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JUNE 2017

The Sorry Tale of a Family Trust

“This is a sorry tale of what can occur when a family adopts an inappropriate form of trust deed without adequate advice or sufficient understanding of the legal effect of its terms.”

- Dobson J begins his judgment in McLaren v McLaren [2017] NZHC 181

The parents (D and L) wished to create a family trust and transfer their fishing partnership (owned with their son B) to the Trust.

On the advice from D and L’s accountant and with a trust deed precedent from the accountant, D and L:

  • Had their accountant’s clerk as the settlor of the Trust;
  • Had B as appointor of the Trust with the power to appoint new trustees and to nominate a successor as appointor AND the power to declare that any person could be excluded as a beneficiary;
  • Had themselves together with B and their accountant as trustees; and
  • Had themselves together with B and any spouse or children of B as beneficiaries.

Subsequently:

  • D and L gifted their interest in the fishing partnership to the trust but B did not gift his interest in the same partnership;
  • As a result of a family dispute, B used his powers to appoint two new trustees to the trust;
  • As a result of that family dispute, B also used his powers to remove D and L as beneficiaries of the Trust;
  • D and L considered that they were poorly advised when executing the trust deed;
  • With D and L having been removed as beneficiaries of their Trust to which they had gifted their major asset, D and L brought High Court proceedings to remove the new trustees and have themselves reinstated as beneficiaries.

High Court decision

The High Court considered the intentions of D and L in setting up the Trust and the wording of the trust deed. The Court considered that B’s power to appoint new trustees was sensibly used given the deteriorating family relationships and such decision was open to B as appointor of trustees.

However, B’s excluding of his parents as beneficiaries “was in breach of the basic fiduciary obligations he owed them” and accordingly the Court ordered that D and L be reinstated as beneficiaries.

Conclusions

If the Trust had been created in the conventional manner, then:

  • D and L would have been the settlors (rather than the accountant’s clerk);
  • D and L would have been the appointors with the powers of appointment and removal of trustees and beneficiaries (rather than their son B); and
  • B, even though a trustee, would neither have had the power to appoint further trustees to his parent’s Trust nor to remove his parents as beneficiaries of their own Trust

– and hence avoid these Court proceedings.

Getting the structure and decision-making roles right is an essential first step for an effective family trust.