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Trusts

Bank of children

Estate, House, Kids, Property, Relationships, Retirement, Trusts
0

Children helping their parents

Most of us have heard of the expression ‘Bank of Mum and Dad’ where parents help fund their children to get onto the property ladder or with another investment.

 

What happens in the reverse situation, however, where children become the ‘bank’ and assist their parents financially?

 

Why would this happen?

In recent years, parents may have assisted their children in allowing their property to be used as security for borrowings by their children, they could have helped fund the deposit for a child’s first property or provided financial support in a number of other situations.

 

Sometimes, the boot is on the other foot when parents retire or have their income reduced. That may be the time for children to repay the favour and assist their parents.

 

Family-wide discussion

If children are considering helping out their parents financially, we recommend that you have a family-wide discussion on what sort of assistance could be provided.

 

It is important that the entire family is aware of any proposed arrangements, especially if not all of the children are going to be involved. Those children who are assisting may become part-owners of their parents’ property as part of the agreement.

 

There are various family arrangements that could apply but some children may already own their own home. Other children may already be living with or intend moving in with their parents. All of these circumstances will need to be considered.

 

Contact your parents’ lender

Presuming the transaction will be funded by a loan, rather than cash from the children to the parents, the next step is for the parents to contact their lender (usually their bank) to discuss its requirements. The lender may require the current lending for the parents to be discharged and an updated finance application in the name of all of the joint owners with new loan documents. Often, the lender requires the added security and details of a child’s income for the application.

 

See your lawyer

To prevent any future difficulties and dissention in the family, it is important to arrange suitable documents such as a property sharing agreement. This records each party’s responsibility for who and how the family will use the property, loan repayments, maintenance of the property, rates, insurance and a sale process for the property should there be a breakdown in the parties’ relationship or if one of the parties wishes to sell.

 

A property sharing agreement will be the guiding document for the arrangement. As well as ensuring you have a will in place, the agreement can cover what will happen to the parent’s share of the property when they die. The last thing parents want is a falling out between their children.

 

Other things to consider

Other considerations for both parents and children include:

  • The children’s ability to use KiwiSaver funds in the future to purchase their own home
  • Current and future relationships of the children
  • Parents moving into a rest home and how subsidies could be affected
  • The alternative of a reverse mortgage, and
  • Review of wills and enduring powers of attorney.

 

Conclusion

With increases in interest rates and the rise in the cost of living, more retiring parents may face the difficulty of retaining their family home. Rather than the option of a sale, children may be able to assist with the retention of their parents’ home and keeping past memories alive.

 

DISCLAIMER: All the information published in Fineprint is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Fineprint may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Trusts and succession

Estate, Property, Rural, Trusts
0

Trustee duties in farm succession planning

In a previous edition[1] of Rural eSpeaking, we covered certain aspects of the changes to trust law brought about by the Trusts Act 2019, particularly in relation to succession. That article focused primarily on the duties imposed by the Act on trustees to provide information to beneficiaries and some of the implications of that.

The Act also codified trustees’ duties to beneficiaries, with the guiding principle set out in section 21:

‘In performing the mandatory duties set out in sections 23 to 27 and (except to the extent modified or excluded by the terms of the trust) the default duties set out in sections 29 to 38, a trustee must have regard to the context and objectives [our emphasis] of the trust.’

The mandatory duties are pretty self-explanatory. These are a duty to:

  • Know the terms of the trust
  • Act in accordance with the terms of the trust
  • Act honestly and in good faith, and
  • Act for the benefit of beneficiaries or to further permitted purpose of the trust.

Those duties would all seem self-evident, but practice suggests that many trustees have difficulty in knowing the terms of the trust or acting in accordance with the terms of the trust, particularly without advice.

In that situation, a trustee’s duty is to ensure that they are appropriately advised so that they can carry out their duties properly.

Default duties bring the most angst

It is the default duties that are likely to cause trustees more difficulty. These duties can be modified by the trust deed and virtually all new trust deeds since the Act has come into force modify these to the maximum extent permissible. Older trust deeds may impliedly modify some or all of these, but not by specific reference to the Act (for obvious reasons).

There are 11 default duties but the ones most likely to cause trustees difficulty in terms of succession or future planning are the duties to:

  • Not exercise power for their own benefit
  • Not bind or commit trustees to future exercise of discretion
  • Avoid conflict of interest, and
  • Act impartially.

Affecting farm succession planning

If trustees are considering a succession plan for a trust-owned farm property that may not result in an equality of treatment between beneficiaries, the first step is to have a thorough review of the trust deed. The review will ascertain exactly who the beneficiaries are; in the case of the older trusts this could be a wide group. From this, trustees can establish what restrictions there are on their power to act, particularly where there is some element of favouring one beneficiary over another (common in a farm succession scenario), or acting in the favour of one or more beneficiaries who may also be trustees.

Many trust deeds have been reviewed, or are under review, since the Act came into effect on 30 January 2021. Where possible, trust deeds are being modified to ensure that, as far as possible, these default duties are excluded. Some older trust deeds, however, don’t have a power to vary the terms of the trust. In this situation, trustees are faced with having to act within the terms of the existing trust or, where there is a power of resettlement, exercising their power to resettle the entire trust capital on a new trust, although this can be an expensive exercise and have tax implications. Another option is court orders.

Who are the beneficiaries?

The other area that trustees are looking at is the definition of beneficiaries. Older trust deeds tend to have an extremely wide beneficiary pool.

One way to limit the exposure of trustees to challenges from disaffected beneficiaries is to reduce that beneficiary pool to core family members, and to exclude the wider family such as spouses, stepchildren, etc.

Why is this all important?

In the context of farm succession, families often have the difficulty of having significant capital assets but insufficient cash or borrowing capability to enable absolute equality between children if one child is going to have the farm.

Often the other children are asked to accept a lesser share of the trust to enable  the farming operation to be carried on by one sibling. By reducing the beneficiary pool, and by excluding the trustees’ default duties as far as possible, there is greater protection for the trustees when making decisions about which some beneficiaries may be unhappy.

 

Risks

There is, however, always a risk in amending a trust deed by excluding certain beneficiaries and excluding trustees’ default duties. The risk is that by making those decisions, the trustees can leave their actions open to challenge – on the basis that they weren’t exercising their power to exclude beneficiaries or vary the trust for a proper purpose; this is one of the mandatory duties that cannot be excluded. If, for example, a group of trustees exclude all the settlor’s children except for one and then remove all their default duties in order to leave the trustees free to benefit that beneficiary solely, the previous decision (to exclude beneficiaries, and varying the trust) would be open to challenge.

 

Have a plan all can live with

As always for succession matters, the best answer is to come up with a plan that all of the core beneficiaries can live with and buy into. This would ordinarily take some time to plan so that the farming operation is in a position to enable the desired succession to take place and also to accommodate siblings who are not involved in the farming operation.

Sometimes, however, this isn’t possible. If the trustees are faced with making difficult decisions that may be unpopular with some beneficiaries, they must be very careful to understand what they can and cannot do and to seek (and take) professional advice.

[1] Rural eSpeaking, Autumn 2021, No 35.

 

DISCLAIMER: All the information published in Rural eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Rural eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

When Lotto winners fall out

Relationships, Trusts
0

The importance of who gets what

Winning a Lotto prize is always a reason to celebrate; dreams can be realised and life can be more comfortable. Banking a lump sum can, however, give headaches to families as they not only grapple with newfound wealth, but also how it could be distributed amongst family members. A recent case[1] concerned a family that fell out over its $250,000 Lotto win.

The family comprised Mrs Kaniamma Winter, her children Angeline Narain and Ajnesh Chinappa, and Ajnesh’s wife, Vilashni Chinappa.

In January 2009, Angeline bought a Lotto ticket. That ticket was in Mrs Winter’s possession when she went shopping with her daughter-in-law, Vilashni, and checked the ticket numbers at a Lotto shop. Even though Mrs Winter said the ticket was her daughter Angeline’s, she completed a claim form in her own name on the spot; Mrs Winter used Vilashni’s bank account details as she could not remember her own.

When Lotto deposited the winnings, Vilashni transferred $220,000 to a bank account in the names of Mrs Winter and Angeline, leaving $30,000 in her own account. Mrs Winter signed a gifting certificate for this $30,000; this sum was then transferred to the joint bank account that held the rest of the winnings.

 

Property purchase

The family, then living in a Kāinga Ora property, decided to use their Lotto winnings to buy a six-bedroom home in Papatoetoe. The deposit of $36,000 was paid from the joint bank account (in the names of Mrs Winter and Angeline), but the property was purchased in the names of Ajnesh and Vilashni Chinappa, who borrowed $288,000 to assist with the purchase. The balance of $37,046.70 that was required to settle was paid from the joint account.

The four family members moved into the property and lived there harmoniously. Angeline contributed generously to the maintenance costs and improvements – until Angeline’s new partner, Daniel Prasad, moved in. When relations within the family broke down, Angeline registered a caveat; the Chinappas responded by trespassing Mrs Winter, Angeline and Daniel from the property. The three were forced to rent elsewhere for 10 years while the Chinappas enjoyed exclusive occupation of the Papatoetoe property. The situation deteriorated to the point that the Chinappas filed court proceedings in the High Court.

 

High Court

The High Court, “faced with completely contradictory narratives” about who owned the Lotto ticket, the status of the gifting certificate and other contributions, found that:

  • Angeline owned the Lotto ticket
  • Angeline had contributed 20% of the purchase price of the Papatoetoe property
  • It was reasonable for Angeline to expect an interest in the property
  • Angeline had contributed generously to furnish and upgrade the property, and
  • The gifting certificate was drafted solely to meet the bank’s requirements, the money was not intended to be a gift and it could not be used to suggest the ticket was Mrs Winter’s.

The High Court awarded Angeline a 50% interest in the house, after deduction of the mortgage amount, on the basis of a constructive trust. The decision to award 50% rather than 20% was made on the grounds that Angeline had not had the benefit of occupation for 10 years. The Chinappas appealed this decision.

 

Court of Appeal

The Court of Appeal agreed that Angeline owned the Lotto ticket, had contributed 20% of the purchase price, and made further direct and indirect contributions to the property. Angeline’s indirect contributions to the property, however, were not materially greater than that of the Chinappas, meaning Angeline could not reasonably expect a greater share than the 20% (of the full market value) she contributed under a constructive trust.

 

A twist in the tail

The Court of Appeal then took a very interesting step that was to award occupation rent to Angeline. This was to compensate Angeline for the 10 years the Chinappas had excluded her from occupying the property that was in breach of her reasonable expectation that she would both own a share in the property and be able to occupy it.

The Chinappas were directed to compensate Angeline by paying her occupation rental, calculated at 20% of the market rental for the property, for the period of her exclusion. At the average weekly rental for Papatoetoe, that would amount to an additional $67,600 – a much lower amount than that awarded by the High Court.

 

Multi-generational housing is becoming increasingly common as it provides an excellent opportunity for families to support each (for example, through providing child care and, later, elder care). Caution is needed, however, to ensure there is a written agreement that records:

  • The basis on which funds are contributed to the purchase, maintenance and outgoings on the property
  • Who is occupying the property, and, most importantly
  • How the parties will exit the arrangement.

If you are considering multi-generational housing, do talk with us early on so we can advise on an agreement that is fair to all parties.

[1] Chinappa v Narain [2022] NZCA 183.

 

DISCLAIMER: All the information published in Trust eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Wearing two hats in a family protection claim

Estate, Trusts
0

Get independent advice

In a recent case[1], the High Court found that a will administrator’s default in complying with a court order was so flagrant, it justified issuing an order for arrest of the administrator. How did this arise and, more importantly, how could it have been avoided? The will administrator was wearing two hats – one hat as a will administrator and the second hat as a beneficiary.

Dan Eckhout died in October 2017. Dan had named a South-African lawyer as executor in his will; that lawyer renounced the executorship. The court then appointed Dan’s third wife, Karen Eckhout, as administrator of Dan’s estate. Dan’s will left almost all of his estate to Karen. As well as Karen, Dan was survived by five adult children, one of whom was a stepchild. The sum of 120,000 South African rand (NZ$12,000) was left in trust for the three children of Dan’s second marriage. Michelle Connelly, the second child of Dan’s first marriage received nothing. She brought a claim under the Family Protection Act 1955 (FPA) for some provision from Dan’s estate. None of Dan’s other children brought claims.

 

Two hats are a no-no

Karen was wearing two hats in the proceedings. Wearing her first hat, Karen was a court-appointed administrator with duties to all the beneficiaries; she also had an obligation to assist the court by making information available about Dan’s finances. Wearing her second hat, Karen was the beneficiary who would lose out financially if Michelle’s claim succeeded.

An administrator must be neutral in a FPA claim. Karen was definitely not neutral.

 

Dan’s assets

It is fair to say that Karen had a somewhat laissez-faire attitude in providing the court, and Michelle, with information about Dan’s finances. It was not made clear how much Dan’s estate was worth.

A family trust, of which Karen was a trustee and both Karen and all of Dan’s children were beneficiaries, was wound up and the proceeds distributed to Karen only. Karen bought property in Hamilton, sold the New Zealand family home and moved to Perth to look after her sick parents.

Some of these factors were enough to cause Michelle’s lawyers to apply for a preservation order over the estate’s assets. The application was refused even though Karen did not appear at the hearing. The court, however, required Karen to file a statutory declaration providing precise information on the nature and whereabouts of Dan’s assets.

(It is interesting to note that the lawyers who initially represented Karen in each of her capacities were allowed to withdraw from the case, apparently over issues in relation to the payment of their invoices.)

Karen did not file the statutory declaration about Dan’s finances in the time allowed. Time was extended and the scheduled FPA hearing was delayed. Eventually, two days after the extended deadline, Karen’s new lawyers filed the statutory declaration. Karen declared she had spent about $1 million, but more than $600,000 remained to meet any judgment in Michelle’s favour.

 

Michelle’s award

The financial information Karen provided was still not precise, but the court had enough information to approximate the value of Dan’s estate at $1,939,000. Karen acknowledged that Dan breached his moral duty to Michelle. Michelle said the breach warranted an award of $850,000. Karen said that was unrealistic and suggested $228,000 would be adequate. The court awarded Michelle $350,000, which it calculated represented 18% of Dan’s estate, plus costs, making a total of $449,742.

 

Failure to pay leads to order for arrest

Karen did not pay Michelle the funds from her father’s estate. Charging orders were made over the funds Karen had earlier declared she still had and would use to pay Michelle. The Australian bank in which the funds were held could only pay A$4,828. Alarmingly, this was all that remained of the previously declared $600,000+.

Frustrated with Karen’s behaviour, Michelle’s lawyers applied for an order for Karen’s arrest; Karen did not appear at the hearing of this application. A few days later Karen emailed Michelle’s lawyer saying that she would make a substantial, but not full, payment within two weeks.

The court was unimpressed by Karen’s knowing failure to comply with its judgment for which absolutely no excuse, reasonable or otherwise, was offered. It issued an order for Karen’s arrest. The order ‘lay in court’ for a month, giving Karen some wiggle room to make the required payment. If Karen failed to pay within this period, the arrest order would be acted on.

In the absence of news of Karen’s arrest (and it would have been newsworthy), we presume that she finally paid Michelle.

 

Take care if you’re wearing two hats

This case serves as a warning to anyone who may be both an administrator and a beneficiary in an estate where a family protection claim is made; we can help if you’re in this situation. You will need different lawyers to act for you in each of your different capacities and to help you properly differentiate the roles you have.

Unwittingly wearing two hats is capable of bringing trouble to your door.

[1] Connelly v Eckhout [2022] NZHC 293.

 

DISCLAIMER: All the information published in Trust eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

Trusts Act 2019 also affects executors and administrators of wills

Estate, Trusts
0

Mandatory and default duties explained

When the Trusts Act 2019 came into force on 30 January 2021 the changes it brought were well publicised. However, not everyone is aware that the some of the provisions in this legislation also apply to wills and the administration of estates by executors. We outline executors’ mandatory and default duties as well as briefly discussing some interpretations of the latter.

The changes in trust law that came into effect on 30 January 2021 have been incorporated into estate administration law by s4B of the Administration Act 1969. It confirms that trustees’ mandatory and default duties set out in the Trusts Act also apply to executors or administrators of estates. This is an important set of protections for beneficiaries of estates who may have concerns about the way an executor is administering estate assets.

Mandatory duties for executors

Executors or administrators are now subject to mandatory duties; these cannot be modified or excluded by the terms of a will. These include the duties to:

  • Know the terms of the will
  • Act in accordance with the terms of the will
  • Act honestly and in good faith
  • Act for the benefit of the beneficiaries, and
  • Exercise powers under the will for a proper purpose.

All executors and administrators must be familiar with the terms of the will and follow it; they cannot do something contrary to the terms of the will unless all of the beneficiaries agree or the court has authorised the action.

They must act for the benefit of the beneficiaries. This can become difficult in some situations where executors or administrators have a close relationship with one beneficiary, and want to act in that beneficiary’s interests, rather than for the benefit of all beneficiaries.

Default duties

The default duties outlined in the Trusts Act 2019 also apply to executors and administrators of wills (unless the will expressly excludes them). Some of the most relevant default duties include the general duty of care, as well as duties to:

  • Invest prudently
  • Not to exercise powers for the executor or administrator’s own benefit
  • Avoid conflicts of interest
  • Not to profit
  • Act for no reward, and to
  • Act unanimously.

Modifying the default duties

In some circumstances, these default duties are not always appropriate to a will-maker’s circumstances. For example, often a lawyer or other professional is appointed as executor of a will, and many wills provide that professional executors can charge their usual fees, modifying the duty to act for no reward. Most professionals will not take on an executorship without being paid!

In some cases, it may be desirable for executors or administrators to invest in an asset that doesn’t seem, by ordinary standards, to be a prudent investment. Such an investment may benefit the beneficiaries (or one beneficiary), such as owning a home for a beneficiary to live in; the investment may not lead to capital growth and may not earn much (or any) income but will fulfil a social need.

Investments such as the above may bring complaints from other beneficiaries who feel an executor is favouring one beneficiary’s interests over their own.

Another example is where a will-maker leaves their spouse or partner a right to live in their joint home, and that home (an asset of the estate) does not increase in value. Such an arrangement, however, may be permitted by the will.

It might also be desirable for an executor who is also a beneficiary, to purchase an estate property in a personal capacity. It means that the executor’s personal interest – to buy the property at the lowest price – conflict with the interests of the other beneficiaries, that is to have the property sold for the highest price. The will may allow such a purchase, although to help minimise arguments, it might require a registered valuation to guide the sale price.

Lawyers’ obligations

When you’re signing your will, we will explain all the modifications of, or exclusions to, the default duties that are included in the will. We will often include executor/administrator powers that will over-ride some of the default duties, such as those we’ve explained in the paragraphs on page two.

We will also take reasonable steps to ensure that you understand the meaning and effect of any clause in your new will that modifies, or excludes, those default duties.

This is an additional safeguard to ensure that when you sign your will you understand the implications of the terms of your will. It also means that if beneficiaries have any concerns about the terms of your will, such as in one of the situations we set out on page two, they should have confidence that you intended to word your will in that way and you understood the consequences.

If you have any concerns about your own will, or of a will of which you are acting as a trustee or administrator, please don’t hesitate to contact us.

 

DISCLAIMER: All the information published in Trust eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022.     Editor: Adrienne Olsen.       E-mail: [email protected].       Ph: 029 286 3650

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