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Acknowledgement of Debt, appointment and removal of trustees, Appointor; power of appointment, Beneficiaries, Settlor; settlors, trust, Trustee liability, Trustees, Trusts

Emerging failure

Mr White established the Rex White Family Trust (the Trust) in 1992 to hold an inheritance he  received from his mother.  The trustees of the Trust were Mr Davis and the solicitor who prepared the trust deed, Mr McNiece (together the Trustees). Mr White’s wife was not aware of the trust at the time, although she had been married to Mr White for several years.

Mrs White did find a draft trust deed and a partially executed deed of acknowledgment of debt in her husband’s papers after his death, recording a debt of $142,000, being the money that Mr White inherited from his late mother’s estate.

However, Mrs White did not become aware of the trust until Mr McNiece wrote to her after Mr White’s death advising that “…all of the assets in the trust … are effectively yours”.  Since becoming aware of the trust, annual income from the trust was paid to Mrs White  and after request by her, several distributions of capital were made to her.

Matters between Mrs White and the Trustees were cordial and the relationship settled until Mrs White asked for money for a trip as she had been diagnosed with Macular Degeneration and she wished to travel, with a companion, before losing her sight.  At this point the Trustees conveyed a more constrained view of the settlor’s wishes.

Following from this in 2014 Mrs White, who lived in Australia, consulted an Australian law firm who requested a copy of the trust deed from the Trustees and expressed Mrs White’s wish that the trust vest and the trust funds be paid to her. Mr McNiece replied advising that the deed for the Trust has been lost and that:

“The writer has conferred with his co-trustee and re-established that it was the settlors (sic) intention that Beatrice was not to receive any capital of the trust as he did not want monies to eventually go to Mrs White’s family but he did wish her to receive the income from the capital. Upon Mrs White’s death it was the settlors (sic) intention that the monies be distributed amongst various charities and there is provision in the trust deed for that to be done. The settlor also had a son whom he also did not wish to benefit from any capital distribution of the trust. (emphasis added)”

Mr McNiece then obtained a legal opinion regarding the Trustees’ power to distribute the whole of the trust fund to the Freemasons.

Court proceedings

When the matter came before the Court Mr Davis gave evidence was that Mr White had informed him on two occasions that the ultimate beneficiary of the trust should be Freemasons New Zealand.

Both the Trustees and Mrs White agreed that the Trust was validly created.  However, the trust deed although registered with the Inland Revenue had been lost. An unexecuted draft trust deed (the draft deed) was based on a precedent for another client of Mr McNiece, and contained numerous errors.

Three Certainties

The Court was satisfied that a trust deed was executed in 1992 creating and establishing the Trust and that there was identifiable property. The issue was whether the Trust still subsisted.

For a valid trust to be created and subsist, the three certainties must be satisfied.  These are:

  • intention.  See Re Reynolds; Official Assignee v Wilson
  • subject (property), and
  • object (beneficiaries). The identity of beneficiaries of the trust must be certain. At the least, there must be specified criteria that enable the trustees to say whether a particular person is or is not a beneficiary (category certainty). In the case of a discretionary trust what is required is conceptual certainty, that is a sufficient degree of precision to enable the limits of the class to be ascertained. Evidential uncertainty does not mean that the necessary subject matter certainly does not exist. See Proprietors of Wahatu Inc v Attorney-General

As the Court was satisfied regarding intention and property the essence of the case turned on the certainty of object and if this was not established, whether the trust would fail, in which case  the trustees hold the property on a resulting trust.

Importantly a lost trust deed does not necessarily prevent an applicant from obtaining either judicial advice or a declaration that the trust nevertheless subsists provided that there is clear and convincing evidence as to the formation and existence of the trust and its essential and requisite terms. See [75] and Re Porlock Pty Ltd.

The Court was satisfied a trust was intended and that the property of the trust was Mr White’s inheritance.  However, were the beneficiaries identified?

The draft deed

In the absence of the trust deed it was necessary to refer to the draft deed and the evidence of the trustees.

The draft trust deed was a template from another deed for another client [editor’s note – this practice is never recommended]. The final deed would, it is presumed, have looked significantly different from the draft deed and the Court had no reliable basis on which to determine whether there was certainty as to the objects of the trust, in particular identifying beneficiaries and the ultimate beneficiary or beneficiaries. There was also the matter of the uncertainty created by the use of a nominal settlor and whether any powers given to the settlor to nominate a charity in writing referred to the nominal settlor or Mr White. The draft deed provided for distribution of capital to the “primary beneficiary”, but made no mention of who that was. Without a named primary beneficiary there could be no certainty whether the settlor intended Mrs White, the Freemasons or any other person or organisation as the primary beneficiary of the trust. The power given to the trustees in the draft deed to include any charity did not provide the requisite certainty that would authorise and enable the trustees to pay the trust capital to such a charity.

Erroneous and irrelevant provisions in the draft deed included:

  • reference to children and grandchildren that “the Whites” did not have (and would not as Mrs White was 64 and had been unable to conceive prior). No plans to adopt had been mooted
  • reference to the spouses of the children and grandchildren that “the Whites” did not have
  • a definition of grandchildren as the grandchildren of the Scotts, an entirely unrelated party, but were also clients of Mr McNiece, and
  • final distributions are to be made to the primary beneficiaries.  However, there is no definition of primary beneficiary.

The list of discretionary beneficiaries also includes “any charitable objects which the Trustees in their absolute discretion select”, with provision for the trustees to have regard to, but not be bound by, the wishes of the settlor expressed to them in writing from time to time. This too was problematic for the Court, as the settlor named in the draft deed was not Rex White, but Mr Ellis, a solicitor then in legal practice in Auckland. Mr McNiece having adopted a practice[Editor’s note: which has lead to certain court applications to rectify for the reasons that follow]  when drafting trusts not to make a person who was going to derive a benefit from the trust, either the settlor or trustee of the trust. For that reason, he says he had named Mr Ellis as the settlor of the trust.

However, as noted by the Court “if Mr Ellis was in fact intended and named as the settlor, it makes no sense to make provision for the trustees to have regard to his wishes as to the selection of charitable objects. It is unlikely that a professional and wholly independent settlor, whose only role is to fulfil a formal legal requirement in order to establish the trust, would have any continuing role, let alone any need to express written wishes as to which charitable objects should be selected by the trustees to receive distributions from the trust.”   This practice was also contradicted by the Trustees’ correspondence about Mr White’s intentions.  See [99] where the Court notes:

“In the letter dated 1 July 2014, Mr McNiece wrote to Mrs White’s solicitors Browne Linkenbagh, and referred to the “settlors [sic] intention” in terms that was a clear reference to Rex White. By 2014, Mr McNiece was well aware that the RWFT deed was lost, and while he was obviously relying on the terms of the draft deed, in which Mr Ellis was named as the settlor, as evidencing the terms of the trust that he and Mr Davis were administering, it is inconceivable that he would have referred to Rex White as being the settlor, unless that was what he understood to be the correct position.”

Another inconsistency between the draft deed and the terms of the trust deed relates to Rex White’s son, Christopher. In Mr McNiece’s letter of 1 May 1993 to Rex White, with which he enclosed a copy of a deed of trust, he said “I note your instructions that your son is not to be a Beneficiary under the Trust. I have still included him as a discretionary beneficiary but naturally no money will be paid to him unless you so authorise. I think that it is better to have him in there as a discretionary beneficiary.”

However, the draft deed contains no mention of Christopher as he could not be a children of “the Whites” who were defined as Rex and Beatrice White.

The court considered that the naming of a primary beneficiary was a significant feature of the trust noting at [109] that “by identifying with certainty the person to whom the trustees are to pay any remaining trust capital upon the vesting and date of distribution of the trust.” The court going onto note that  “The omission of any reference to the identity of the primary beneficiary in the draft deed is a very significant error and omission that directly informs the issue as to the existence of the certainty of objects of the Trust.”

“Without a named primary beneficiary, the trustees are quite unable to apply [the final capital distribution] … there can be no certainty as to whether the settlor intended Mrs White, the Freemasons New Zealand, or any other person or organisation as the primary beneficiary of the trust.”

At [110] the court goes on to say that “Mr McNiece explains the failure of the draft deed to specify the primary beneficiary as an error in drafting the document. If so, it would have been a startling omission. It is inconceivable that the omission of such a key and fundamental provision of the [Trust], would have escaped the attention of both Rex White and Mr McNiece when reviewing the draft deed prior to execution of the final version.

[111] But irrespective of the reason for the omission, it leaves a large gap that cannot be filled by means of speculation and guesswork as to who the settlor intended as the primary beneficiary. For the reasons already expressed above, I consider that the power given to the trustees in the draft deed to include any charitable objects as discretionary beneficiaries, does not provide the requisite certainty that would authorise and enable the trustees to pay the capital of the [Trust] to Freemasons New Zealand.”

Conclusion

The Trustees could not satisfy the Court as to what the terms of the deed for the Trust were. Mr McNiece’s statements and conduct, particularly as regards the objects and beneficiaries of the trust were found to be inconsistent and his evidence unreliable. In 2001 he advised Mrs White and her Australian solicitor that she was the sole beneficiary. But in 2014 the Trustees took an entirely different approach, advising Mrs White’s solicitor that Mrs White was not the sole beneficiary and that the capital would be divided among “various charities” and later advising it was intended to distribute to “The Masonic Lodge”. This demonstrated that there could be no certainty as to what the settlor’s intentions were and obfuscated the true position. Mr McNiece was also misleading as regards his involvment with Freemasons. Mrs White, by way of contrast was found by the Court to be entirely reliable and credible.

Failing to identify any certainty of object the the Trust failed and the trust funds revert to the estate of the settlor to be held for Mrs White as the sole beneficiary of that estate.

The case highlights the need to retain contemporary file notes when drafting deeds and the risk of free wheeling in the absence of clear terms of trust.

References:

  • Davis v White [2016] NZHC 1626

  • D R McKendry Nominees Pty [2015] VSC 560
  • Maks v Maks (1986) 6 NSWLR 34
  • Porlock Pty Ltd, Re; [2015] NSWSC 1243
  • Proprietors of Wahatu Inc v Attorney-General [2012] NZHC 1461 at [219]
  • Reynolds, Re; Official Assignee v Wilson [2008] NZCA 122, (2008) 2 NZTR 18-005; [2008] 3 NZLR 45

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