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alter ego trust, appointment and removal of trustees, Appointor; power of appointment, Beneficiaries, Beneficiary rights, Cases, Removal of trustees, sham, trust, Trustee liability, Trustee retirement, Trustees, Trusts

A sorry tale …

As noted in the judgment McLaren v McLaren at [1]  this case relates to “… a sorry tale of what can occur when a family adopts an inappropriate form of trust deed without adequate advice or sufficient understanding of the legal effect of its terms. In this case, a son who was given a power of appointment has, following a falling out with his parents, used that power to remove them as beneficiaries of the trust and to appoint additional trustees, thus neutralising his parents’ ability to dictate the outcome on trust resolutions. The essential issue is whether equity or the provisions of the Trustee Act 1956 can come to the parents’ aid to prevent their exclusion as beneficiaries or their relative loss of control as trustees and, if so, whether such relief is appropriate.”

The terms of the trust deed for the BDM Trust (the Trust) are summarised as follows:

  • the trustees of the Trust were Bruce, his parents and their accountant (Mr Brown)
  • the Trust was settled by Mr Brown’s accounting clerk on 2 March 1999.
  • Bruce and his parents each transferred assets previously owned by a partnership to the Trust
  • Bruce’s parents’ forgave the debt owing back to them, Bruce did not
  • Bruce was the “appointor” and as such had the power to appoint and remove trustees and to remove beneficiaries
  • in 2007 Bruce separated from his wife who was also a beneficiary of the Trust
  • in 2008 the Trust purchased a property for Bruce to live in
  • in 2013 Bruce’s wife and the children from their marriage were excluded as beneficiaries of the Trust
  • in January 2015 the parents advised Bruce that they wanted to sell “their” mussel farms, that is the farms owned by the Trust
  • relations between Bruce and his parents broke down
  • in June 2015 two new professional trustees were appointed
  • in July 2015 Bruce executed a document that was intended to remove his parents as beneficiaries.  This was re-executed as a deed in June 2016 to meet the witnessing requirements of the Property Law Act 2007

Proceedings were filed and the parents sought:

  • removal of the professional trustees
  • appointment of Public Trust as the sole trustee
  • reinstatement of the parents as beneficiaries
  • orders setting the Trust aside

The only application that succeeded was that to reinstate the parents as beneficiaries.  this decision is important and warrants close consideration as the power was held by Bruce personally and historically such a power was generally treated as a personal power (that is one that can be exercised as the holder of the power wishes) rather than a fiduciary power, the exercise of which is constrained by fiduciary obligations.

Bruce’s position was that his power of appointment was a general one vested in him personally, that it cannot be constrained by any fiduciary obligations and that his position as appointor was to be considered distinctly from that as a trustee. In support of this reference was made to the Court of Appeal decision in Clayton where the Court of Appeal noted that:

[104] Fiduciary obligations are not usually imposed by the courts on the exercise of a general power of appointment of this nature. This is because the courts recognise that a power of this nature is personal to the donee and may be exercised by the donee exclusively in his or her own interests. …

The Court distinguished the reasoning in Clayton on the basis that that decision related to a relationship property claim and a determination of the property right in powers. Also of significance was the close identity between the settlor and appointor (both Mr Clayton in Clayton) the Court noting that:

[38] That analysis excluded the relationship between the equivalent of an appointor and beneficiaries from the categories of relationship recognised as having a fiduciary character. It is relevant to the reasoning in the Clayton judgments that the Principal Family Member (appointor) was also the settlor, and by analogy it would apply where there is a close identity between settlor and appointor. It leaves open the question whether respect for the unconstrained nature of a power vested in an appointor should also apply where there is no meaningful identity of interests between the settlor and the appointor. Further, that starting position does not exclude the prospect of factual circumstances arising in a particular relationship where circumstances of vulnerability of a beneficiary and the nature of the reliance placed on the appointor may justify the imposition of fiduciary obligations of an appropriate extent.

[39] The basis for considering the imputation of fiduciary obligations in individual cases falling outside the relationships recognised as having a fiduciary character was put by the Supreme Court in Chirnside v Fay in the following terms:

“It is clear from the authorities that relationships which are inherently fiduciary all possess the feature which justifies the imposition of fiduciary duties in a case which falls outside the traditional categories; all fiduciary relationships, whether inherent or particular, are marked by the entitlement (rendered in Arklow as a legitimate expectation) of one party to place trust and confidence in the other. That party is entitled to rely on the other party not to act in a way which is contrary to the first party’s interests. …”

Also see Jay v Jay where the Court of Appeal noted at [65] that “… no single formula or test has received universal acceptance in deciding whether a relationship outside the recognised categories has been established. The key feature in the imposition of a fiduciary duty is the entitlement of one party to place trust and confidence in the other.”

In the case in hand in providing a context to its reasoning the court considered both powers of appointment of trustees and beneficiaries noting at [45] to [49] that:

[45] I note academic comment that is critical of reasoning to the effect that where a power to appoint or remove trustees arises in a personal capacity, that factor is determinative of whether it carries fiduciary obligations. Such comment cites Gilbert J’s decision in Carmine v Ritchie for the proposition that fiduciary obligations will arise even if the position is held in a personal capacity.

[46] Because of the critical importance of the identity of trustees, powers to remove or add them are distinguishable from powers to alter the class of beneficiaries. The former power naturally reflects a shared interest by all beneficiaries, whereas the latter is inevitably discriminatory between beneficiaries.

[47] A relevant consideration to the nature of an appointor’s power is the circumstances in which the trust was formed. The traditional form of family trust is where the settlor provides the majority of assets and the principal purpose of the trust is to provide the benefits of those assets for future generations. In that classic situation, an appointor is likely to be seen as standing in the shoes of the settlor which readily justifies the distinction between the personal nature of the powers granted to an appointor and the fiduciary nature of obligations owed by trustees.

[48] In this case, the settlor had no interest at all in how the trust would be administered, so any on-going role for her (or her imputed interest in the trust’s governance) was not in contemplation.  Therefore there were no “settlors’s shoes” in which the appointor would be “standing”. Bruce was the person who was likely to have the closest day-to-day involvement with the assets that were to be transferred to the trust, and to be involved with them for the longest period of time.  Bruce was the person who was likely to have the closest day-to-day involvement with the assets that were to be transferred to the trust, and to be involved with them for the longest period of time.

[49] I reject the proposition that the characterisation of an appointor’s powers as personal ones, rather than being derived from the status of a trustee, is determinative of itself. A relevant qualification is that if Chirnside considerations require the recognition of some fiduciary obligations in the particular circumstances that have arisen, then equity will recognise such obligations to the requisite extent. However, where the power is to alter the class of discretionary beneficiaries, the fact that such a power will inevitably be exercised discriminately as between beneficiaries puts a limit on the extent of any fiduciary obligations because it logically excludes any obligation to act even-handedly between all beneficiaries.

Who thought what

The respective positions of each parties provides important context regarding the exercise of powers by Bruce.  These positions or views include:

  • Bruce said in evidence that he had been aware of the power he had to remove discretionary beneficiaries from the time the trust deed was completed, and the power had been used without any challenge in 2013 to exclude his first wife and the children of that marriage [50]
  • Bruce saw the BDM Trust arrangements as a form of “living will”, with the shared expectation being that the assets involved in the business of servicing mussel farms would pass entirely to him on his parents’ death [51]
  • Bruce removed his parents as beneficiaries only after they had signalled a fundamental change in the previously shared expectation as to how various aspect of the family businesses would operate [53].  Editor’s note – this might make it appropriate to remove the parents as trustees but not beneficiaries
  • The parents considered that they had been poorly advised about the deed [Editor’s note – take particular attention anyone who is advising on a multi-generational structure] and they never considered the possibility of a falling out with Bruce.  Or to recap – it would have been fine if everything panned out they way they expected [54]
  • As providers of a substantial portion of the Trust’s assets the parents had expectations [56].  As unrealistic a these might be for that reason, which again goes back to the quality of advice given.

Normally the intentions of the settlor, as evident from the terms of the trust deed, are considered  important in determining the nature of powers created by the terms of the deed; and perhaps why settlors generally write memoranda of wishes. However, in this case “any attempt to discern the intentions of the settlor from the terms of this trust deed would be meaningless. The notional settlor was an independent functionary with no interest in any of the property to be settled on the BDM Trust, and no understanding of the relationships between trustees and beneficiaries. This was not a trust in the classic sense that was driven by the intention of the settlor to provide for a range of beneficiaries. The precedent adopted by the parents’ accountant had not been reviewed in light of any legal advice that could reasonably be expected to reflect on subsequent developments with the business and in the relationship between the parents and Bruce.” [Advisers beware!]

Fiduciary obligations

Before concluding that Bruce’s powers of appointment were subject to fiduciary obligations  the court noted as follows:

“[57] Focusing first on Bruce’s exercise of the power to remove his parents as discretionary beneficiaries, I find that the circumstances of this trust gave rise to a relationship of trust and confidence in his position as appointor. I also find that prior to the falling out between them, the parents and Bruce would have shared an expectation that the parents would continue to have an interest in the assets held by the BDM Trust, at least to the extent of the income that the business it operated was generating.

[58] The parents’ reliance on Bruce not to remove them from all prospects of receiving benefit from the assets is distinguishable from the 2013 decision, taken mutually but in Bruce’s name, to remove other beneficiaries. Bruce’s first wife and the children of his first marriage were excluded after contested relationship property claims had been resolved.

[59] On any objective view, Bruce should have appreciated that his parents were vulnerable to complete exclusion and therefore had to trust him to exercise the power to exclude them as discretionary beneficiaries only after considering the matter in good faith in light of the purposes of the trust and the circumstances then pertaining. This is less than an obligation of even-handedness.

[60] I accept that the terms of the trust deed do not suggest any constraints on the exercise of the appointor’s general power. It is not an adequate answer in this case to say that any exercise of the power would inevitably be discriminatory, and that the Court ought not to impose any constraints where the trust deed appeared to create the power in unfettered terms. The case-specific rejoinder to that proposition is that the circumstances at inception of the trust and as they have evolved do not justify treating the power as an unfettered one.

[61] I also acknowledge that the predicament has arisen at least in part because of the parties’ adoption of an inapt form of trust deed without adequate advice, and that the parents are not now entitled to the intervention of equity to save them from the consequences of being poorly advised in the past. The matter is to be assessed on the terms and effect of the deed in light of the clear intention of the parties in creating it.

[62] The most likely inference is that Bruce was nominated as the appointor because the business operated by the trust was likely to continue under his stewardship after the parents ceased active involvement, and potentially after they died. That operational role is distinguishable from that of a person acting according to his or her perception of the intentions of the settlor.”

The difficulty the writer has with this decision is that the parents were trustees, they were parties to the Trust deed and they were advised, albeit possibly poorly.  Is it correct to connote fiduciary obligations to a power that to all intents and purposes is personal when the power is not challenged until one of the beneficiaries (who was a party to the deed as a trustee) would have behaved differently if better advised – in circumstances  where the parties appear to be in agreement that the terms were agreeable to all parties – they just didn’t consider every eventuality.

In considering the extent of fiduciary obligation the court felt that all the obligations owed by a trustee would be a step too far and that the obligations owed by Bruce as appointor were that “Bruce was obliged to act responsibly, with an appropriate level of diligence and prudence, and to avoid taking into account irrelevant, improper or irrational factors. He was not to act in bad faith or for an improper motive.”

From Bruce’s perspective, “his parents “cast the first stone” by indicating their intention to sell the mussel farming assets” which were  essential for the on-going business of the Trust.  This should have been a trustee decision – not something that required removal of beneficiaries.

Bruce’s argument “that his parents’ exclusion was only accelerating the inevitable in that their shared intentions long-term were that he would inherit the assets used in the operating business” does  overlook what the court found “to be the shared expectation that the parents would be considered for distributions of income during their lifetime.”

The court concluded at [68] that “Bruce’s response in removing his parents as beneficiaries was disproportionate. Leaving him and his immediate family as the only beneficiaries of the BDM Trust, given the circumstances in which its assets were vested in the trust and the shared aspirations of Bruce and his parents until their falling out, amounted to an expropriation of trust property entirely in his own interests, and disproportionately punitive to his parents. I find that the decision was taken having regard to improper or irrational factors.  it was not a reasonable one.”

The remaining claims failed as the court was stratified in the performance of the new trustees and in this regard the court was “satisfied that Bruce’s exercise of the power to appoint them was one that was reasonably open to him in the circumstances.”

Although the Court found that there was no basis upon which the Trust could be set aside  (see [84] to [88] the writer wonders whether the intention requirement was adequately traversed.

The sting in the tail, as increasingly seems to be the case in such matters was costs.  While the new trustees were held blameless they were nevertheless found liable for some of their costs the court concluding here has follows:

“[100] I consider that the claims to remove the new trustees and replace them with the Public Trust were misconceived. Attacks on their professional standing were not withdrawn after they ought reasonably to have been. I consider that the new trustees are entitled to scale costs on a 2B basis, and that those costs should be met out of the funds of the BDM Trust. I appreciate that attributing this liability to the trust in a sense punishes Bruce for conduct not of his making, but that is a consequence of being embroiled in the family dispute that has arisen.

[101] I also appreciate that an award of scale costs leaves the new trustees and/or their professional indemnifiers out of pocket for the unrecoverable component of Mr Darroch’s reasonable costs. Again, I consider that the appropriate balance between reimbursement for their being wrongfully pursued to trial, and such challenges being an incident of professional practice.

[102] The parents have succeeded in one significant component of their claims. I consider they ought to be indemnified out of the trust fund for the portion of reasonable costs represented by the cause of action on which they have succeeded. I would provisionally suggest that they be entitled to a reimbursement out of the fund of 30 per cent of their actual expenses, subject to vetting the reasonableness of the extent of those expenses.

[103] I do not consider that Bruce is entitled to a contribution to his costs from his parents. However, his reasonable costs should be claimable from the trust fund.”

Nominee settlors

This case also serves to highlight the risks inherent in nominee settlors. The writer wonders whether the initial settlement was paid by the settlor to the trustees and whether in a different case, this might have provided grounds for a trust to be set aside.

Take home message

The times they are a changing.  What used to be considered OK cannot be presumed to be OK moving forward.  Trusts settled by nominee settlors should be re-visited and far greater care taken in the appointment and removal of beneficiaries.  Appointment being noted as if greater care is taken with the appointment of beneficiaries, less will need to be removed.

This might be an example of hard cases make for bad law.  It might be that this case is right on its facts, but should be limited to those.  Time will tell.  The writer wonders whether more consideration might have been given to whether the Trust should be set aside.  Let’s say the initial settlement was not paid by the office clerk, therefore there is no certainty as to property – clearly the “true” settlors did not understand the terms of the trust – was there, therefore truly certainty of intention?  And while we ponder – what is the role of the “true” settlor, if there is one at all …  Maybe the original $10 settlement (presuming this was the amount) is valid, but the subsequent settlement from the parents should have been set aside.

Also see STEP Forum: When is the exercise of a fiduciary power open to attack?

References:

 

 

 

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