Alex McDonald | Trust Lawyer | Auckland

“Thank you so much for referring me to Alex. She has been most accommodating, helpful and sensitive during this most unpleasant and difficult time.”

Alex is a skilful and experienced trust litigation lawyer. She possesses not only a solid understanding of the law but the negotiation and tactical skills which are critical to obtaining a just result. Alex regularly acts for clients in trust disputes including applications to remove trustees for breach of trust or where a trustee has become incapacitated as well as disputes involving breach of trustees’ duties and applications to vary trust terms.

Trust dispute basics

WHAT ARE TRUSTEES?

Trust disputes usually involve trustees. Trustees are the people who are in charge of the money or other property which is the subject of the trust – usually there are two or more trustees but sometimes there is only one. For all trusts, the trustees receive the trust property from someone (known as the settlor) to hold the property on trust for the benefit of others (known as the beneficiaries) on the terms of the trust. The settlor trusts the trustees to faithfully administer the trust for the purposes for which the trust was created.

Usually the terms of the trust are contained in a trust deed. Wills can also create trusts (called testamentary trusts) where the will-maker leaves property on trust for beneficiaries. This often happens where trust property is left to the spouse or partner as a life interest (to use until they die) and the residue goes to the settlor’s children (known as final or residuary beneficiaries).

Importantly, trustees can also be beneficiaries. The mere fact that a trustee is also a beneficiary doesn’t mean that the trustee has a conflict of interest that disqualifies him or her from being a trustee.

WHAT ARE THE DUTIES OF TRUSTEES?

Trust disputes often involve breach of trustees’ duties. The duties are set out in the Trusts Act 2019 and come in two types: mandatory and default.

The mandatory duties are compulsory and pretty obvious:

to know the terms of the trust,
to act in accordance with them,
to act honestly and in good faith,
to act for the benefit of the beneficiaries, and
to act for a proper purpose, which is essentially the settlor’s original purpose for the trust (see my article for more info on what a ‘proper purpose’ is).

The default duties are:

to exercise reasonable care and skill,
to invest prudently,
to not act only in self-interest,
to avoid conflicts of interest,
to treat beneficiaries impartially (though not necessarily equally),
to not profit from being a trustee,
to not be rewarded (though they can be paid), and
to act unanimously (all trustees must agree to any action of the trust).

One might think these default duties are important enough to also be mandatory, but they can in fact be excluded in the trust deed. Moreover, the trustees can alter the deed to exempt themselves from the default duties. This provides trustees with the flexibility they need to adjust to changes in circumstances over time.

The Trusts Act also places obligations on trustees:

to keep proper records and provide certain information to beneficiaries (read my article for more info on what information must be provided), and
to terminate the trust if all beneficiaries agree.

In addition to all these duties and obligations, trustees also have fiduciary duties. Fiduciary duties are very similar to the duties in the Trusts Act, but have different standards and different solutions if breached. This mean that a trustee may not have breached the Trusts Act but can still have breached their fiduciary duties.

WHAT CAN THE COURT DO WHERE TRUSTEES HAVE BREACHED DUTIES?

Trust barristers are frequently involved in applications to the High Court for orders to make sure that trusts are managed and administered properly.

The powers of the High Court include powers to:

appoint new trustees,
make vesting orders,
authorise dealings with trust property,
authorise variations of trust, and
make orders for costs.

POWER OF THE COURT TO REMOVE AND REPLACE TRUSTEES

Beneficiaries can apply to the High Court to remove trustees and appoint replacements. As any experienced trust barrister will advise you, the High Court has broad discretionary powers and the likelihood of success is very fact dependent.

The Court has specific power to remove and appoint replacement trustees where a trustee:

has misconducted himself or herself in administering the trust,
is convicted of a crime involving dishonesty,
loses mental capacity to be a trustee (see below),
is a bankrupt; or
is a corporation that is insolvent.

More importantly, the Court has a broad discretion to remove and replace trustees where it is expedient to do so. Misconduct, breach of trust, dishonesty or unfitness need not be established to obtain an order on the expediency ground. The Court can remove or replace trustees simply by having regard to suitability, practicality and efficiency.

Hostility and deadlock are situations where courts are sometimes willing to replace trustees. So, for example, where a brother and sister are the trustees and beneficiaries of a trust which only asset is a house, and one lives in the house and the other wants it sold, the Court can remove both the brother and sister as trustees and appointed a replacement trustee, often a professional trustee like Public Trust.

As any experienced trust barrister will advise you, the Court is likely to consider:

the express or implied intentions of the settlor,
the ability of the trustee to be impartial and even-handed between beneficiaries,
the best means of promoting the purposes of the trust, and
the welfare of the beneficiaries.

Trustees who actively oppose their removal and replacement by beneficiaries need to be aware that if they are found to have breached their duties, they can find themselves having to pay not only their own costs but the full costs (known as indemnity costs) of the beneficiaries.

COURT’S POWER TO REMOVE & APPOINT WHERE TRUSTEE HAS INCAPACITY

The High Court can also replace trustees where the trustee has moderate to severe dementia or other mental incapacity, but the trust deed does not provide for their replacement, and sections 92 to 105 of the Trusts Act also do not quite fit the circumstances to allow replacement.

An experienced trust dispute barrister can assist with that application.