New Zealand in the 1990s and 2000s went through a boom in the creation of family trusts. A big part of it was parents establishing trusts to protect the family home and other assets for their children. Many of those trusts are now coming to fruition as the parents pass away leaving the trustees to work out what to do with the assets.
But not all trustees are keen to close down the trust and distribute the assets. Some might see pecuniary advantages in not distributing, perhaps from rental income. Some might want to keep the family home intact. Some might just be too busy to deal with it. That’s fine provided everyone agrees. If not, the resulting dispute can be fraught and destroy relationships with people you really ought to be on good terms with.
Death is Stressful
Often trust issues arise after a breakdown in relations between the survivors, perhaps between siblings or between the deceased’s children and surviving second spouse – or third, or fourth!
The death of parents and close family can raise unexpected emotions. It can make people act in strange and bizarre ways. Feelings of vulnerability can make people less generous or trusting. And if there are large amounts of money at stake, family loyalties can become even more strained.
Trustees have various responsibilities, known as fiduciary duties. Over the centuries these duties have been developed and refined, and are now enshrined in Part 3 of the Trusts Act 2019. The law requires trustees to know the terms of the trust, act in accordance with them, act honestly and in good faith, act for the benefit of the beneficiaries, and act for a proper purpose.[1] Somewhat surprisingly, that’s the end of the trustees’ mandatory duties.
The default duties – such as the duty of care, to invest prudently, to not act in self-interest, to not profit from being a trustee, to not be rewarded, and more[2] – can all be contracted out of with an exemption in the trust deed. Moreover, the trustees can usually add that exemption into the deed themselves. So trustees can wield considerable power over the trust’s assets and can sometimes be quite adversarial towards some of the beneficiaries. Many trustees are lawyers who understand and abide by their duties. However, that is not always the case and situations can arise where:
- Trustees won’t communicate.
- Trustees will disclose basic trust information but not financial details.
- Trustees believe they have absolute, unfettered discretion to distribute assets however they please.
- Trustees think they know best.
- And very occasionally a trustee has dishonest motives.
In the face of unfriendly trustees, all final beneficiaries[3] have two unassailable rights. The first is the right to receive trust information, in order to scrutinise the trustees. I write about this in more detail here. The second is the right to terminate the trust, known as the rule in Saunders v Vautier.[4] But for this to happen all beneficiaries must agree. Therefore, neither of these beneficiary rights help if a stubborn trustee happens to be one of the beneficiaries.
But there are other solutions.
Proper Purpose
Trustees must observe the age-old rule of trusts to exercise their powers for a proper purpose. It’s one of the mandatory duties mentioned above. Proper purpose is the original purpose of the settlor when they setup the trust in the first place.
If, as is common in New Zealand, the settlor was a parent wishing to protect the family home and other assets for the sake of the children, the trustees must consider that purpose in all their decisions. This is a fundamental principle of the Trusts Act 2019.[5] Any trustee who fails to exercise this discretion correctly is actually breaching the trust and can be removed as a result. But trustee removal is a lengthy, fraught and costly process, and there is often no guarantee of success.
The Privy Council case of Grand View Private Trust Co v Wong[6] concerned a series of family trusts worth billions of dollars. The law lords who decided the case devised three proper purpose tests of trustees’ actions, omissions or decisions:
- Is the action, omission or decision within the terms of the deed or implied by it?
- Did the trustee adequately consider whether and how they should exercise the action, omission or decision?
- Was the action, omission or decision for an improper purpose, ie. a purpose other than one for which the power was conferred on the trustee?
Trustee decisions have been successfully challenged for lack of proper purpose, and the trustees removed, or the trust wound up and distributed.
Good Faith
Another potential solution is to prove the trustee is not acting in good faith. Acting honestly and in good faith is another mandatory duty of trustees, which if contravened is a breach of trust. But there’s quite a high bar to proving lack of good faith on the part of a trustee. Dishonesty, outrageous conduct, or total disregard for the beneficiaries to the point of using trust funds to invest in an internet scam[7] will clearly suffice but there are often circumstances where the poor conduct is less clear. Ultimately it comes down to the circumstances of the case.
Going after trustees for improper purpose or lack of good faith can be complicated, so is best attempted with the support of an experienced trust law barrister.
Takeaway
The upshot is that final beneficiaries need not wait forever for a trust to be terminated. They can require trustees to act in accordance with the settlor’s intentions.
Settlors would be well advised to make those intentions crystal clear in a memorandum of wishes, or even just an email to the beneficiaries, so everyone is on the same page. And beneficiaries should make sure they keep such emails, letters or any other evidence they have of the settlor’s intention when establishing the trust.
Because you never know when it might come in handy to avoid a fraught dispute with someone you really should be on good terms with.
Alex McDonald I Trust Barrister I Auckland
[1] Sections 23 to 26.
[2] Sections 29 to 38.
[3] Final beneficiaries are also known as residual or absolute beneficiaries. But discretionary beneficiaries are different and have no guarantee of receiving from the trust. They really are at the discretion of the trustees.
[4] Saunders v Vautier (1841) 4 Beav 115, 41 ER 282 (LC Ct) now enshrined in the Trusts Act 2019, s 121.
[5] Trusts Act 2019, s 4(a).
[6] Grand View Private Trust Co v Wong [2022] 2 LRC 559.
[7] Part of the incredible background to Lee v Torrey [2015] NZHC 2135.
Recent Comments