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Deed of Trust, Settlors, trust, Trustee liability, Trustee Resolutions, Trustees, Trusts

Positive exercise of discretion requried

In Shakespeare’s Henry IV, Part I when Prince Hal finds the cowardly Falstaff pretending to be dead on the battlefield, the prince assumes he has been killed. After the prince leaves the stage, Falstaff rationalizes “The better part of Valour, is Discretion; in the which better part, I haue saued my life” (spelling and punctuation from the First Folio, Act 5, Scene 3, lines 3085–3086). This is more commonly (and incorrectly) cited as “discretion is the better part of valor”. See Paul Brians Common Errors in English usage.

However, it is cited the practical reality from a trust law perspective is that too many trustees pretend to be trustees and through their failure to exercise any discretion can become mortally liable for this omission.

Staying with my self-imposed theme of times past the case of Turner v Turner still provides excellent guidance on the how trustees should exercise their discretion.

In that case it is stated that the circumstances are highly unusual.  However, while that might have been the view of Mervyn Davies J who read the judgment of the court, the facts (or at least a facsimile of the same) are not all far removed from many a discretionary trust settlement.

Background to Turner v Turner

The trust in question was settled with a view to avoiding estate duty.  The deed used was that used by another farmer in the course of an estate duty saving scheme.  The settlor did not follow advice to appoint a professional trustee, but instead appointed his father, a friend and later, the friend’s wife who was also the settlor’s sister in law.  None of the trustees had any experience or understanding of trusts.  During the tenure of the trusteeships one of the trustees emigrated to Australia.

Various dealings happened with trust property.  However, the trustees had little involvement with these.  It was stated in evidence that the trustees were “quite unaware of their responsibilities and duties”.  It was also noted that “It is plain that the Nutlands, unversed entirely in business affairs, became trustees to oblige the settlor as their friend with a family connection.  They had no thought that they would be expected to do anything at all.”

Exercise of discretion

The question for the Court was whether the trustees effectively exercised their powers of appointment in respect of the trust fund.  The court framing this as “… whether or not the trustees so far failed to direct their minds to the matter of their discretionary powers of appointment that the deeds of appointment ought not be regarded as an exercise of the powers of appointment.”

The Nutland trustees were not aware of their duties or what the effect of the settlement was.  They did realise that it was to benefit the settlor’s children, but thought that they only had a role to play if the settlor and his wife died.  (Editor’s note – a sort of trustee/godparent role).

Other evidence deduced at trial has a familiar ring to it when measured against many current trust practices in New Zealand:

  • the trustees thought their signatures were required as a formality
  • that they had “no business’ to look into the settlor’s affairs
  • the settlor held the reins
  • no legal advice or explanation was given to trustees
  • they did not realise that the documents signed “required any consideration or decision by us”
  • we signed what was put in front of us we believed that the settlor made all the decisions

So that’s what happened in practice – but what is the law?

  • A trustee “is bound by the duties of his office in exercising that power to do so in a responsible manner according to its purpose”(In re Hay’s Settlement Trusts).
  • Apart from the obvious duty of obeying the trust instrument, the trustee must periodically consider whether or not to exercise powers (In re Hay’s Settlement Trusts)
  • trustees have a duty to consider

Trustees do not execute their duties when they merely sign, even if in good faith, what is put before them without ever giving any attention to the terms of the deed of trust.

And what does it all mean?

Where trustees fail to exercise their fiduciary powers, that is the trustees never apply their minds to the exercise of the discretion entrusted to them, any such purported exercise of trustee powers can be set aside and the impugned transaction set aside.

Something trustees and settlors alike need to keep in mind.

Also see Martin Hawes: Beware Misplaced Trust

References:

  • Turner v Turner [1984] Ch. 100
  • In re Hay’s Settlement Trusts [1982] 1 WLR 202

 

 

 

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