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Beneficiary rights, Costs, Deed of Trust, probate, section 14, trust, Trustee Act, Trustee liability, Trusts, will validation, Wills

Family at war – but which war?

On 17 July 2016 the Sunday Star Times reported about a family at war over a mansion with an opening quote that read “Lawyers say the judiciary are increasingly overturning wills in family disputes.”

The dispute ended up in the High Court, firstly regarding an application for the removal of the trustees and secondly a directions application by the trustees.

It is important by way of background here to be very clear that the case has nothing to do with a will, but rather relates to a Memorandum of Guidance written by a settlor of the W H R and Z D White Family Trust (the Trust).  How the case came to be reported as it was remains a complete mystery.  I will copy this blog to the journalist and if he is able to elucidate on that point I will up-date the blog accordingly.

What the case was about was a property owned by the Trust, not the Trust’s settlor Mr Royce White.   After his wife died Mr White wrote three separate Memoranda of Guidance to provide some direction to the Trust’s trustees about the manner in which he wanted them to deal with Trust assets after his death.

At this point it is useful to consider the role of a Memoranda of Guidance also known as a letter of wishes or memorandum of wishes.  At the simplest level these can be seen as a settlor’s attempt to “direct from the grave.”  While it is fundamental to a trust that the settlor loses control of any assets disposed of to a trust, it is common practise for settlors to advise trustees as to their wishes.  These directions are generally considered “persuasive” but not binding.

In the case in hand, as noted by Heath J at [9]:

“In broad terms, the late Mr Royce White’s laudable intention was that the property be sold promptly to one of his three children. That was to be done by the trustees obtaining a registered valuation and providing a copy to each of the children. Each would have an opportunity to purchase at valuation. In the event that more than one was prepared to purchase at that value, the trustees were given a discretion to determine which of them should be allowed to buy.”

So far so fair.  Alas, the plan was thwarted when the trustees realised that the property had significant water ingress issues, something Mr White had been unaware of.

The trustees, cautious to protect themselves “asked all three beneficiaries whether they wished to exercise an “option” to purchase the property. The “offer” was put on the basis that the trustees required indemnification in respect of the way in which they proposed to deal with the weathertightness problems. Neither Mr Stephen White nor Ms Parsons was prepared to give an indemnity. Dr Chambers did. She “accepted” the “offer” to purchase the property at the valuation on which the letter of 16 June 2014 was premised, $945,000. The valuation was based on a report dated 26 November 2013.”

From thenceforth matters failed to progress.  For some insight into why not, the property is now valued at $1,725,000.

The questions when the matter came before the court were:

(a) Have the trustees entered into an enforceable contract with Dr Chambers, as a result of which she is entitled to purchase the property for $945,000? (The contractual issue)

(b) If I were to hold that Dr Chambers did not have an enforceable right to purchase the property, what steps should the trustees now take to sell? (The sale issue)

From a trust perspective, the most interesting facet of the judgment to this writer (apart from the enduring question as to how anyone who reported on the case thought it was about a will)  was the consideration of the Memorandum of Guidance.  While memoranda of wishes are routinely prepared when trusts are settled, and in some cases reviewed from time to time, the extent to which trustees must adhere to such wishes is not considered as often as might be thought.

As noted at [17]

“It is important to focus on the nature of the Memoranda of Guidance. They were precisely that: guidance for the trustees to follow as they thought fit, in light of prevailing circumstances. They did not constitute terms of the trust deed that the trustees were obliged, as a matter of law, to follow.”

In the case at hand it is noted that Mr White died on 9 July 2012.  The trustees got on with getting the property valued with a view to following the Memorandum of Guidance.  However, the valuation raised the prospect of weathertight issues.  One valuation lead to another, correspondence was written. Time passed.  By May 2014 the trustees were ready to offer the property to the beneficiaries.  Dr Chambers purported to accept the offer.  However, the requirement in the trustees offer that all the beneficiaries  indemnify the trustees was not met.

So the question then for the court was – had there been an agreement reached that Dr Chambers could enforce?

This entailed a contractual analysis, which lead the court to determine that there was no enforceable contract between the trustees and Dr Chambers.

What then to do?

The next step was the trustees seeking directions from the court pursuant to s 66 of the Trustee Act.   Where an application for directions is made the parties are bound by the directions given.

The court then gives useful guidance as to how to approach an application for directions, noting at [60] that “… the Court must be mindful that its role is to determine what is in the best interests of the beneficiaries of the trust. This was explained by Lord Oliver of Aylmerton, delivering the advice of the Privy Council in  Marley v Mutual Security Merchant Bank and Trust Co Ltd. His Lordship said:  

… By way of introduction, however, it is appropriate to state two general propositions. In the first place, there has always to be borne in mind the position and duties of a trustee who applies to the court for directions. A trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his fiduciary duties and discretions is always entitled to seek proper professional advice and, if so advised, to protect his position by seeking the guidance of the court. If, however, he seeks the approval of the court to an exercise of his discretion and thus surrenders his discretion to the court, he has always to bear in mind that it is of the highest importance that the court should be put into possession of all the material necessary to enable that discretion to be exercised. It follows that, if the discretion which the court is now called upon to exercise in place of the trustee is one which involves for its proper execution the obtaining of expert advice or valuation, it is the trustee’s duty to obtain that advice and place it fully and fairly before the court, for it cannot be right to ask the judge in effect to assume the burdens of a trustee without the information which the trustee himself either has or ought to have to enable him to carry out his duties personally. The court ought not to be asked to act upon incomplete information and, if it is so asked, the proper course is either to dismiss the application or adjourn it until full and proper information is provided.”

The manner in which the decision is crafted provides useful guidance as to how the court views applications for directions, and what the court needs to be able to give directions.   Specifically:

  • the court must first be satisfied that it is appropriate for the court to give directions
  • the trustees and other parties must provide sufficient information on which to determine the directions to be made
  • the court’s focus is on “the best interests of the trust estate” not it is noted, the path most aligned to the settlor’s wishes
  • the court did consider the memorandum of guidance confirming that this will usually be given significant weight by a trustee who is seeking to execute a trust in accordance with that person’s intentions. But, confirming they are not binding [70] and [71]
  • importantly it was noted that the context in which the memoranda were expressed and any material changes in circumstances necessarily affects the weight to be placed on them [71]
  • the court also considers the extent of a trustee’s discretion not to follow guidance given by a settlor [73] and [74].  In this vein the court notes as follows:[79] Given the delay between the date of Mr Royce White’s death (9 July 2012) and the “option” letter of 16 June 2014, his inability to foresee problems caused through the weathertightness defects with the property, and the marked increase in value ($780,000) between the dates of the valuation reports of 26 November 2013 ($945,000) and 30 March 2016 ($1,725,000), I must consider whether it is appropriate to follow his guidance. I do so on the basis explained in Marley, by reference to what I consider is in the best interests of the trust estate.[80] The controlling principle, which accords with the late Mr Royce White’s wishes, is the need to treat each of the three children equally. They would not be treated equally if only Dr Chambers were given the option to buy at the $945,000 valuation, in circumstances where her original “acceptance” did not give rise to a contractual entitlement to purchase.

While the court could not enforce strict adherence to Mr White’s wishes, the directions made were directed at meeting his fundamental wishes, even if the method required variation.

The case is a useful read as it suggests that where wishes cannot be followed, trustees should perhaps still consider what they can do; rather than treat any obstacle as the option to disregard the wishes.

What the case will not help with is whether or not the judiciary are increasingly overturning wills.  However, this writer’s thoughts in this regard are that that is not the case; and in fact since s 14 of the Wills Act 2007 was enacted, a staggering number of testamentary dispositions that would otherwise fail are in fact being validated.

References:

  • S R Hamilton Corporate Trustee Ltd and Lamb Trust Services Ltd v White & Ors [2016] NZHC 1408
  • White and Parsons v  S R Hamilton Corporate Trustee Ltd and Lamb Trust Services Ltd[2016] NZHC 1409
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