There are numerous reasons why people decide to make gifts to others during their lifetime, such as to reduce Inheritance Tax.
However, making lifetime gifts, especially significant ones, can lead to various disputes, such as:
- The donor lacked the mental capacity to make the gift
- The donor’s attorney for their financial affairs unlawfully made gifts to themselves or others (i.e. they did not have the required approval)
- The donor made the gift as a result of fraud
- The donor made the gift as a result of undue influence
- The donor made the gift in an attempt to avoid a claim
Mental Capacity to make a lifetime gift
The principles that apply to establishing whether someone had the required mental capacity to make lifetime gifts are set out in the case of Re Beaney .
The test is whether an individual would have been capable of understanding the effect of making the transaction if the consequences had been fully explained to him. The test is, therefore, one of ability to understand, rather than actual understanding.
As to the extent of understanding required, this varies with the transaction concerned. Therefore, by way of example, if the donor was giving away his main residence (and main / highest valued assets) the degree of understanding required would be a high one.
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The burden of proving an allegation of undue influence generally rests on the person who claims to have been wronged. It is currently accepted that there are three categories of undue influence:
- Actual undue influence
- Presumed undue influence where the presumption is rebuttable
- Presumed undue influence where the presumption is not rebuttable
A rebuttable presumption is an assumption that is taken to be true unless someone comes forward to contest it and prove otherwise.
Actual Undue Influence
To prove actual undue influence, the party alleging the influence must establish that:
- The party who induced the transaction had the capacity to influence the party alleging undue influence.
- The party who induced the transaction did in fact influence the party alleging the influence and that the influence was undue.
- The undue influence did in fact bring about the transaction.
Presumed undue influence where the presumption is rebuttable
The burden of proving undue influence will normally be satisfied by establishing that:
- The complainant placed trust and confidence in the other party in relation to the management of the complainant’s financial affairs.
- The transaction entered into allegedly by reason of undue influence, calls for some explanation.
Once these two matters have been established, the court may be able to infer that, in the absence of satisfactory explanation, the transaction can only have been procured by undue influence.
Presumed undue influence where the presumption is not rebuttable
In certain cases, the courts have adopted a “sternly protective attitude” and have presumed, ‘irrebuttably’, that one party has influence over the other. These cases involve certain types of relationship where one party acquires influence over the other who is vulnerable and dependent, and where substantial gifts by the influenced or vulnerable person are not normally expected.
For the irrebuttable presumption to arise, it is sufficient for the complainant to prove the existence of the type of relationship, together with a transaction that requires some explanation. Examples of this type of relationship include:
- Parent to child.
- Trustee to beneficiary.
- Medical adviser to patient.
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