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Beneficiary rights, breach of trust, Cases, Taxation, trust, Trustee liability, Trustees

3 roads to ruin

Professor Frances Moran has been attributed with lecturing her mainly male equity students at King’s Inns that “There are three roads to ruin in life, wine, women and becoming a trustee.  The first two are at least enjoyable.”

Not wishing to enter into a debate of the relative strengths of either sex to mislead and ruin; the unarguable fact is that being a trustee is indeed a trick road; and a road that can lead to ruin.  In part this is because the duties and obligations are poorly understood; and in part because being a trustee is in fact incredibly challenging due to the duality of the relationships that comprise a trust.  A trustee owns property and with that comes all the obligations of ownership.  However, because the trustee owns property for beneficiaries; and not for the trustee’s own sole benefit, the trustee can be answerable to the beneficiaries but not necessarily able to have recourse to the trust property.

From time to time the common law throws a bone and it can look like being a trustee can sometimes allow a remedy that is not otherwise available when a mistake is made.

Consider the rule in Hasting-Bass, which derived from the UK Court of Appeal decision in Re Hastings-Bass (deceased), which held that trustees must act in good faith and responsibly and reasonably, and that decisions trustees made would be liable to be set aside if the trustees had taken account of irrelevant factors or ignored relevant ones.

Quite the get out of jail free card.

The 1974 case, Re Hastings Bass established a principle that allowed the Court, in certain circumstances, to set aside actions taken by trustees which had unintended results, including tax consequences.

In Re Hastings Bass the Court of Appeal declared as valid the advancement of funds made in 1958 even though that advancement breached the rule against perpetuities ). As a consequence  the funds were held not to have been liable to estate duty  on Captain Hastings-Bass’s death in 1964. When reaching its decision, the Court of Appeal held that a discretionary decision taken by a trustee in good faith should not generally be interfered with by the Court and this would be the case even if the consequences of the trustee’s action did not have the intended effect. However, an exception would arise if either:

  • the trustee was not permitted by the trust deed to do what the trustee had done; or
  • it is clear that the trustee would not have acted as the trustee did had the trustee either taken into account considerations that the trustee should have taken into account or (vice versa) not taken into account considerations that the trustee should not have taken into account.

In Mettoy Pension Trustees Limited v Evans  the  rule in Hastings-Bass was restated in the positive form so that the Court could intervene in cases where the trustees had overlooked a relevant consideration when deciding how to exercise a power under the trust deed.  It is noted that it was never entirely clear that this did not effectively amend rather than re-state the rule.  However, subsequent events render this observation moot.

The rule in Hastings Bass was later described in Sieff v Fox as follows:


“Where trustees act under a discretion given to them by the terms of the trust, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have taken into account.”

The point of the rule was to protect beneficiaries from mistakes that trustees make, but has also been particularly useful for trustees who want to “turn back the clock” because, for example, their actions have led to unintended tax consequences.

But all good things come to and end.  Enter Futter v Futter and Pitt v Holt, in which the rule in Hastings Bass was applied to set aside the decisions of trustees that on reflection the trustees wished to revisit.

Futter related to settlements onto two trusts where the trustees did not appreciate that subsequent distributions would result in significant capital gains tax liabilities.   In Pitt damages from an injuries claim were settled onto a trust in circumstances where a different approach to how the trust was settled would have avoided significant tax liabilities.  In both cases the trustees sought to apply the rule in Hastings Bass to unwind their actions and thus avoid the taxation liability. The matters ended up before the UK Supreme Court, which upheld the Court of Appeal decision that the rule in Hastings Bass could not apply where the trustees had acted in reliance of apparently competent professional advice Lord Walker noting at [73] that for the rule in Hastings Bass to apply the trustees’ inadequate decision making must be sufficiently serious so as to amount to a breach of fiduciary duty. The requriment of the breach of duty is a necessary element because it is that breach of duty that allows the court to intervene (presumably on the behalf of the beneficiaries).  In Pitt at least the ground of mistake was also available and allowed.

However, trustees’ ability to rely on the rule in Hastings Bass has been significantly restricted and where they have taken advice (which turns out to be inadequate), the proper recourse will be against their professional advisers in negligence rather than a Court application for the transaction to be avoided.

Even where an application might be able to be made the costs of litigation and the extent to which trustees can recover their own costs is also a relevant factor.  The development of the limitations to the rule in Hastings-Bass (the rule itself never having enjoyed wide-spread application in New Zealand) appears to have been tacitly endorsed in New Zealand in Masters v Stewart.  This does not mean that the rule in Hastings Bass is dead in the water; but the threshold is much higher.  While it could be read into it, that only the worst trustees can benefit; it is suggested that presenting one’s case in reliance of the trustees’ own breaches of trust, is at best tricky and to be avoided.

Being a trustee is a serious business and it should be treated as such.  It is not an honour. It is not a favour to a friend. It is not just something professionals do for clients. It is a vocation in its own right and should be treated as such.

References:

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