposed to on the document) would avoid many of the problems with hard copies and wet signatures. It would also ensure that the original version is stored and thus available when needed, thereby avoiding the problem of lost documents (another issue that seems to happen quite frequently). Therefore, the news that the Law Commission is looking at these matters is really welcome even if any developments in this area will not happen imminently.

What are the legal requirements?

English legislation requiring certain documents  to be in writing goes back to the 1677 Statute of Frauds which is still in force (along with a huge number of other Acts of course). For the purpose of our article we are concerned with wills and trusts.

Execution of wills in England are still governed by the Wills Act 1837 although the Law Commission is also consulting on bringing this part of the law up to date, including consideration of proposals for digital wills. The 1837 Act expressly provides that a signature on a will must be in ink or handwritten.

As far as trusts are concerned, whilst the requirement for a trust to be in writing only exists for trusts of land and equitable interests, in practice most trusts will be created by a deed. In the case of life assurance policies, a trust can also be effected by means of a trust request and declaration but a deed will be required to transfer the title to the policy to the trustees.

With regard to electronic signatures, Regulation (EU) No 910/2014 (eIDAS) already says that an electronic signature cannot be denied legal validity simply because it is electronic, and that electronic signatures are admissible in evidence in legal proceedings. But while the Electronic Communications Act 2000, a UK statute, had mirrored the admissibility provision in eIDAS, it does not expressly provide for the validity of electronic signatures and apparently this is the reason why some confusion exists as to the validity of e-signatures.

For this reason the statement from the Law Commission confirming validity of electronic signatures in contracts is most welcome. Note, however, that the statement refers to contracts which do not need to be entered into by way of a deed. In short, if a deed is being executed, as of now it cannot be validly executed electronically, save where legislation provides for this, as is the case with conveyancing transactions which can be carried out entirely online with an e-signature mechanism provided through the Gov.uk Verify service. The latter required changes to the Land Registration Rules 2003, and applies only to conveyancing documents.

So back to the subject of deeds. A deed has been defined as a written document which is executed with the necessary formality, and by which an interest, right or property passes, or is confirmed, or an obligation binding on some person is created or confirmed (the reference to an obligation clearly implying a trust).

In England the requirements for a valid deed are contained in the Law of Property (Miscellaneous Provisions) Act 1989 and this requires not only the use of an appropriate wording but also that the deed must be signed by each party in the presence of a witness who attests the signature.

Deeds executed by companies under the Companies Act 2006 are governed by sections 44 and 46 of that Act.

So what happens if a deed is not executed correctly? The answer to this is that it will depend on the circumstances, namely what exactly went wrong. An incorrectly executed deed may be rectified in some circumstances, in others it may be deemed invalid.  Given that, as stated above, there is no general requirement that a trust must be created by way of a deed, an incorrectly completed trust deed relating to a life assurance policy or an investment will not necessarily invalidate the trust but it may be necessary to go to Court to determine the outcome.

Online deeds - legal implications

Unlike for electronic signatures, generally there are no legislative provisions currently in force which deal with the electronic execution of deeds. The key problem here is with witnessing which is considered to involve the physical presence of the witness at the same location.

The Law Commission (LC) acknowledged that some stakeholders had suggested that the formalities applicable to deeds in general should be abolished but noted that the scope of the current project was limited to electronic execution and invited opinion on a separate project to consider such a change.

For now, the LC is seeking views on certain provisional proposals for reform to allow more flexible arrangements for deeds executed electronically. These provisional proposals include:

  • permitting the witnessing of an electronic signature by video links
  • allowing the use of online signing platforms on which both the signatory and the attesting witness log in, sign and attest in real time
  • introducing a new concept of “electronic acknowledgement” where a signatory would sign a document electronically and then acknowledge to the witness by telephone call, email or even in person that they had signed it, showing or sending the document to the witness. The witness would then sign the document with their own electronic signature and include a statement that the signatory had “acknowledged” the signature.          

An additional problem with deeds is the requirement that they be delivered before they take effect. The LC noted that delivery does not necessarily require the physical handing over of the deed, which could be confusing. However, the LC noted that it was not aware of any strong demand for the removal of the “delivery” requirement for deeds and sought views as to whether there was such demand. Alluded to in the consultation paper is the fact that the requirement for delivery enables to a certain extent the use of escrow and the holding to order of deeds, which can assist in closing more complex transactions.

The Consultation is open until 28 November and it will obviously be some considerable time before we have any firm proposals, let alone new legislation.

For completeness it may be useful to add that, in 2013, the government carried out a consultation on plans to allow lasting powers of attorney (LPAs) in England and Wales to be created entirely online, but it met strong objections from leading professional bodies and so the proposal was dropped.

Comment

The current  problems with e-signature systems such as exist lie in that they usually rely on an email being sent to somebody and them then reading and acknowledging a document by following a link in that email. The difficulty with this is that it is hard to verify that the person who was sent the email is the same person who acknowledges the document and that either of these people are the person actually named in the document.

It is the fear of potential fraud, especially in relation to older people entering into transactions, that has hampered the development of electronic signatures in many areas, in particular, as mentioned above, with LPAs. Trusts are, of course, another area where such fears are understandable, given that potentially they may involve the gifting of very valuable assets.  It is likely that there will need to be developments in the technical side of things before the e-signature situation is fully mature and ready for widespread adoption.

While the LC’s proposals to look at the law of deeds is most welcome, the nagging question in relation to trusts is this: given that it is essential that any prospective settlor of a trust, as well as the trustees, are fully familiar with the trust provisions, what is wrong with spending some time on the execution of a deed in the hard copy, with all the parties given an opportunity to study the document before signing and then given a copy of the same  to keep safe and refer to as and when needed?

Next month we will look at the most common mistakes made when creating trusts and how to avoid them.

This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.

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