Edmonds Judd

trust

Significant issues raised

In June 2023, the Supreme Court heard the ‘Alphabet case.’ To understand the significance of what is at stake in this case, it is worth considering the facts that gave rise to the litigation and the High Court’s decision.

 

Abuse of A, B and C by Mr Z

Mr Z and Ms J married in 1958 and separated in 1981. They had four children: G (1960-2015), A (b 1961), B (b 1963) and C (b 1971).

Mr Z severely abused Ms J and the children physically, psychologically and sexually. A was repeatedly raped between the ages of seven and 13, but she did not disclose the abuse to anyone until 1983. She did not tell her mother until 1991. A was unable to face taking action against Mr Z.

Mr Z died in 2016 leaving an estate valued at $46,839. He had, however, settled a trust two years previously for the express purpose of preventing his family from “chasing” his assets, to which he had gifted his home and investments worth $700,000. The children were not beneficiaries of Mr Z’s estate or the trust; rather, the trust’s beneficiaries were the children of Mr Z’s former partner.

 

Children’s claims

That should have been the end of the matter because the Family Protection Act 1955 (FPA), that allows children to challenge their parents’ wills, only applies to assets a deceased owned in their personal names; it doesn’t apply to trust assets.

However, the children argued that their father owed them a fiduciary duty and, that because of the abuse, he continued to have obligations to them even after they became adults. They said that Mr Z had breached that duty when he gifted his home and shares to the trust in order to prevent his children from claiming against those assets under the FPA.

 

In the High Court

In the High Court,[1] Justice Gwyn agreed with the children and said they could bring claims under the FPA against the assets that had been transferred to the trust.

The trustees of Mr Z’s estate and trust appealed to the Court of Appeal.

 

Court of Appeal divided over case

The Court of Appeal[2] accepted that Mr Z owed a fiduciary duty to his children and that he breached that duty when he abused them. The issue was whether Mr Z continued to owe those fiduciary duties to his adult children at the time he gifted his assets to the trust.

The majority of the Court of Appeal judges disagreed; they said that the appropriate remedy for the breach of fiduciary duty was equitable compensation (and the children had run out of time to make that claim).

However, one judge said that in some circumstances the inherently fiduciary relationship between a parent and a child may continue after a child becomes an adult (for example, in the case of a severely disabled child).

The judge (who was in the minority, so their views don’t affect the final outcome) decided that A’s position, owing to the abuse she suffered, was analogous to that of a disabled child. Mr Z therefore had a continuing duty to take steps to remedy, as best he could, the enormous harm he inflicted on A, not only when she was living in his care, but also during her adult life. This meant he was required to protect her interests when considering gifting his principal assets to the trust, and failed to do so.

 

Decision awaited

The Supreme Court will tell us whether Mr Z owed a continuing fiduciary duty to A into her adult life because of the abuse he perpetrated on her. Many commentators believe that it is stretching the concept of a child/parent fiduciary duty too far.

If legal principles cannot evolve, however, a situation may emerge where extraordinarily meritorious claimants are left with no effective relief, simply because too much time has passed, and/or because their parent transferred their assets into a trust to prevent claims after they have died.

That raises two questions:

  1. Should time count against people such as A, who have been so seriously abused by a parent?
  2. Should parents be allowed to transfer their assets into a trust in order to prevent their children making claims after their death?

[1] [2021] NZHC 2997.

[2] [2022] NZCA 430.

 

 

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


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


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