Family Trusts have been particularly significant since 1993. Anecdotally, it would seem that there are in excess of half a million Family Trusts in New Zealand currently. That is significantly more, per head of population, than for almost every other country. However, although Family Trusts are a good and effective legal structure they are not necessarily ideal for everyone.
Inder Lynch has developed an extensive practice advising on, establishing and assisting with the ongoing operation of Family Trusts. In particular, at the beginning of the process we carefully advise clients of both the advantages and disadvantages of the trust structure. We are frequently reminding clients that the trust structure is a good vehicle but not necessarily the right vehicle to get you where you want to go. Your personal circumstances will be the overriding factor in determining whether a Family Trust is right for you. That is where our initial advice is so crucial.
In the following articles we comment on several Family Trust situations where care is necessary to ensure that Trustees fulfil their extensive obligations to the Trust. These situations highlight that it is not simply a case of changing the ownership of assets from your name to the Trust’s name. There are, in fact, many obligations that the appointed Trustees must take on to comply with the terms of the Trust Deed and the provisions of the Trustee Act that the Courts will enforce, when required.
Don’t be afraid of Family Trusts but do be aware of the additional requirements.
Trustee Resolutions = Certainty as to Trustee decisions
In a recent decision, the High Court said: “recording the resolution in writing is important to ensure that there is certainty as to what they [the trustees] have decided.” This followed a careful consideration of a disputed proposed land transaction between a trust and one of its beneficiaries.
Briefly, there had been negotiations between the trust and a beneficiary CM, through their respective lawyers regarding the sale of a piece of land owned by the trust. “In principle”, terms for the sale & purchase had been agreed upon. However, the trust’s lawyer had advised CM’s lawyer that there would first need to be a trustee resolution which they wanted CM (who as a beneficiary of the trust had other issues in dispute with the trustees) to approve. Once approved, the trust’s lawyer would draft the agreement for sale and purchase. There was further correspondence between the lawyers regarding trust issues and the proposed resolution. Without any agreement for sale and purchase being signed, the trustees indicated through their lawyers that circumstances had changed and they wanted a new valuation. CM sought a Court Order for specific performance to enable the purchase (even though there was no signed agreement) on the basis that all essential terms for the purchase had been agreed to and the agreement for sale and purchase was intended merely to restate the terms in a form which would be fuller or more precise but not different in effect. The trust contended that there was no concluded bargain at all until they executed a formal contract.
The Court considered the arguments and concluded that “the correspondence between the lawyers is consistent with them operating on the basis that a deal would not be done until an agreement for sale and purchase had been signed by both parties…The fact that the trustees proposed to sign a formal resolution before entering into the agreement is significant…Recording the resolution in writing is important to ensure that there is certainty as to what they have decided…That reliance on approving a resolution shows that the trustees did not intend to exercise the power of sale until they had made that resolution” and signed an agreement for sale and purchase.
The moral to this story for trustees is:
- Always have written trustee resolutions when making any decisions on behalf of the trust; and
- Keep all such trustee resolutions in a folder or minute book.
Trustee’s unreasonable actions = Trustee’s personal liability
The starting point for trusts is that trustees will normally be indemnified by the trust for any actions taken by trustees in their trustee capacity.
A recent decision of the Court of Appeal upheld a decision of the High Court regarding trustee’s actions and their liability. In this case, RWFT was created by Deed of Trust in 1992. A copy of the signed Deed was forwarded to Inland Revenue (“IRD”) at that time. Subsequently, the Deed could not be located and IRD no longer had a copy. All that remained was the original draft deed. RW had died and the trustees sought directions of the High Court to distribute all trust funds to a charity. The issue was “what were the objects and who were the beneficiaries of the trust?”
The High Court Judge “found the trustees were unable to demonstrate by reference either to documentation or by cogent and reliable evidence what the objects of the trust were.” The trustees had relied upon the draft deed which contained numerous drafting errors and the trustees had been shown in evidence to have acted inconsistently with the objects outlined in the draft deed in any event. The Court found that “there was no certainty of objects” for the trust and, accordingly, RWFT failed by reason of uncertainty. The Court ordered that the trust fund be paid to RW’s estate with the widow as beneficiary (rather than the suggested charity).
The Court of Appeal held that “while the Judge accepted that it was appropriate for the trustees to have sought directions from the Court he considered they had acted unreasonably by pursuing an argument as to the existence of the RWFT which was lacking in merit. The trustee’s behaviour in relation to the RWFT and the manner in which they brought and conducted the proceeding led him to conclude that the trustees should pay the costs award personally.”
The moral to this story for trustees is:
- Ensure that you have the executed trust documents;
- Adhere strictly to the objects and beneficiaries of the deed;
- Only advance meritorious positions with any Court proceedings; and
- Do not assume that you will always be indemnified by the trust for decisions you make.
As a footnote, there has been a further case in the High Court, where a trustee (who was appointed only 4 weeks prior to the hearing) was refused indemnification from the trust for his costs and expenses incurred in unsuccessfully defending a $36,000 District Court claim. The High Court found the proceedings unnecessary as the economics did not justify continuing. The High Court reminded trustees of the ability to obtain court directions when faced with pressing dilemmas.