Undue influence is a legal concept which is usually raised when someone wants to challenge either a transfer of an asset made by a person during their lifetime or a Will made by a person. There are two distinct limbs of undue influence. In relation to lifetime gifts by an individual it has one meaning and in relation to the making of a Will it has another.
So far as lifetime gifts are concerned, there are two categories. The first is “actual” undue influence and the second is “presumed” undue influence.
“Actual” undue influence is established when there is evidence to show that someone (“the donor”) has been coerced into making a lifetime gift. The degree of coercion required depends upon the strength of will of the donor to resist coercion. If actual undue influence can be proved in Court (the evidence must show that it is more likely than not that “actual” undue influence occurred) then the gift can be set aside by the Court.
With regards to “presumed” undue influence, this is often raised in circumstances where the recipient of a gift has acquired influence over the donor. This concept of “presumed” undue influence is helpful in cases where there are suspicious circumstances surrounding a gift but not enough evidence to prove “actual” undue influence. It is not enough to establish that the recipient is in a position to influence the donor into making the gift. It also has to be established that the transaction is one that calls for an explanation. This means that the circumstances need to be such that the Court considers it appropriate to be vigilant and look at the evidence of the circumstances in which the gift was made. If the Court decides to do this then the recipient of the gift has to produce evidence to show that the gift was entered into freely by the donor without constraint. There are key areas of evidence which would need to be examined like the nature of the relationship between the individuals concerned, whether there is a disadvantage to the donor in making the gift, whether the donor received advice and, even if they saw a lawyer or other professional for advice, whether that advice was truly independent of the recipient. If the recipient of the gift cannot establish that there is no undue influence then the Court can set aside the gift.
The position with regards to undue influence in relation to Will making is different. Undue influence in relation to the making of a Will is never “presumed” and can only be established if it can be shown that it is more likely than not that the person making the Will was coerced into doing so against their wishes. Again, what amounts to coercion would depend upon how strong the Will maker is. If they are mentally or physically frail then it may be easier to coerce them when compared to someone who is strong in both body and mind. Coercion in relation to a Will would usually be expected to take the form of violence or a threat of violence but can sometimes be extended to mental abuse. It has to be said that an individual merely putting pressure on another to make a Will is not sufficient. The pressure has to be that great that it leads to a person making a Will against their wishes. Because of the evidential burden, undue influence claims in relation to Wills are very hard to make out and further, if undue influence is alleged and a challenge fails, there are substantial adverse costs consequences for the person making the allegation.
So where does all of this sit with regards to the new pension freedoms? The reforms will allow the pension pots of those with defined contribution schemes to be passed on by individuals either free of tax altogether if the individual dies before 75 years of age or, if they die after that age, to be passed to their intended beneficiaries who will be taxed when they make withdrawals at their own marginal income tax rates.
Decisions made by individuals about pension death benefits are usually documented in nomination or expression of wish forms. Where do these forms sit in relation to the issue of undue influence?
If a binding nomination can be made, i.e. one which the pension scheme provider has to follow when paying the death benefits, then which test of undue influence would apply if the individual was coerced into signing the nomination form? Having analysed the cases I think the question of whether there has been “actual” or “presumed” undue influence is the key. Is the fact that a nomination does not always have to be witnessed a factor which would make the Court lean more towards “presumed” undue influence? What if the only persons who are there when the form is signed are the donor and the recipient? Who would know? It could be argued that as the nomination is intended to take effect on death then it is “Will-like” meaning there has to be a threat or actual violence or abuse but I cannot see any authority on the point at all. This is, in my view, far from satisfactory from a legal point of view. The relatives of those with valuable pensions need to have a right of recourse if there is something suspicious about the circumstances surrounding the making of a binding nomination.
Sometimes the pension forms require the owner of the pension to simply express a wish to the pension scheme provider about how the death benefits are to be disposed of. This does not in any way bind the pension scheme provider although they will usually follow those wishes. They tend to have discretionary powers under the terms of a trust. If an individual was coerced into signing an expression of wish form, could undue influence be raised by others if there were any points of concern about that at all? Probably not in my view as the completion of an expression of wish form is not an actual disposition by the person signing the form. The person with concerns would only appear to have the option of raising any points of concern with the pension scheme provider so that when a decision is made about the payment of the death benefits, they can take into account their concerns and if necessary, explore those concerns by investigating further before any decision is made. Some would say that those making the decision have a duty as trustees to investigate before choosing how to exercise their discretionary powers as trustees. Those who are disappointed may therefore have a trust law based remedy grounded in the law relating to the exercise of discretions by trustees. However, the Courts are always very reluctant to interfere with the deliberations and decisions of trustees unless it can be shown that the trustees have acted in bad faith. How could a disappointed person with legitimate concerns establish that the pension scheme trustees have acted in bad faith? Again, this appears to be unsatisfactory.
For the reasons given I think there is certainly an argument that the government should ensure that legislation is in place in relation to the pension freedoms to ensure that individuals who are vulnerable are not unduly influenced in relation to making decisions about the death benefits under their pensions. It could of course be argued that the fact that most individuals with substantial pensions receive advice from regulated advisers is a safeguard to some extent as they will have presumably discussed their wishes about pension death benefits with those advisers but is it enough? In my view, it is not.
The remedies available at the present time appear not to afford a convenient remedy to those with legitimate concerns and in the absence of statutory provisions this is an area of the law which arguably needs “filling”.
I have to thank Becky Bonner at Sagars Chartered Accountants for posing this interesting question which I find difficult to answer!