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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:

Discussion

3 thoughts on “3 roads to ruin

  1. Some years ago my mom started to show signs of dementia. The rest of the family urged me to have my mom put her home in an irrevocable trust so it could be passed down to my sister and me. At the time, my mom was married (2nd marriage) and I was helping her a financially. My sister, on the other hand, never helped at any time. After her first marriage to a promising writer, she became entangled in a tax dispute with the IRS serious income tax and declared bankruptcy. She was borrowing heavily from my mom. My mom had started to become paranoid and would only create the trust if I was willing to be Trustee. At the time I had no children. When went to a lawyer who put us into an irrevocable trust of which I am both Trustee and co-beneficiary The problems began there.

    It soon became clear that the trust had no income. My mom’s husband died. So, caring for the house – taxes, maintenance, any kind of improvements such as broken water tanks our fallen trees became my financial problem. This is also true for any expenses for my mom: food, clothes, electricity, heat. My mom had a 12 hour aide provided by medicaid and at night she would go to a sleep program so that we could get a break. My mom has lived 10 years since the Trust was created. There was a home equity line which we used to create a “safe” section of the house for my mom to live. We created a widened walkway with entry ramp for her wheelchair, bought a hospital bed, added recessed dim control lighting, renovated the bathroom so that she could sit and be bathed. The home equity line of $250K was exhausted by the capital improvements. But after seeing my grandmother in an institution with Dementia, I know that my mom has the best care humanly possible. She loved her home and she still lives there.

    My sister retained a lawyer to dispute the 250K spent on home improvements. During an extremely inconvenient time – my wife was giving birth to our third child – I produced an acceptable accounting. Since then, every action is contested by them. After my sister divorced her first husband, she married a second who did not work for 4 years and they are simply counting on the money from the house for their retirement. In the meantime, I had 3 kids – one with Down’s syndrome – and we are forced to manage the situation on a daily basis. It occupied all my wife’s time. The situation became so difficult that we moved into the other part of the house – 5 people with 2 bedrooms and 1 bathroom.

    Being Trustee has had a terrible effect on my life. I have done well professionally but can’t move in search of the best jobs. All cash required to run the house – and there are many – is paid for by me because there is no Trust income. During the last 10 years my sister hasn’t contributed a dime, nor made any effort to lighten the burden. I have asked my sister to settle 50/50, but she will not because she sees the house as an appreciating investment. She tells me to call her lawyer and then her lawyer ducks the calls and emails.

    I don’t know what to do. It has put my marriage and my life under terrible strain. It seems like my sister has all the rights and I have none, all because I helped my mom when she was getting old. When I ask about the increasingly unworkable situation of 1 boy and 2 girls living in one bedroom, nobody seems to care. I had talked to my sister about making capital improvements out of my earnings but she has made it clear that 50% of that value will go to her as per the trust agreement upon my mom’s death. I know that my mom never intended it to be this way and would never have let this happen if she had seen it coming. The letter of the law is completely violating the spirit of the law.

    I have an attorney, but she focuses more on the creating trusts part of the business. She is non-confrontational and counsels nothing but patience. Is there a lawyer out there that specializes in these types of Trusts that went awry? By this I mean that a situation that was intended to be equitable has become completely inequitable. There is no Trustee self-dealing in this situation. In fact, all my accounting is kept court ready by my attorney. This has been one of the most negative experiences of my life. Keeping my mom at home costs the state about 1/3 of what it would if she was institutionalized. I have done the right thing right down the line. Why did all this happen? Is there no way to get help?

    Sincerely,
    Miserable Trustee, and as a result, bad husband and father.

    Posted by Richard | February 27, 2018, 10:47 pm

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