Edmonds Judd

Trust Act 2019

Supreme Court – Mr Pinney’s trust powers not property for purposes of PRA

Media, News, Property, Trusts
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Supreme Court Cooper v Pinney – Clayton distinguished – Mr Pinney’s trust powers not property for purposes of PRA

The Supreme Court’s decision in Cooper v Pinney[1] (Pinney) is an important clarification of the application of the principles established by Clayton v Clayton [Vaughan Road Property Trust][2] (Clayton) that a bundle of rights and powers held by an individual under a discretionary family trust can be so extensive as to amount to “property” under the Property (Relationships) Act 1976 (PRA), and the effect of the Trusts Act 2019 (2019 Act) on trust powers and rights.

The judgment is a compelling and well-reasoned analysis of the principles in Clayton and the importance of fiduciary obligations as constraints on trust powers.  The Court’s careful analysis leads to the clear conclusion that the trust deed in Pinney and the trust deed in Clayton “are not alike” and that Mr Pinney’s bundle of trust powers do not amount to property for the purposes of the PRA[3].  The emphasis on the requirement of unanimous decisions by a minimum of two trustees, the fiduciary nature of trust powers and judicial oversight provides valuable guidance for both trust and relationship property practitioners.

This analysis will begin by showing how the definitions of “property” and “owner” under the PRA have been expanded to encompass rights and powers under a trust deed. It will then provide an overview of the Clayton decision, followed by a summary of the Supreme Court’s decision in Pinney.  Finally, the analysis will conclude with a discussion on the application of the mandatory and default duties in the Trusts Act 2019.

 

Relevant PRA definitions

The starting point is the definition of “property” and “owner” in section 2 of the PRA.  The definition of “property” includes “any other right or interest”, and the definition of “owner” includes “the person who, …is the beneficial owner of the property under any enactment or rule of common law or equity”, together these definitions tie into the meaning of “relationship property” at section 8(1) PRA.

That a discretionary beneficiary does not have a beneficial interest in the income or capital of a discretionary trust is well supported by a long-standing line of authorities.[4]  The principle applied in the PRA context provides that discretionary beneficiaries do not have a beneficial interest amounting to property under the PRA, even where there is evidence of a long-standing intention by the trustees to exercise their discretion to favour a particular beneficiary.[5]

However, case law has broadened the definitions of property and ownership to apply to trust rights and powers through application of the purpose and principles of the PRA, it’s statutory context and the social context in which legislation such as the PRA is interpreted.  This “substance-over-form” approach was endorsed by the Supreme Court in Pinney.[6]

Clayton and the Vaughan Road Property Trust (Clayton Deed)

The Supreme Court agreed with the Court of Appeal[7] that a general power of appointment was tantamount to ownership[8].  Defining a general power of appointment as “a power to appoint property to anyone including themselves without considering the interests of anyone else”[9].

Clayton considered whether the bundle of rights comprised of powers and entitlements vested in Mr Clayton by the Clayton Deed gave him effective control, to such an extent that the bundle of rights was appropriately classified as property under the PRA.  Such an analysis must also consider restrictions on the exercise of powers, including how the rights of remaining beneficiaries can exert practical limitations on the exercise of trust powers.[10]

The relevant provisions of the Clayton Deed meant that Mr Clayton could:[11]

  1. apply all of the capital and income of the trust to himself as a discretionary beneficiary;
  2. bring forward the vesting day and appoint all trust capital to himself as a discretionary beneficiary; and
  3. resettle the trust capital on another trust of which he was a beneficiary.

The Supreme Court in Pinney clarified its findings in Clayton as:

… not whether powers or rights conferred by a trust deed actually amount to a general power of appointment.  That status does not necessarily define those powers constituting donee property.  Nor is that status definitive as to whether a power is property for the purposes of the RPA: in Clayton this Court did not find the trust deed actually created a general power of appointment, but rather recognised something analogous to one (which the Court said was property for the purposes of the PRA).[12]

Central to this finding was the “suite of provisions”[13] modifying or removing fiduciary duties. The Supreme Court found that there was no effective constraint on Mr Clayton’s exercise of powers in favour of himself.[14]

Pinney and the MRW Pinney Family Trust (Pinney Deed)

In Pinney the Supreme Court was asked to apply the principle in Clayton that a bundle of trust rights and powers such as those vested in Mr Clayton and unrestrained by fiduciary obligations, are together so extensive as to amount, in effect, to a general power of appointment, and therefore fall within the definition of property for the purposes of the PRA.[15]

Although the Supreme Court states that a finding that goes as far as saying that trust powers actually amount to a general power of appointment is not determinative of those powers being property for the purposes of the PRA.  It also goes on to say:

But a finding that one is dealing with powers amounting in effect to a general power of appointment may offer a short-cut: it tends to be conclusive as to effective ownership by the donee, and an inference can then be drawn that the power concerned is property for PRA purposes.[16][emphasis added]

Dealing with the law applying before the 2019 Act, the Supreme Court found that judicial oversight of trusts is a constraint that can be inconsistent with a finding that trust powers amount to effective ownership by the donee.  Noting that the more intrusive the scope for judicial oversight, the less likely that power is the property of the donee.[17]

Contrasting the terms of the Clayton Deed with those of the Pinney Deed, the Supreme Court found there were several significant differences that were sufficiently material to distinguish the Pinney Deed from the Clayton Deed.  That the power to appoint and remove trustees does not allow Mr Pinney to take sole control of the trust was found to be sufficient on its own to distinguish the Pinney Deed from the Clayton Deed.  The Supreme Court went on to state that even if unilateral control were possible, the powers to dispose of trust assets in Pinney were still constrained by fiduciary obligations.[18]

The Supreme Court framed its analysis under the following headings:[19]

  1. The deeds distinguished: The main similarity between the Clayton and Pinney deeds are the almost identically framed broad discretionary powers to distribute income and capital to discretionary beneficiaries.  But noting four significant differences:
    1. Appointment and removal of trustees: Both deeds confer a power to appoint and remove trustees, including to self appoint. However, the power contained in the Pinney Deed is subject to the requirement for a minimum of two trustees.  By contrast, the power contained in the Clayton Deed allows Mr Clayton to appoint himself sole trustee.[20]
    2. Unanimity: The Pinney Deed requirement for all trustee decisions to be unanimous, combined with the minimum of two trustees, meant that every decision “must be the product of a meeting of the minds of more than one trustee”.  Whereas the Clayton Deed allowed a sole trustee to act freely, only requiring unanimity where there is more than one trustee appointed.[21]
    3. Exclusion of fiduciary constraints: Both deeds have general clauses purporting to allow trustees to make decisions in their “absolute and uncontrolled discretion”.  The Pinney Deed went no further.  However, the Clayton Deed went on to expressly exclude obligations, such as the core obligation of a trustee to consider the interests of the beneficiaries.[22]
    4. Removal of beneficiaries: The Clayton Deed allowed Mr Clayton to remove all discretionary beneficiaries leaving himself the sole discretionary beneficiary, and to appoint all of the trust assets to himself before the vesting day, leaving nothing for the final beneficiaries.  There are no equivalent powers in the Pinney Deed.[23]
  2. The trustee appointment power remains fiduciary and constrained: Counsel for Ms Cooper argued that Mr Pinney could appoint himself and another trustee who would act on his direction, or a corporate trustee controlled by Mr Pinney, to then appoint all the trust assets to Mr Pinney.

The Supreme Court did not accept that argument.  Finding that exercise of the power of appointment with the intention of taking sole control of the trust would be a breach of the proper purpose rule and inconsistent with the fiduciary nature of the power of appointment and removal of trustees.[24]  By finding that the power as expressed in the Pinney Deed is fiduciary in nature, it follows that it must be exercised in good faith and in the interests of the beneficiaries, and not for any improper purpose.[25]

The Supreme Court felt that was sufficient to dispose of the case, but for completeness, went on to address the powers to dispose of trust capital and income.

  1. The remaining trustee powers likewise are fiduciary and constrained: Counsel for Ms Cooper also relied on provisions of the Pinney Deed allowing Mr Pinney to direct that the trustees appoint all trust assets to himself as a discretionary beneficiary to the exclusion of all others.[26]

In considering the argument for completeness, the Supreme Court noted the substantive difficulty with that argument is that the trust ownership arrangement is still subject to an “irreducible core” of duties owed by a trustee which are a fundamental trust concept: the duty to perform the trust honestly and in good faith for the benefit of the beneficiaries.[27]

  1. Mr Pinney’s powers are not his property for PRA purposes: The Supreme Court said it best, and I for one cannot do better.  So here it is in the words of Winkelmann CJ and Kόs J:[28]

[125] It will be clear by now that we consider the combination of powers reserved to Mr Pinney under the MRWT deed to be significantly different to those powers reserved to Mr Clayton in Clayton v Clayton.  A power analogous to a general power of appointment is not created.  Rather, the core power in cl 15 to appoint and remove trustees remains limited by the proper purpose rule and bound by the fiduciary obligations that it be exercised in good faith and in the interests of the beneficiaries.  So too are the dispositive powers in cls 4, 6 and 7 – powers which are moreover constrained by the two-trustee requirement and the requirement of unanimity.  The general discretion provision in cl 13 does not alter this analysis, and nor does the limited variation power in cl 12.  The distinctions between the VRPT deed in Clayton and the MRWT deed are therefore sufficiently material to warrant different classification in terms of the PRA definition of “property”.  The two cases are not alike.

[126] It follows that we do not consider Mr Pinney enjoys a personal property right in respect of the bundle of powers vested in him by the MRWT deed.

Application of the Trusts Act 2019

Although the 2019 Act came into force on 30 January 2021 and applies to all express trusts whether created before or after commencement, it was accepted that the 2019 Act did not directly apply to Pinney.  Because Pinney was commenced prior to the 2019 Act coming into force the proceedings were governed by the 1956 Act, due to the effect of sch 1 cl 8 of the 2019 Act and s 18 of the Interpretation Act 1999.

Despite this the Supreme Court highlights the intention of the 2019 Act to “restate and reform” the law of trusts in New Zealand by “setting out the core principles of the law relating to express trusts”[29]. Further emphasising that the mandatory duties – to know, and to act in accordance with, the terms of the trust; to act honestly and in good faith; to act for the benefit of the beneficiaries; and to exercise powers for a proper purpose – were “intended to restate and summarise the current legal position”[30].

The fiduciary obligations imposed on trustees and implied in all trust deeds by the mandatory and default duties contained in the 2019 Act, are likely to have a significant effect on the status of a bundle of trust rights and powers for the purposes of the definition of property under the PRA.

It seems that trusts will continue to provide some limited protection for beneficiaries in PRA proceedings, at least where the fiduciary obligations in the mandatory duties are combined with relevant default duties and a requirement for two-trustee unanimous decision making.

Will we ever see the like of Clayton again?  One certainly hopes not.

[1] Cooper v Pinney [2024] NZSC 181

[2] Clayton v Clayton [Vaughan Road Property Trust] [2016] NZSC 29, [2016] 1 NZLR 551.

[3] Cooper vi Pinney, above n 1 at [125]-[126].

[4] Cooper v Pinney, above n 1 at [90], citing Gartside v Inland Revenue Commissioners [1968] AC 553 (HL) at 607 per Lord Reid, Lord Morris of Broth-y-Gest and Lord Guest and 617-618 per Lord Hodson and Lord Wilberforce concurring.

[5] Cooper v Pinney, above n 1 at [91].

[6] Cooper v Pinney, above n 1, at [34]-[36].

[7] Clayton v Clayton [2015] NZCA 30 at [99] and [111].

[8] Clayton v Clayton, above n 2 at [60]-[61].

[9] Cooper v Pinney, above n 1 at [38].

[10] Clayton v Clayton, above n 2 at [50]; Cooper v Pinney, above n 1 at [40].

[11] Clayton v Clayton, above n 2 at [52]-[55]; Cooper v Pinney, above n 1 at [41].

[12] Cooper v Pinney, above n 1 at [93].

[13] Cooper v Pinney, above n 1 at [42].

[14] Clayton v Clayton, above n 2 at [67]; Cooper v Cooper, above n 1 at [42].

[15] Cooper v Pinney, above n 1 at [1] and [92].

[16] Cooper v Pinney, above n 1 at  [94]; See Australian Securities and Investments Commission v Carey (No 6) [2006] FCA 814, (2006) 153 FCR 509 at [19].

[17] Cooper v Pinney, above n 1 at [98].

[18] At [100].

[19] At [101]-[102].

[20] At [102(a)].

[21] At [102(b)].

[22] At [102(c)].

[23] At [102(d)].

[24] At [104]-

[25] At [115].

[26] At [116].

[27] At [116]-[118].

[28] At [125]-[126].

[29] Cooper v Pinney, above n 1 at [67]; Trusts Act 2019, s 3(a).  Among other maters: see paras (b)-(d).

[30] Cooper v Pinney, above n 1 at [67]; Trusts Act 2019, ss 23, 24, 25, 26 and 27; and Law Commission Te Aka Matua o te Ture Review of the Law of Trusts: A Trusts Act for New Zealand (NZLC R130, 2013) at 107.

Refusing an inheritance

Estate, Trusts
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What options does a trustee have?

What is the trustee of an estate supposed to do when a beneficiary will not accept their inheritance?

This was the question faced by Mr Holland, executor and trustee of the estates of Margaret Glue and her husband, Ian Glue.[1] Margaret died in 2005, leaving a life interest in her estate to her husband Ian, and her remaining estate to her two sons. Ian died in 2009, also leaving his estate equally to his two sons, David and John.

 

Best efforts to contact beneficiary

John received his inheritance shortly after Ian’s death in 2009; John died in 2019. David, however, was unable to be contacted, despite Mr Holland’s efforts to contact him for well over a decade. His inheritance was worth approximately $300,000 as at August 2022. Mr Holland had written to David advising him of his inheritance and asking for a bank account number so the funds could be deposited.

David lived in London. Mr Holland had arranged for a professional investigator to confirm that David lived at the address known to him, and where correspondence had been sent. It was confirmed that David did live at that address; this was understood to be local authority housing (similar to ‘council housing’ in New Zealand).

 

Actively avoiding contact?

There was a suggestion that David may have wished to avoid receiving his inheritance as it could have disqualified him from living in that property. Welfare or social housing benefits are means-tested in many countries; it is common for these to become unavailable if a recipient’s assets exceed a certain threshold.

It is possible that David did not want to receive his inheritance because he thought he would be better off with stable and affordable housing, rather than receiving his inheritance that would then be dissipated on more expensive housing and eventually leave him in the same position. There was no specific evidence on the point, however, as David would not engage with the trustee, so this was only conjecture.

 

What next?

Mr Holland had held the inheritance for more than a decade and he wanted to be freed from his trustee obligations to David. Mr Holland applied to the High Court for an order[2] asking for permission to distribute the inheritance to John’s children, on the basis that David was ‘missing’ and his entitlement should be disregarded. Mr Holland swore an affidavit that he had known Margaret and Ian Glue for many years, and they would have wanted their descendants to benefit from their estate. He thought that Margaret and Ian would have preferred that the beneficiaries of John’s estate (i.e. his children) receive the inheritance, than for the money to sit indefinitely in case David eventually decided to accept it.

The High Court noted that section 136 of the Trusts Act 2019 applied to beneficiaries who are ‘missing.’ It said that David was ‘decidedly not missing’; he could be found, but he simply would not engage with the trustee or accept his inheritance. Initially the court proposed that the money be paid to the Crown to be held in case David ever made a claim, but it was persuaded that this was not what Margaret and Ian would have wanted.

The High Court found that even though David was not missing, section 136 applied anyway because:

  1. The trustee had taken reasonable steps to bring the inheritance to David’s attention, over more than 10 years
  2. More than 60 days had passed since the trustee’s last attempt to contact David, and
  3. In the circumstances, it was reasonable to disregard David’s position and direct that the inheritance be paid to John’s estate (and therefore to his beneficiaries), as though David did not exist.

 

The lessons in this case

While it is unusual for a beneficiary to fail to claim their inheritance, it can happen, and they may have good reasons for doing so. That can, however, make things difficult for an executor or trustee who is holding funds on their behalf.

This case is a good reminder that a trustee who is in this situation may have other options and will not be forced to hold the funds indefinitely.

[1] Re Holland [2023] NZHC 464.

[2] Under section 136 of the Trusts Act 2019.

 

 

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

Who really wants to be a trustee?

Trusts
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A trustee has many obligations

Are you a trustee of a family trust, or considering becoming one? If so, you need to be familiar with the obligations you are taking on when agreeing to act as a trustee. You should also have a clear understanding of the risks that you are exposed to when you agree to act as a trustee.

Before the Trust Act 2019

In its Review of the Law of Trusts in 2013, the Law Commission found that despite the large number of trusts in New Zealand and the number of people acting as trustees, the majority of non-professional trustees had little appreciation of the extent of their obligations.

The commission recommended an overhaul of the Trustee Act 1956 and, in 2019, new legislation was passed. It sets out the obligations of trustees, so that it is clear to both trustees and beneficiaries about trustees’ obligations and what beneficiaries can do if trustees do not fulfil those obligations.

Trustees’ obligations

The main obligations for trustees, as set out in the Trust Act 2019, are to:

  • Know the terms of the trust
  • Act in accordance with the terms of the trust
  • Act honestly and in good faith
  • Act for the benefit of the beneficiaries
  • Exercise their powers for a proper purpose
  • Exercise the care and skill that is reasonable in the circumstances (particularly where that person acts in their capacity as a professional, such as a lawyer or accountant)
  • Invest prudently
  • Be impartial as between beneficiaries
  • Not exercise powers for their own benefit
  • Act without reward (except where otherwise permitted by the terms of the trust), and
  • Hold trust documentation.

The obligations on trustees are wide-ranging and there are significant risks for trustees who do not meet their obligations.

Why become a trustee?

In taking on a trusteeship, an individual or company is agreeing to act in the interests of the beneficiaries of the trust, and generally to do so without any expectation of reward for their services. Trustees are also often involved in court proceedings when family relationships break down.

So why would anyone take on a trusteeship?

The settlor/s, who are the people establishing the trust and contributing its initial assets, may wish to take on the trusteeship themselves in order to retain a high degree of control and oversight over the trust’s assets. This arrangement is often attractive to settlor trustees as not only does it allow more control, but it also means that the trust is not incurring the costs associated with instructing a professional to act as an independent trustee.  There are, however, risks associated with this arrangement – particularly if a marriage or relationship breaks down and the trust owns property or there is a bankruptcy.

Ask a friend or relative?

A close friend or relative of the settlor/s may also be prepared to take on a trustee role – most commonly in conjunction with the settlor/s.  This arrangement can appeal as there is usually a high degree of trust between the settlors and the ‘independent’ trustee.  It does, however, run the risk of placing the ‘independent’ person in a difficult position if the settlors have a relationship breakdown or if different groups of beneficiaries take issue with decisions being made affecting their interests in the trust.

It can also be difficult if there are court proceedings relating to the trust; that ‘independent’ professional trustee may be in the firing line, despite having tried their best and not having received a benefit for acting as trustee.

Have an independent trustee?

Independent professional trustees – whether individuals or trust companies – may be prepared to act as trustees, either by consent or by court appointment. Independent professional trustees expect to be paid for their services and the trust funds will need to be sufficient to justify those expenses being incurred. Sometimes these trustees charge an annual fee to account for the risks involved in being a trustee, such as being involved in litigation, as well as fees for their time spent on trust activities. The trust deed will also need to allow remuneration.  If the trust funds are sufficient to justify this cost, it can be worthwhile and will help protect trust assets in the event of a relationship breakdown or bankruptcy.

If you are asked

If you are considering taking on a trusteeship, we are happy to discuss with you any potential risks. This can also be a good opportunity for the trustees to consider a review and update of trust structures which are no longer fit for purpose, particularly before new trustees are brought on board.

 

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