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General, Relationship Property, Removal of trustees, s. 182

Relationship proofing trusts – can we, should we?

A trust can run for up to 80 years at present.  While the odd relationship clocks up similar tenure, like trusts many are brought to an end sooner than death does them part.

Some settlors of trusts, or their canny advisers, consider the possibility of the relationship not lasting the distance and draft the deed of trust to provide that the trust must resettle or vest if the settlors part company (McCartney v Cox [2012] NZHC 1369).  While this may seem “fair” it does fly in the face of the idea that assets gifted or otherwise transferred to a trust are held for the benefit of all the beneficiaries. While it could be considered that this leaves the trustees in a somewhat tricky position vis-à-vis their duties to the wider class of beneficiaries, this can be countered with the argument that the terms of the trust are clear and the trustees are doing no more and no less than what they can with what they have.  The settlors themselves may actually be the more compromised parties.  Given the implication that there is a clear plan to part with the assets only while the going is good but not otherwise, this leaves such trusts wide open to allegations of sham. Further, if the trust is effectively revoked on the settlors’ separation, have the settlors retained property rights in the assets transferred to the trust? 

While these weaknesses cannot be ignored, at least there is a plan as such.  Not that this necessarily advances matters where the trustees cannot work together.  In the case cited above (McCartney v Cox), despite a trust deed that addressed relationship breakdown as the trustees weren’t talking the terms of the deed could not be acted upon and it became necessary to seek the High Court’s assistance to remove the former partners as trustees and appoint an independent trustee to address the deadlock).

The fact is relationships fail.  The exact figures are unknown due to the increasing number of long-term de facto  relationships; and it is not unheard of for married couples to separate but not divorce.  From professional experience and anecdotal information, I would say the figure is somewhere around 50%. 

So where does that leave the trust?  If the settlors are both trustees and amicable, a trust can operate as well for separated parties as for the doe eyed.  Alas once the doe eyed are the cross eyed, or just plain cross, it can get pretty messy.  This is especially so if the trustee decisions must be unanimous.  Trusts can become deadlocked very quickly. 

When the trustees cannot agree the first option is to do nothing, which can be fine in the short term, but not so good over time and, of course, the trustee’s duties and obligations to the wider class of beneficiaries start to get a bit tested. 

The next option is to get litigious.  It is here that we are starting to see more and more attempts to resolve deadlocks through the courts.  For the record, this is not a criticism: when trustees cannot resolve matters court is often the best place to go, and my primary criticism would be that many delay too long.  While it is appreciated that cost is a factor, the costs associated with long deadlocks and the liability that stagnant trustees can incur is not often fully factored.  Another factor not often taken into account is who will be ultimately responsible for the legal costs of court action.  See for example Carter v Carter where ultimately the trust was responsible for one trustee’s application (on an indemnity basis, meaning that all Mr Carter’s costs were met) to remove his former wife as a trustee, despite the fact that she later consented to the removal of all trustees and the appointment of an independent trustee.

What is interesting is the number and ways that the problem is attacked.  Often wood and trees spring to mind as court action sometimes starts before the usual avenues have been exhausted, meaning that the court is unable or unwilling to assist.  See for example the recent recent decision in Wallace v Naknok  where Mr Wallace unsuccessfully applied to the Court to remove Ms Naknok as his co-trustee following the end of their relationship. 

While courts can remove trustees, more commonly, courts appoint trustees, the Trustee Act including specific provision to allow for this. Cases where court assistance has been required to address former partners or spouses no longer able to act in the best interests of the beneficiaries (all the beneficiaries), which is the touchstone for when the court should assist, appear to be on the increase.  See for example De La Rossi v Pilkington.  Given the huge number of trusts in New Zealand, that is not surprising.  Perhaps what is surprising is that there aren’t more.

Another recent court case (Gillam v Gillam and Enersave Products Limited) involved a rare application under s.174 of the Companies Act to appoint a new director to resolve a relationship deadlock that was having a flow on effect for the trust owned company.  Although in this case the Court conceded it did have jurisdiction to do so, an alternate solution was found.

The answer to broken relationships between trustees and settlors is not simple.  The fall out can be huge.  However, better thought as to the possibilities when trusts are settled and greater use of parallel trusts might assist.

The last option for the formerly married is a claim under the Family Proceedings Act, s. 182.  The agreement of the trustees not being required; the court having the power to make orders as it sees fit where expectations in respect of settled property have been disappointed.

References:

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Discussion

One thought on “Relationship proofing trusts – can we, should we?

  1. Thanks for another excellent article.

    Posted by sean parsons | September 13, 2012, 9:29 am

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