It is conceded that liberties have been taken with the heading due to space limitations. The point, that cannot be emphasised too much, is that at the most basic level trusts exist to hold, manage and protect, property, for the benefit of the beneficiairies. Not the trustees. A trustee’s liability between the trustee and the beneficiary can be limited pursuant to the deed of trust. However, whether that liability can be completely extinguished is unclear (and if the Law Commission’s preferred approach is adopted certain minimum liability will be codified by statute).
Being a trustee means taking on risk. When a trustee is also a beneficiary, the blurring of beneficiary expectations and trustee liabilities can leave a trustee somewhat vulnerable to findings that the trustee has not executed the role of trustee at the required level. This was highlighted recently when a trustee was found to be in contempt of court (Smith v Penney and Simunovich) following a relationship breakdown. The facts of that case are as follows:
- Mr P and Ms S are trustees and beneficiaries of the MC Family Trust (“the Trust)
- the Trust owns a number of properties
- following the relationship breakdown agreement was reached that the trust property would be re-settled onto to new trusts, one settled for the benefit of Mr P and one for the benefit of Ms S
- a relationship property agreement was concluded. However, the trustees of the Trust, which included an indpendent trustee could not reach agreement regarding the final division of trust assets and the resettlement did not occur
- Mr P continued on the basis that the resettlement had occured and proceeded to enter into lease agreements in respect of trust property and to direct that the income was paid to a new trust settled for his benefit
- Court proceedings were initiated by the independent trustee to requrie Mr P to account for the trust funds and for an order replacing the new trustees
- Mr P resisted involvement in the proceedings and persistently refused to execute his duties as a trustee, the Court noting that  “… [Mr P] has put himself in a position where there is an irreconcilable conflict between his personal interests and those of the trust and its beneficiaires.”
Mr P was been given 10 days to “purge his contempt” that is, make good the losses to the trust. Had he failed to do so, he could have been imprisoned for contempt.
I’ve said it before and I’ll say it again, being a trustee is a risky business. Balancing beneficiary rights with trustee obligations is difficult at the best of times. When it goes badly, it can go horribly badly. For many settlor/trustee/beneficiary trusteees the added complication is the underiding, but mistaken, belief that “it is still really my property” and so I can do as I could have but for the trust being settled.
The final instalment of the matter was a costs decision where Mr P was ordered to pay the independent trustee’s costs on an indemnity basis, that is actual costs; and Ms S’s costs on scale with a 25% up lift.
The reason for the increased costs included Mr P’s failure to observe his obligations as a trustee and the manner in which he conducted his case. While the same could be said with regard to Ms S in this quarter the judge considered that some of the issues between these parties were “matrimonial” and also that more of the case was conducted by the independent trustee’s counsel.
So what options to limit that liability are there?
Between beneficiaries and trustees as noted above, liability can be limited by the terms of the trust, or at common law. However, such limitations will not assist when the charge has been levelled by a co-trustee and the breach is so manifestly clear.
Liability between trustees and third parties can be limited by contract. However, it is important to consider all the terms of any agreement.
For example, many contracts exclude a limitation for trustees who are also beneficiairies. Further, where that contract provides that costs can be recovered on a solicitor-client (indemnity) basis, this will not be negated because one of the parties to the contract is a trustee (White and Freeman v BNZ )
The proceedings between Mr P and Ms S and the family trust continue as the procedural issues surrounding the appointment of new trustees and disclosure develop. See Smith v Penney  NZHC 1850.
- White and Freeman v BNZ  NZHC 2845
- Smith v Penney  NZHC 2988
- Smith v Penney  NZHC 619
- Smith v Penney  NZHC 1850