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appointment and removal of trustees, Beneficiaries, Beneficiary rights, breach of trust, General, Right to trust information, Trusts, Wills

Boys will be boys

When embarking on asset and estate planning, an important but often overlooked enquiry is as to how the next generation will manage the assets (and what those assets might be) and who sensibly should be in charge.  Consider the case of Frickleton v Frickleton. In this case one of four sons ends up as the sole executor of an Estate of which the four brothers are beneficiaries.  The brothers are also beneficiaries of the family trust together with any grandchildren.

Carl, as executor, commences proceedings against a company of which Mark is the sole director and shareholder on account of an alleged debt of over $400,000 (plus interest  at the rate of 10% compounding monthly).  Carl is also the sole trustee of the family trust.  There is a dispute there relating to Mark as well.  The other two brothers support Carl.

Mark seeks Carl’s removal as executor of the Estate under s 21 of the Administration Act and as trustee of the trust under s 51 of the Trustee Act.

An executor can be removed if unfit or incapable of carrying out the role; or if it is expedient to do so. The existence of hostility between an executor and a beneficiary is not in itself grounds to remove an executor.  However, if that hostility prejudices the welfare of a beneficiary or undermines the executor’s execution of the role; the executor’s removal may be expedient.

The overarching question to ask is “whether the removal of the executor … will be a suitable, practical and efficient means of advancing the interests of the estate and its beneficiaries” while ensuring that due respect is “given to the wishes and autonomy of the testator.”(Crick v McIlraith).

The tests regarding the removal of a trustee under s 51 of the Trustee Act are essentially the same as those under s .21 of the Administration Act, the guiding question still being what is expedient in light of the welfare of the beneficiaries.  Each case will necessarily turn on its own facts.  See Letterstedt v Broers.

Importantly, mere incompatibility is insufficient to found an application for the removal of a trustee – the question is as to whether the relationship dynamics are such that the execution of the trust is being undermined.

The jurisdiction is, as noted above, fact dependant and the analysis must be macroscopic, not microscopic – that is – don’t sweat the small stuff – look at the big picture.

In analysing the matter the Court started with a consideration of the testator’s wishes.  As a practical matter – this is an area where anyone taking instructions on a will can helpfully assist by ensuring file notes about why a particular executor or executors are chosen so that the analysis does not stem from the end result – eg if there were two (but one then died or renounced) there should be two, rather than the other trustee acting alone.  Without evidence of why two were chosen – was one essentially a spare?  Did the will-maker want more than one – file notes or relevant temporal evidence might help.

The next matter considered was whether there was a conflict.  Was Carl, in pursing the debts owed by Mark’s company, merely collecting estate assets in a competent fashion; or was he motivated by self-interest?  Both sides made lengthy submissions.  However, what it came down to was – would the estate be administered differently with an independent trustee? That is would an independent trustee chose not to pursue the debt?  Here the Court opined no.  Although concern was raised regarding the rate of interest as the matter was shortly to be heard, the Court appeared satisfied this could be addressed.

Arguments of conflicts of interest that Carl had in his trustee and personal capacity were dealt with by reference to clear facts to the contrary.  An argument that the trustee had failed to keep proper accounts was perhaps dealt with a little softly on the basis that there was a degree of informality that can be expected in a family situation.  In this regard perhaps the tolerance extended would have been less so, had Mark’s own accounts been more in order.  It is respectfully suggested that any trustee would be wise not to rely on such an argument in the future.

The degree of hostility that was being engendered and the division between the brothers was noted.  However, the Court appeared minded to rely on analysis from other hearings around the debt matter that there was in fact likely a debt.  Also, as Carl was a sole trustee the spectre of deadlock was not an issue.  However, as Carl sought the appointment of an independent trustee, as well as defending his removal – the Court ordered that an independent be appointed by agreement between the parties in part to bring an element of independence and objectivity and in part to ensure compliance with the Trustee Act, which provides that there cannot be a sole trustee unless a sole trustee was initially appointed (or the trustee is a statutory trustee).  It was unclear from the decision what the terms of the trust deed were regarding the appointment of a sole trustee.

As the management of trusts moves increasingly to the second generation more and more families will be in the position of the Frickletons – something wise settlors and their advisors might wish to turn their minds to.  It is suggested that Carl was wise to accept and agree to the appointment of an independent trustee and that had he not (or had one not been needed) the outcome might not have been the same.

A useful and considered judgment due to some considered reasoning around matters that will be considered with increasing regularity.

References:

 

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