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Beneficiary rights, Cases, Deed of Trust, Testamentary trusts, Trustee Act, Trustee liability, Trusts, Will trusts, Wills

What’s in a name?

References to executors and trustees are routinely combined and treated as synonymous with each other.  But are they?  Actually they are not.  While the distinction is often unimportant, in certain circumstances it is critical.

The executor’s duties include obtaining a grant of probate, getting in all of the assets, paying outstanding (and future) debts including funeral expenses and making an inventory of the estate’s assets.

Once the executor has completed the administration of the estate the assets are either distributed directly to the beneficiaries or the executor holds the assets as trustee.  This stage is referred to as the final distribution, which is somewhat of a misnomer, given that there may still be assets held by the trustee on testamentary trusts.

The difficulty is in identifying whether the transition from executorship to trusteeship has occurred.  Formal confirmation of the transition (assent) can be given by the executor.  However, this does not usually occur in New Zealand and instead assent is inferred once the residue of the estate has been identified.

Guidance on the transition from executor to trustee is provided in IRC v Smith,  where the Lord Judge notes that “The property which on the death of the testator vests in the executor does not remain vested in him for ever.  So soon as he assents to the dispositions of the will becoming operative and to the trusts taking effect, the estate vested in him as executor is divested and vests under the dispositions of the will in the trustees of the will.”

The relevance of identifying whether a person is acting as an executor or a trustee can have relevance where a claim is made against the estate and it is necessary to determine whether or not the claim is out of time.  For example, although the court has a discretion to extend time, a claim under s 6 of the Law Reform (Testamentary Promises) Act 1949 must generally be made within 12 months.  One factor the court will take into consideration in determining whether or not to exercise discretion if a claim is made out of time is whether there has been  a final distribution of the estate; that is the executor has completed the administration of the estate and now holds the assets of the estate as a trustee.

Where a claim is pending, it is not generally possible for the residue of the estate to be identified given the element of uncertainty.

Another practical implication of the stage of the administration of a trust is how to determine the rights of beneficiaries.  While the estate is being administered beneficiaries only have a right for the will-maker’s property to be properly managed and applied for the beneficiaries’ benefit when the administration is complete.

However, once administration is complete and the residue of the estate determined, beneficiaries can have caveatable interests in the estate. To support a caveat, which is a creature of statute (not equity) the requirements of the Land Transfer Act must be met.  That is beneficiary must be able to support a claim to be entitled to, or to be beneficially interested in, the land or estate or interest by virtue of the testamentary trust.  This cannot ever be presumed and expert assistance should be obtained as any caveator who lodges a caveat that cannot be sustained can be liable for damages (Land Transfer Act, s 146).  So why might a caveat be lodged?  Most commonly because beneficiaries are concerned with a course of action trustees are proposing or are undertaking.

Where there are doubts regarding the ability for a caveat to be sustained, the more appropriate course of action may be to seek an injunction pursuant to the High Court’s equitable jurisdiction to review and restrain trustees as required to ensure trustees meet their fiduciary obligations to beneficiaries.  In the alternative an application can be made pursuant to s 68 of the Trustee Act, which enables the High Court to review trustees’ actions and anticipated actions.  However, for s 68 to have application the power that is the subject of scrutiny must be a power the trustees have under the Trustee Act (the power may also be in the trust instrument, but the power must be a Trustee Act power).  See Neagle v Rimmington.

This is pretty dry territory, and perhaps surprisingly not traversed as commonly in the courts as might be expected.  However, where beneficiaries are not happy with the administration of a trust estate advice should be sought to ensure a timely and appropriate course of action.

So what sort of things can lead to such courses of actions being considered?  Well that can be another word play.

Occupation licences

Another word game that gets played out in wills is life interest, life estate, residence interest and similar.  Again, does the terminology matter?  Often not (also see the Trustee Act 1956 at s 14 (2B)).  But consider the situation where the will-maker directs that a replacement residence interest can be acquired, but the interest in question is an occupation licence the terms of which do not permit ownership by anyone other than the occupier.  What are the trustees to do?  Whether they can sell a real property interest and say, advance funds to the beneficiary so that the occupation licence can be acquired will depend on the terms of the will.  Given the growing number of retirement home options where occupation is only by way of occupation licence the wise will-maker (or the wise will-maker’s adviser) will ensure a will drafted on suitably wide terms.

Beneficiaries who stand to be disadvantaged by the purchase of an occupation right that will almost certainly diminish in value as opposed to the retention of an estate in land, which can be presumed to appreciate over time may have views on how any relevant trustee powers should be exercised regardless of how the will is drafted.

While this may seem pretty old and stale law, given the preponderance of blended families moving forward, life interests are more commonly being considered when wills are drafted. Accordingly there is a need to canvas all the issues and preferably before the death of the will-maker to ensure a will drafted on terms that will allow as much (or as little) flexibility as the will-maker might wish if he or she turned his or her mind to how the terms of the will might play out in the future.

References:

  • Re Estate Eagle; Barbalich v Kennedy High Court Auckland M 721/97
  • Lilley v Public Trustee [1981] 1 NZLR 41
  • IRC v Smith [1930] 1 KB 713
  • Rauch v Maguire [2010] NZHC 1009
  • Sullivan v Brett [1981] 2 NZLR 202
  • Land Transfer Act 1957, s 137
  • Guardian Trust Executors Company of New Zealand v Hall [1938] NZLR 1020
  • Neagle v Rimmington [2002] 3 NZLR 826
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